Issuing Shares, yet Another Way to Loosen the Shipping Finance Conundrum

While most of the debate in shipping is focused on any recovery of the freight markets, the small world of shipping finance keeps living one day at a time, one long day after another that is. Freight markets have been moving up and down in the last year, and so have done shipping asset prices; however, for shipping finance, most of the news has been disheartening for the ship owners.

Shipping banks keep divesting of their shipping portfolios, whether those are consisting of bad or good loans. To the extent that certain shipping banks are still viewing the shipping industry as a “core” industry, a handful of big players – who check all the boxes for compliance, regulatory, strategy and value – soak up quickly any liquidity, leaving most of the remaining market as “un-bankable”.  Private equity investors have lost most of their faith in shipping by now, and the alternative funds that have been angling for a lending spot under the shipping sun, are getting ever demanding with each passing day.

The IPO market for shipping has been dead given the uncertainty with the freight market and the prospects of a recovery; and, the much advertised Mergers & Acquisitions (M&A) (a.k.a consolidation) wave has been surgically applicable. In the liner business, where there is ample reason for consolidation (latest example of OOCL’s acquisition by Cosco) there has been more hope, while in the dry bulk sector, a fragmented market is the preferred way of doing business for the foreseeable future.

There have been, however, a few recent transactions in the M&A front in the tanker and dry bulk sectors that had gotten attention to the extent that the sellers opted to accept payment in cash and shares (in the buyers’ business or in the new business entity formed).  The newsworthy point is that shares have been used as currency in order to make the deals happen in the first place, and also in a manner that could allow for more value creation for both the buyer and the seller if there is a market recovery.

Lower Manhattan and Financial District (FiDi) skyline, home to many shipping financiers and shipping finance companies. Image credit: Karatzas Images

A few cases in point: a few months ago, Golden Ocean acquired Quintana by assumption of debt and by issuing of shares valued at appr. $110 mil. to the seller. Hard cash is a valuable commodity for most shipowners these days, and thus the lack of transaction activity in the market to a certain extent; the purchase of Quintana by issuing shares (or “paper”, in the investment lingo), had been the key to the transaction, a key that only publicly listed companies hold. The Quintana shareholders exchanged their stock of a privately held company (Quintana) for shares in a publicly listed company (Golden Ocean); seeing through the transaction, in a circumventional way, Quintana accomplished their long aspired goal of going public; in this case, not by having an IPO but by selling to an already listed company. In a similar way, earlier this year, the BW Group sold their VLCC business to DHT for appr. $540 mil, $260 mil of which were in the form of newly issued DHT shares.  Again, it had been rumored for a while that the BW Group had explored the IPO venue for a public listing; however, a sale for cash and shares partially accomplished the goal of a public company, allowing not only for liquidity for the BW Group shareholders but also preserving for all the equity benefits, especially those emanating from a recovering and booming (VLCC) market.  Also, in a weak tanker market, Tanker Investment Limited (TIL) – a purpose-set public company sponsored by Teekay and private equity funds to exploit tanker asset appreciation, was folded into one of the Teekay companies (Teekay Tankers) in exchange of shares payable to the institutional investors, while Navig8’s aspirations for a monstrous IPO in the tanker space had to materialize in the form of a sale and payment in shares to Scorpio Tankers.

Issuing shares for the acquisition of assets or companies is standard procedure in the M&A world. By issuing shares, the buyer can lessen the burden of taking on too much debt and jeopardizing the transaction and the overall outcome of the transaction by overleveraging. For the seller, accepting, at least partial payment, in shares provides for a better alignment of interests and ensures that they will work hard to see the transaction through; also, it indicates that the seller has faith in the buyer and the market and that they take a position to benefit from an improving market.  Quite frankly, none of the four transactions above would had happened if the buyer was not able to issue shares, and vice versa, none of these transactions would had happened if the seller was not agreeable to a partial payment in shares. And, in our opinion, all these transactions happened since payment in shares was the closest the sellers would have gotten to obtaining liquidity and/or public status, given the IPO market is closed shut at present.

Issuing new shares and paying in shares is a distinct benefit of being a public company. Privately held companies (shipowners) have to pay in hard cash for any acquisitions but publicly traded companies can offer their shares as currency, too. Of course, paying in shares is not always indicated (such as when the shares trade below NAV), and not always the buyer is prepared to accept payment (total or partial) in shares – among other considerations, the shares have to have some “value”. In a world that’s getting trickier for shipping finance, for a shipping company to have the luxury to issue shares and transact with own shares is a distinct advantage that publicly listed companies have over the privately held ones.

