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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The ‘Asset Appreciation’ Play has yet to Leave the Port

The so-called ‘asset play’ investment strategy, buying low and selling high, is a well-known way of generating outstanding profits in shipping. In an industry as volatile as shipping, where freight rates can expand or shrink by a multiple in a matter of months, asset prices can fluctuate substantially over time.  In the last decade, when the market was moving in one direction, asset playing was almost a guaranteed way of making obscene money in shipping.

Not to be held back by the market crash in 2008, the gospel of buying ‘cheap ships’ was the rock upon which many business plans in shipping were based upon. There were so many ships to be bought cheaply from distressed shipowners, from distressed shipping banks, from bankrupt KG funds in Germany, from shipbuilders that got stuck with contracts in default and ships at their slipways.

The ultimate opportunity for establishing a position for a possible asset play took place in 2016 when the BDI reached its lowest point ever since the inception of the index in the 1980’s. In 2016, there were days that good quality dry bulk ships for sale could not get an offer or an interesting party to send an inspection for a pre-purchase inspection. Ten-year old dry bulk vessels in 2016 were selling at a multiple of their scrap value; and tankers and containerships, although better appreciated, were selling at comparably valuations.

There were not many shipowners in 2016 that were not pounding the table for the buying opportunity of the decade if not of a lifetime; a couple of shipowners called for ‘blood in the streets’ buying opportunities at a few conferences. 2016 indeed was a year that many a shipowner would wish they could put behind.

Thankfully, 2017 is a better year, for the most part for dry bulk vessels and containerships, although tankers have been experiencing a deteriorating market at present. The dry bulk and containership markets have improved compared to 2016, and when compared absolute bottom of 2016 to a relative high in 2017, the BDI was up by a four-fold. So enthusiastically and strongly the dry bulk market moved up, that many shipowners with plans to buy ships were crying that the market took off and they were left behind: too late to buy anymore as the asset play boat had left the dock…

There have been a couple of examples whereby dry bulk vessels that were bought in 2016 and sold in 2017 demonstrably doubled in price and fetched their shipowners the windfall of a few million dollars of a profit within a year. Not bad. Not bad, at all. In the last decade, lots of money was made by just flipping ships. As painful as it’s to remind, modern capesize vessels were selling in 2008 well in excess of $150 million and a shipowner missed on the opportunity selling a resale VLCC at that time at an unheard of $200 mil price because he didn’t want to pay a full commission of 1% to a shipbroker. Modern capesize vessels had been sold last year as low as $32 mil and VLCCs can still be had at $80 million. As sweet as the market is when shooting up, it can be brutally ugly on the way down; especially when the asset play is levered to the hilt with ship mortgages and OPM.

From a purely investment perspective, asset play is mostly a speculative vehicle since it’s an opinion that an asset will appreciate and will be resold in a timely manner for a profit. When an asset play takes with shares, it can be easily levered with a margin account in order to amplify the profits. When asset play takes place with currencies or commodities, the leverage (since these are futures contracts, mostly) is astronomical by a multiplier of 100 or even more. In shipping in the last decade, it was a similar investment as ‘investors’ (whether shipowners or speculators) could obtain 90% leverage on loose covenants to speculate, effectively. The sorry state of the shipping industry presently can partially be explained by the ability to immensely speculate in shipping in the last decade with borrowed money.

As said earlier, shipping is a very volatile (variance between peaks and troughs) and we have no doubt that serious money can be made by just timing the sale and purchase of ships.  As long as an investor or shipowner or speculator is right more times than they are wrong, and make more money when right than lose money when wrong, no objections to such a strategy. Risk management will have to be outstanding, and possibly helped with some good luck for one who is a bit superstitious, but an asset play has been known to make money. But, also losing fleets and fortunes when done improperly or not done at all.

We have seen several shipowners in different degrees of exasperation in the last few months about whether it’s too late to initiate an asset play position in the dry bulk market or how right they were last year when ship prices were at rock bottom. And, for the twisted part, how narrow-minded institutional investors have been by refusing to invest now in shipping, especially the dry bulk market.

There are many “loaded” statements in the last paragraph, but we think that when it comes to asset appreciation and asset play, the boat has really never left the port. Two charts based on data for five-year old vessels from the Baltic Exchange (Karatzas Marine has been proudly been member of, and having access to such data) are provided herebelow.

Shipping Asset Prices since 2010 (selective data). Credit: The Baltic Exchange and Karatzas Marine Advisors & Co.

The first graph shows asset prices since 2010, just after the shipping market started finding its footing from the 2008 collapse. There has been volatility in asset prices since then, and money could have been made if the timing was perfectly correct and prompt. However, there has been no clear trend of asset appreciation, despite the great debating that 2010 was still one of the worst years in shipping ever.

Shipping Asset Prices since 2016 (selective data). Credit: The Baltic Exchange and Karatzas Marine Advisors & Co.

Paying closer attention to the graph with asset price since January 2016, the asset value curves are practically as flat as any highway in the great state of Texas (we lived there for fifteen years!), despite the minimal improvement in prices in 2017. It’s correct that older dry bulk vessels (appr. ten years old) experienced most of the volatility and appreciation in asset values in the last twelve months – and not five-year old vessels, but again, two points are clear: a) when it comes to asset appreciation and playing the market to benefit from increased asset values, the boat – it seems – has never left the port, actually – the lines are flat, more or less; and, b) when it comes to asset playing in shipping, it’s easier said than done in times when there is no clear market trend, and a strategy best left to professionals in the market, especially to those able to be playing with their own money or substantially own equity or their seed funding, which would have to be substantial, in our opinion.

There are many more fine nuisances when it comes to asset playing, and given our expertise and line of business as shipbrokers to banks and institutional investors and independent shipowners, and as vessel appraisers and investors in shipping – on our own right, we have seen first hand what has worked in the past and keeps working over time and business cycles, and what ‘asset play’ projects act as a people’s exhibit that ‘a sucker is born every minute’ when it comes to ‘buy cheap ships now’.

But again, the volatility in shipping and its ‘saltiness’ are what they make this industry so easy to be passionate with. And, yes, the saltiness of the seawater is added bonus of what it makes this industry loveable, too!

There are many good reasons and ways to be invested in shipping at present; the ‘asset play’ boat has not left yet the port, in our humble opinion, though.

Idling harbor tugs hoping for a market whereby ‘asset play’ is an investment strategy! Image credit: Karatzas Images.


This article was first published on July 6th on the Splash 24/7 website, a well-respect shipping news portal with original content under the title “The asset appreciation play has yet to leave the port”. We are grateful for their trust in hosting our article!


© 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.

New Market Landscape to Question Commodity Shipping

In a recent article in the Splash 24/7, a debate was initiated on whether shipping is a “commoditized” business. We define “commodity business” as any business or industry whereby there is little pricing power and the product can be procured from many different suppliers with little effort or additional cost (interchangeable product.)

Certain sectors of shipping, such as the cruiseship business, have positioned themselves as far from “shipping” as possible, and their relevance to the shipping industry is limited to the loyalty and romance and affinity they can offer on behalf of the differentiation of their cruiseship fleet to their guests and passengers. For those who have talked with vacationers who are frequent cruiseship passengers, we all have moved by their affection for the cruiseships individually and their loyalty to the brand collectively and the type of cruiseship they cater to. The cruise-line industry has managed to create a clear image for the industry and individual cruiseship companies have created a “brand” and appeal to a certain segment of the market, ranging from the luxury and discerning high-end of the market to the “cattle class” segment of cruising appealing to the younger crowd on a budget. The cruiseship industry is a clear example of a sector in shipping that has not been a commodity and it has created a brand and has charging a premium pricing for its product.

The dry bulk market, however, with the very long tail of charterers – with some of them trading in obscure ends of the globe and the freight cost being of paramount importance, is a highly commoditized business. As long as a dry bulk ship can transport a certain amount of cargo from port A to port B, price is the only differentiating factor: the age of the ship, the quality of the vessel management, the financial strength of the shipowner, and several more factors could easily be sidestepped. A ship with a shiny, bright smokestack would get almost exactly the same freight revenue as a ship with a heavily darkened-from-smog smokestack; and given that the former ship has a higher cost basis (the cost of the fresh paint, at the very least), the owner of the latter dry bulk vessel was enjoying better overall economics. Dry bulk is the least regulated of the shipping sectors and the sector closest resembling what economists call “perfect competition” and staying closest to a commodity business model has made sense. Charterers objectively would barely differentiate vessels besides pricing, and pricing was set by the market, not a shipowner or a ship.