Too bad that many of the shipping IPOs of the last decade have degenerated into “penny stocks” with their shares of little or no value that no-one would accept as payment. Too bad that quite a few of the shipping IPOs of the last decade were no more than quick “cash grabs” that have deprived their shareholders of the optionality to presently be able to thrive when the market and competition is stuck in the low shipping finance lane.

Paying in shares is not panacea and it has both practical and financial, and also regulatory, limitations. Once again, in a world where shipping finance is in a bind, shipowners are  compelled to explore every option, and payment in shares is fair game. Actually, there may also be cases where the envelope seems to be pushed to the limit: in its latest announcement, Nordic American Tankers (NAT) announced that payment of the company’s 80th consecutive dividend will be paid in cash and in … shares of another company, Nordic American Offshore (NAO), a daughter company of NAT in the offshore space where the prospects have not played out very well so far.

The “sharing economy” seems to get a completely different meaning for the shipping industry.

Lower Manhattan and Financial District skyline, the World Trade Center and the Upper New York Harbor with its busy shipping traffic lanes…where money and shipping meet. Image credit: Karatzas Images


A version of this posting was first published on the shipping portal Splash 24/7 on August 14th, 2017 under the heading: “Issuing shares helps loosen the shipping finance conundrum”.


© 2013 – present Basil M Karatzas & Karatzas Marine Advisors & Co.  All Rights Reserved.

IMPORTANT DISCLAIMER:  Access to this blog signifies the reader’s irrevocable acceptance of this disclaimer. No part of this blog can be reproduced by any means and under any circumstances, whatsoever, in whole or in part, without proper attribution or the consent of the copyright and trademark holders of this website. Whilst every effort has been made to ensure that information here within has been received from sources believed to be reliable and such information is believed to be accurate at the time of publishing, no warranties or assurances whatsoever are made in reference to accuracy or completeness of said information, and no liability whatsoever will be accepted for taking or failing to take any action upon any information contained in any part of this website.  Thank you for the consideration.

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Doubling Down as an Exit Strategy?

The present state of the dry bulk market has caught many people in shipping by surprise; the wave of the orderbook getting delivered in 2015 onwards was expected, but several macro factors – and primarily China’s slowdown – were not properly factored in; as a result, dry bulk rates are close to thirty-year lows. Other sectors in shipping such as tankers and containerships – although markedly with cash flow positive numbers – have not been doing exceptionally well either. And now, with the collapse of the price of oil, the offshore industry is also under the watchful eye of creditors and value-oriented investors.

The weak state of the market definitely has ripple effects in every aspect of the maritime universe from shipowners with quickly diminishing cash reserves, to the deteriorating condition of shipping loans and their impact on the shipping banks and their capital ratios, to the collapsing prices for scrap metal and ships. One thought that has been in the mind of shipping people is the behavior of the institutional investors having entered shipping between 2010 and early 2014, when the markets were at higher levels – primarily in terms of asset prices. Most of these investments in hindsight turned out to be poorly timed and investors ended up catching a ‘falling knife.’ Hindsight is perfect, as they say, but most of the concern is with future action and reaction in reference to the underwater investments.

MV SEAGO PIRAEUS 2

Panamax Containership MV ‘Seago Piraeus’ calling the Port of Piraeus Image source: Karatzas Photographie Maritime

Private equity funds and institutional investors were never expected to be long partners and capital providers in shipping, just opportunistic investors exploiting the crisis and benefiting along with their strategic and limited partners from the recovery phase of the cycle. Thus, an exit strategy was expected sooner or later, and some people were concerned from the possible waves of said exit strategy. The most likely scenario of an exit strategy would have been an IPO whereby companies, businesses and ships could be sold at a profit to retail investors and hedge funds – constrained by mandates to invest small amounts or in liquid investments – but still aiming at an ever growing shipping market. The present state of the market with fairly weak asset prices is definitely not conducive to IPOs in an industry where shipping companies are valued at NAV of their long-term assets (ships) instead at a premium to that for management expertise or multiple of cash flows. One can easily realize that the damage done by ‘falling knives’ has cut too much into pricing that even in the tanker sector – where freight rates are strong enough to be suitable for an IPO, shipowners cannot dare go for an IPO; asset prices are well below the cost basis.
Typically, institutional investors have approximately five to seven years as an investment horizon, implying that for investments taking place in 2010, the window is not fully open any more.  Based on anecdotal evidence during our travels, whether from envy or misinformation, some shipowners are expecting that institutional investors will be forced to sell their ships to meet such deadlines, thus creating ripples in the market and also a buying opportunity; such an outcome is not likely to happen, at least not any time soon; there is still time for the funds to play for time and also deadlines to liquidate a fund and return proceeds to investors are not set in stone as there are provisions for extensions; and of course, unfavorable positions could be rolled over in future funds and  be given even more time to wait out the cycle and hopefully come to fruition.

There may be an alternative scenario on how institutional investors could react to the present unfavorable shipping market conditions and also better position themselves for an IPO – the dream exit strategy. Commodity prices for iron ore, coal, copper, etc. and also prices for oil and petroleum products, etc are at cycle lows whether it has been caused by excess investment and capacity (i.e. iron ore, oil, etc) or diminishing demand primarily from China. The corollary of this is that prices for newbuilding contracts can now be more favorable; the direct material cost is at least 10% lower than this time last year, all being equal, and thus the shipbuilders have room to lower prices. Also, most of the outstanding orderbook is maturing by the end of 2016, less than eighteen months away. It’s a scary thought, but the shipbuilders may decide to get aggressive later this year in attracting new orders and building their backlog once again. Given that commodity prices have been declining, many shipbuilders may decide to pass the savings to the buyers of newbuildings rather than go for thicker margins.  Besides lower newbuilding prices, likely ‘new and improved’ vessel designs may be developed by the end of the year, higher fuel efficiency, higher cargo capacity, bigger…better… why not a new ‘eco eco design’ to completely kill vessels of fifteen years of age and make hell the trading life of new, just ‘eco design’ vessels?

MT AEGEAN VIII_7

Bunkering Tanker MT ‘Aegean VIII’ in the Port of Piraeus. Image source: Karatzas Photographie Maritime

One may get tempted to question whether such line of thinking makes sense at all, when the freight market is at a thirty-year low (for the dry bulk vessels, at least,) the outstanding orderbook overall is more than 20% of the world fleet, and the majority of the vessels on the water at present are newer than five years old. It’s a fair prayer to have that buyers and investors will show restrain and self-discipline and will not follow up with a new wave of newbuildings trying to undercut the competition and double-down on their investments.  But as previously mentioned, shipowners are their own worst enemies and ‘shipping is not a team sport’, thus self-discipline is in the eye (or judgment) of the beholder, and each potential investor can decide their own course.  Furthermore, legendary investor Warren Buffett is happy to see share prices of stocks he owns to go down as that gives him the opportunity to buy whole companies at a lower cost; if doubling down is good enough for Mr Buffett, why then not good enough for the garden variety institutional investor with shipping interests?  And as an exhibit, another legendary investor, Wilbur Ross, ordered a series of Suezmaxes at $70 million per vessel in 2010; in the fall of 2014, it has been reported that his funds have sponsored the newbuilding contracts of four additional Suezmax tankers at $60 million apiece, bringing his overall cost basis to $67 million per vessel overall. If they were a good investment at $70 mil apiece, then they make an even better investment at $60 mil apiece.

It’s hard to predict how the present owners and institutional investors will react to the weak shipping market; there are many variables that can change fast, including the freight market itself. On the other hand, there are too many contributing factors that favor a new wave of newbuilding contracts and going for a ‘doubling down’ strategy: low commodity prices that drive lower newbuilding costs, comparatively low interest rates that make newbuildings a fair game, excess shipbuilding capacity and a diminishing orderbook by the end of this year – plenty of money to be invested, whether in shipping or other industries, whether by funds with shipping exposure or funds still looking for optimal timing to get invested in shipping…whether the freight market moves up or down, it will stimulate more orders, too.

Possibly doubling down may provide the best way out… sometimes one has to wonder…or wander…


Article was originally published on the Maritime Executive website, under the ‘Blogs’ section, where Karatzas Marine Advisors & Co. are regular contributors.


© 2012-2015 Basil M Karatzas & Karatzas Marine Advisors & Co.  All Rights Reserved.

IMPORTANT DISCLAIMER:  Access to this blog signifies the reader’s irrevocable acceptance of this disclaimer. No part of this blog can be reproduced by any means and under any circumstances, whatsoever, in whole or in part, without proper attribution or the consent of the copyright and trademark holders of this website. Whilst every effort has been made to ensure that information here within has been received from sources believed to be reliable and such information is believed to be accurate at the time of publishing, no warranties or assurances whatsoever are made in reference to accuracy or completeness of said information, and no liability whatsoever will be accepted for taking or failing to take any action upon any information contained in any part of this website.  Thank you for the consideration.