But again, the last few years forced the shipping industry to take quickly many steps at a time: the freight market crashed and controlling vessel operating expenses became critical, new regulations came to effect (whether for emissions or ballast water, etc), bunkering costs could not be neglected by the charterers, etc Therefore, some differentiation started entering the market in an effort to separate the wheat from the chaff. And, large charterers and trading houses, under the luxury or pretense of a weak freight market, have been pushing for higher vessel and vessel management standards in terms of safety, performance, security, accountability, predictability, efficiency, consistence, etc which further allowed some shipping companies to differentiate their “product”.

The tanker industry, having to live with higher standards ever since the tanker MT ‘Exxon Valdez’ became a household name three decades ago, has forced shipping companies to be more cognizant of their “brand” and reputation. The tanker industry is also driven by a group of select charterers (oil majors, etc) who themselves are held to high standards and a few minimum standards we established for the tanker market (i.e. OCIMF, CFR, etc) Still the tanker market is far away from a “branding” strategy when tanker owners can differentiate themselves, but nevertheless there is a higher level of “name recognition” in this market sector.

The shipping industry is a “price taking” industry where the shipowner has to take and accept what price the market offers at any time. Unlike the yacht industry where the customer invests in a “I want” or desire product, in the shipping industry, the customer invests in a “I need” or mandatory product. In the first case, the level of desire can be graded and the optimal product and pricing can be found. In the latter case, the product is a basic need (transport of cargo) which by itself doesn’t allow for price differentiation. However, for shipping companies that have a strategy of differentiating the product at any market price, likely to be more successful in the future.

Since 2008, there have been tectonic changes in the shipping industry. What worked in the past likely will not work equally well in the future. There are many reasons for that and the fact that the landscape of shipping financing has changed is just one of them. It’s hard to create a brand in a commodity-driven market and charge a premium price, but charterers and financiers and the rest of the stakeholders will want to see distinct companies with a quality product. “Me too” shipowners of a handful dry bulk vessels will be pressed hard to stand out in a new market. Setting a shipping company apart from the competition will eat into earnings (once again, shipping is a “price taker” industry) and shipowners will have to deliver more value for every dollar earned.

It’s hard to create a “brand” in a commodity world, and there is little in extras one can offer for a basic need of transporting raw material (hard to abuse most of the time, never complains, doesn’t have any demand for comfort and pampering, etc). The only way really to differentiate and build a “brand” would be by providing the charter with the offering of a better product: a ship with good performance with tight ranges of consistency, performance, etc, by optimizing voyages and minimizing downtime and damage, by having a solid balance sheet and not jeopardizing vessel and cargo arrests, etc. And, in order to be able to offer these and any more attributes that would define their “brand”, they would need a critical mass of a fleet in order to be able to spread SG&A and overhead across many ships, and also being able to obtain competitive financing in a world where shipping finance is tough to be found.

Shipping is a B2B (business-to-business) model where the end consumer has little saying. It would be impossible to have an “Intel Inside” marketing campaign to differentiate the product and drive demand via “pull” by the end-consumer (except possibly in the containership sector), but still, charterers and financiers and stakeholders would like to see a product that stands out in terms of quality and value. Probably such a model may not offer the best profitability that the competition over time, but most likely, it may ensure survivability when the market takes another dive. Charterers likely to “fly to quality” and shipping companies that have moved away from a commoditized world with a better product have better odds of survival.


Article originally appeared in the Splash 24/7 website under the title: “New Market Landscape to Question Commodity Shipping”. 


The containership terminal of the Port of Piraeus: trying to get more efficient with commodity shipping under new ownership. Image credit: Karatzas Images


© 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.

Basil M Karatzas and Karatzas Marine Advisors Quoted in the News

We are delighted that Karatzas Marine Advisors & Co., and its founder Basil M Karatzas have become the contact to have for shipping market expertise; with prompt access to market information and a vast network and access to senior executives worldwide, in the shipping industry and several complimentary industries, the company has had a front row seat to today’s developments in the maritime industry and has been enjoying an active deal-flow and the trust of many in the shipping industry.

Five shipping and logistics influencers you should follow (Veconinter, March 13th, 2017)                                                                                                                            Basil Karatzas was named one of the shipping industry’s influencers by Veconinter, a Venezuela-based logistics company; tweets on shipping, and everything about it, by Basil Karatzas can be followed at @KaratzasMarine and @BasilKaratzas

Πήρε «φωτιά» η αγορά πλοίων μεσαίου τύπου για ξηρό φορτίο (Ναυτεμπορικἠ, March 14th, 2017)

ZIM Shipping Names New CEO in Face of Possible Sale (The Wall Street Journal, March 10th, 2017)

Gibraltar Shipping Interview: Basil Karatzas Talks Alternative Bunkers, S&P Markets, Vessel Financing, and Trump by Gibraltar Shipping (March 10th, 2016)

Ναυπηγήσεις – διαλύσεις, διπλή πρόκληση για τα bulk carriers (Ναυτεμπορικἠ, March 6th, 2017)

Still at sea Shipping’s blues: The many barriers to scrapping cargo ships (The Economist, March 2nd, 2017)

Σε «bad bank» το 5% του παγκόσμιου στόλου των containerships (Ναυτεμπορικἠ, February 15th, 2017)

Sinking Feeling: Shipping Is Latest European Banking Worry (The Wall Street Journal, February 10th, 2017)

From the crossroads to the world… Image credit: Karatzas Images

© 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.

2017 03MAR07 N Ναυπηγησεις-διαλυσεις, διπλη προκληση για τα bulker carriers

Shipping industry’s “Neither a borrower nor a lender be”

2016 for the most part has been a difficult year for every sector in the shipping industry: weak rates for dry bulk, containerships, offshore and even tanker vessels exacerbated the financial distress for many owners and their lenders. Recently however the market has shown signs of hope, here and there, with freight rate and asset price improvements, but in general, the greatest hope of all has been that the worst days in shipping, likely, are behind us.

Great name for a bank by the water, but regrettably no shipping loans offered. Image credit: Karatzas Images

One driver in shipping that has not shown any signs of promise are shipping banks in terms of expanding their book in the industry. The market collapse since 2008 has been especially hard for the shipping banks which first saw their clients (shipowners) facing a weak freight market and rendering them unable to sustain the original ship mortgage payments, and then, a precipitous decline in the value of the assets (ships pledged as collateral for the ship mortgages) killed any motivation to keep making payment on underwater assets. Most shipping banks are in an expressed course of departing from shipping and actively have been selling their existing shipping loans for the last several years. The news of certain shipping banks turning their backs to the industry is challenging, but the more disheartening prospect has been that shipping banks still dedicated to shipping have not been able to adapt their models for the current market developments; probably because of the fact that they have to act within strict regulatory and auditing guidelines, shipping banks still active in shipping have been maintaining an almost religious focus on a handful of clients who seem to ‘check all the boxes’, while the vast majority of the market remains un-serviced.

As we had mentioned in the past, the funding gap left in the wake of shipping banks has provided opportunities for institutional investors to enter the ship lending market. Whether these funds are categorized as credit funds or lending funds or alternative capital funds or even disguised as leasing funds on occasion, effectively they are providing capital to the industry in the form of debt, as supposed to equity, and effectively in a sense are substituting for the role of a bank as a lender. On the surface of it, shipping is a capital intensive industry and someone, sooner or later, would had to step in to fill the gap left by the banks.

Credit funds, being institutional investors, have by default higher cost of capital than the funding cost of a bank (read customer deposits), and therefore one would expect that obtaining debt from a fund would have to be at a higher cost. And, indeed, debt financing from a fund typically starts in the low double-digits, all in, even for relatively conservative projects. In a sense, it’s unfortunate that credit funds cannot adjust downwards (below their threshold) the cost of debt of a project depending on risk, since their investors (LPs) have been assured of a certain minimum return, typically in the high single digits after expenses and fees. As expensive the cost of debt financing from credit funds as it may sound, one has to compare it not to what shipowners were accustomed to (and possibly spoiled by indulging shipping banks) a few years ago of a couple of hundred basis points (bps) above Libor (L), but to the real risk of the industry overall and the intricacies of the transaction in particular. If risk can accurately be described by variance and volatility, what risk a rational investor would assign to the dry bulk market when the BDI has varied between almost 13,000 and 300 points in a decade, or when the BDI has varied between 300 and 1,300 points in timeframe shorter of a calendar year?

In need of capital… ‘Ships in a Harbor’, ca 1873, Oil on canvas, Claude Monet; Denman Waldo Ross Collection (1906); Boston Museum of Fine Arts. Image credit: Karatzas Images

As expensive the cost of debt from a credit fund as it may sound, it’s still a relatively low return given that institutional investors typically aim at returns in excess of 20% by taking (mostly market) risk. In a sense, it begs the question why institutional investors would bother with debt investments in shipping. Probably, there are several answers to that: many private equity funds entered shipping aggressively in the last few years and their equity investments have shown a misunderstood industry and its risks; debt investments, on the other hand, either by the same institutional investors or funds who were browsing the industry, is a more measured undertaking of risk, in an industry notoriously volatile. Further, the state of the shipping industry has been so bad that shipowners these days casually consent to high debt financing given the alternative, or lack thereof. Thus, market conditions have pushed shipowners to modify their financing cost expectations and move from bank-related debt financing and closer to fund-related debt financing. And, last but not least, let’s not forget that we are living in an usually low interest rate environment where investors are starved for yield and returns from credit investments in shipping can be acceptable given the interest rate environment.

Depending on how one counts this, more than $5 billion have been committed to credit funds and platforms by institutional investors in the last three years. The mandate of some of these platforms includes investments in shipping loans in the secondary market (not just originations); and, discouragingly enough, some of these credit funds are not completely realistic in their expectations, so we hold doubts on whether their capital can be deployed (still, we cannot get over a really nice ad in the Financial Times a few years ago for a fund having just raised $1 billion to invest in distress, including shipping; they managed to deploy exactly zero dollars in the shipping industry so far, and their in-house shipping guru departed for balmier seas). And coincidentally, $5 billion is still a minuscule amount of money for the debt needs of the shipping industry given that the market of shipping loans stood at more than $700 billion at the top of the market a few years ago. Credit funds will not be able to fill the gap left behind by the banks, but again, that’s not their main mandate or concern.

Can credit funds be considered a strategic partner to the shipping industry? Probably a hard question to answer given that credit funds are still driven by institutional investors who are industry agnostic and tend to gravitate to industries / sectors / geographies in distress, and will not be able to accommodate shipping over the long term. But, for time being and for as long as credit funds are active in shipping, their relatively high cost of capital and their more conservative approach (than equity funds of recent or shipping banks of the last decade), one can be assured that shipping asset prices or newbuilding ordering will not get out of hand, as it has happened twice in the past decade. Credit funds may not be suitable for establishing ‘ceilings’ in the shipping industry but mostly to provide ‘floors’ and holding the market from dropping lower.


© 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.

The World Is Not Flat, Anymore

Only a few years ago, it seemed that our world, despite its spherical shape, was stretching to fit into a two-dimensional level playing field. The internet softly, almost hesitantly, started disrupting industries since the dot.com era, and technological innovations have been aggressively destroying market inefficiencies and rent-seeking industries ever since. During the last two decades, it had been easy to access information, to make decisions, to trade; it was easy for people to travel and for goods to be traded and shipped around. A few well-timed events (such as China’s accession to the WTO in 2001) only helped catalyze and amplify the impact of technology.

However, in the last couple of years, it seems that our world, especially when it comes to trade and shipping, sails against the winds. Clouds have been gathering slowly – politics and the outcome of elections are just a symptom for now, and trade volumes have been declining.

Basil M Karatzas had recently published an article in the Cayman Financial Review (Winter Edition) on the subject, mostly evaluating the topic from the shipowner’s point of view. The original article as posted online can be accessed by clicking here. A pdf version of the article from the print version / magazine can be be accessed by clicking on the image below.

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It seems flat… Click on the picture to access the pdf article. Image credit: Karatzas Images


© 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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Sailing Winds on Wall Street

Shipping is an industry full of surprises. And, volatility. While until February this year the surprise mainly had been about the really terrible state of the freight market, the last few months have shown a tendency for the market to surprise on the positive side. Freight rates for the dry bulk market have moved to cash-flow positive levels in the last few months and tanker freight rates have been fair despite some relative weakness.

It’s a long way from saying that the market has recovered, no doubt. Many shipowners still remain in financial distress and several of the options available to shipping banks can only have adversarial impact on shipowners. But again, when shipping has been in a miserable stage for the last eight years, there are no overnight cures – short of a major macro or geopolitical event.

Besides freight rates, the overall mood for the market seems to be improving; we do not mean only shipowners, who by nature are always an optimistic bunch and they seem pre-conditioned to be looking to buy more ships – always. The capital market seem to have gotten a sense of euphoria too after the presidential elections in the US, whether on a sense of a perceived catalyst of definitely a new approach to governing or on the hopes of an infrastructure investment spree. The fact that capital markets didn’t melt after the results of the Italian elections last week is a further sign of pervasive optimism.

And, we are glad to see that market optimism getting tangible for shipping companies, especially for publicly listed companies. After several years of a bone-dry draught for IPOs and secondary offerings, the last month, just in time for the holidays, brought several successful fund raisings. Most recently, Seanergy of Greece (ticker: SHIP) raised $15 mil in a secondary offering and Safe Bulkers still of Greece (ticker: SB) raised $14 million the week prior; both companies are active in the dry bulk market and intend to finance vessel acquisitions with the proceeds. A couple of weeks ago, Costamare of Greece (ticker: CMRE) raised $72 mil in the containership markets and Höegh LNG of Norway (ticker HMLP) raised $106 mil in the LNG tanker market. A month ago, Saverys in Belgium raised $100 mil in the US for a blank check (SPAC) to acquire dry bulk vessels via their Hunter Maritime Acquisition Corp (ticker: HUNTU) investment vehicle.

The amounts involved are a small fraction of the golden days of the capital markets for shipping companies a decade ago; however, until recently it has been a very quiet market in the capital markets for IPOs and secondary offerings for all types of companies. However, this is a positive development under any light seen. All the offerings mentioned above took some serious effort and / or a serious management team and sponsor behind the companies to raise the money; and still, some of the raisings took place at a discount to the market. Thus, not all news is as rosy and sunny as they appear. However, again, we want to take the view that a successful raising today for shipping is a major accomplishment irrespective of the circumstances. These are five successful attempts for different amounts of money and circumstances and in three different industry segments, two of which (dry bulk and containerships) were left for dead four months ago. It shows in our opinion the resilience of the capital markets and the investor appetite for shipping overall. To that extent, we tend to take the view that the news is just fantastic!

Hopefully the momentum will continue and there will be more offerings in the new year. And, hopefully, any fund raisings will be utilized to build solid shipping companies or strengthen balance sheets of shipping companies and the capital markets will not serve as a fodder for speculative newbuilding orders as it happened a couple of years ago, a course of action that has been detrimental for both the instigators and innocent bystanders whereby the freight market crashed under the burden of huge tonnage oversupply. Hopefully there is a lesson to be learned here.

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Smooth seas… Image credit: Karatzas Images.

Another lesson to be learned too, hopefully, by the recent developments is that the capital markets, especially the US capital markets, are deep and substantial and can be depended upon for shipowners to keep raising money; as long as they have solid management teams and transparent corporate governance and decent business plans. All the companies mentioned above successfully check almost all of these points. Taking a broader historical view of the capital markets and shipping, there has been a wide and diverse populace of shipping companies that opportunistically went public in the last decade and now a few of them ended as penny-stocks or and others soon will be delisted. One cannot blame the market for some of these companies falling into hard times, but there is plenty of blame to go around seeing the management of these companies aggrandizing for themselves by exorbitant executive compensation packages, usurious vessel management agreements and plain old-fashioned self-dealing. Hopefully the present success of shipping companies raising money will be a painful reminder to some of the ailing companies that greed is not always good as it can kill the goose that lays the golden eggs.

We long have taken the position – and have advised our firm’s clients accordingly, that shipping finance is facing structural changes; the old model of committing to lending in shipping based on a hand-shake is extinct. Raising money from shipping banks is and will be getting tougher and more expensive. Capital will be coming to shipping in different ways (capital markets, etc) whereby only few owners will be able to benefit from. The work for shipowners adjusting to the new market circumstances is not done yet.

As we said earlier, we are a long way from a market recovery.


Disclaimer: Karatzas Marine Advisors & Co. has advised or otherwise has been involved with some of the market transactions referenced above. This article is strictly intended for information purposes.


The article was originally appeared on the Maritime Executive under the title “Setting Sail (Again) on Wall Street on December 13, 2016.


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Where the winds are strong… Image credit: Karatzas Images

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.