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.

Looking at Shipping’s Crystal Ball for 2017

We are pleased to reproduce an article that Karatzas Marine Advisors & Co. was invited to contribute for BMTI’s annual review earlier this year. BMTI is an independent research firm which produces daily and bespoke reports in the dry bulk market with special emphasis for smaller tonnage, MPPs, and other specialty assets. Their website can be accessed by clicking here, please pay them a visit! To read our article, please click on the icon herebelow.

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© 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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Hanjin Shipping in Receivership

On August 31st, 2016, Hanjin Shipping filed a receivership petition with Seoul’s Central District Court, and on September 6th, for Chapter 15 protection at US Federal Bankruptcy Court in Newark, NJ. Filings in approximately 45 jurisdictions worldwide, where Hanjin vessels trade, are expected to be filed in the very near term.

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Containership MV ‘Hanjin Monaco’ against the downtown Manhattan skyline in better days. Image credit: Karatzas Images.

With approximately 140 vessels under management, only 40 of which are self-owned and 100 chartered-in or leased, there have been serious implications for the market, at least in the short term. With only US$ 700 mil in equity, US$ 1.7 billion value of its fleet and $5.4 billion in outstanding obligations, the capital structure resembles a house of cards. The value of the cargo on-board of Hanjin’s vessels at the time of filing for receivership was estimated at $14.5 billion. The ensuing result has been a logistical nightmare, given all such cargo had contractual obligations to be delivered on time, but Hanjin’s vendors would not render any services unless they were getting paid in advance. Receivership and Chapter 15 can stop creditors from knocking on the door, but vendors would now perform only on cash basis payments. Hanjin’s financial nightmare has been compounded by the legal complexity of the business which is further compounded by the logistical complexity of the containership liner business. Only the fact that the containership market has appr. 25% capacity (which has caused Hanjin’s financial troubles in the first place) can alleviate concerns that Hanjin’s potential demise will no be a threat to the supply chain and international trade.

Hanjin’s filing has been front page news for the whole last week. Here’s a list of articles in the print, TV and radio coverage where Basil M Karatzas and Karatzas Marine Advisors & Co were quoted:

Moral Hazard Case Study: Hanjin Shipping                                                          Maritime Executive, September 6th 2016

Containers Stranded at Sea After South Korean Company Goes Bankrupt         NPR, All Things Considered, September 8th, 2016                                                    To Listen to the Audio Clip, Please Click here!  

Retailers Seek U.S Help With Shipping Crisis                                                            The Wall Street Journal, September 1st, 2016

Hanjin Shipping Bankruptcy Unlikely to Ease Gluts of Vessels                                    The Wall Street Journal, September 2nd, 2016

Shipping Chaos                                                                                                              The Exchange CBC News Canadian Broadcasting Corporation                                TV Interview, September 2nd, 2016

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Basil Karatzas on CBC News – The Exchange about Hanjin Shipping’s Receivership. Image credit: CBC

© 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 chronically weak freight market and moral hazard

Low freight rates have been a concern for a great number of reasons and to a wide range of market participants: low freight rates entail weak cash flows for the shipowners who cannot perform on their loans and causing problems for the shipping lenders; investors in shipping having experienced poor returns on their investments contemplating asset sales and leading even lower asset prices; shipbuilders facing a great deal of slippage and defaults on existing newbuilding orders while demand for additional orders has vaporized; charterers and cargo owners have to be very careful that vessels chartered even in the spot market not only are seaworthy and commercially competitive, but also the shipowner is current with their financial obligations and there is no risk of seeing the vessel delayed or arrested and the cargo onboard not delivered on time; likewise, vendors to the shipping industry have to be experts with managing credit risk and keep their clients on a short leash (further curtailing market activity and their own business).

All the concerns mentioned above emanate from a single cause, a low freight market that radiates and affects every dimension of the shipping market. Despite the recent bounce in the dry bulk market, freight rates are still very low and at barely operating break-even levels. The freight markets have been too low and for too long, and shipowners, still in business, have had to dip deeply into their cash reserves or seen their equity overly diluted. There is little more aside in terms of cash reserves, funding from investors and financiers outside the industry, or for that matter, of patience.

Based on recent transactions and experience, now another concern has to be added to the long list springing from a weak freight market: moral hazard. Moral hazard in this case can be defined as the behavior where an owner is so much disengaged from reality as to act carelessly in reference to the asset and the parties with an interest in the asset. The most obvious example is when the owner’ economic interest in the asset is so minuscule that there is precious little to care about the asset.

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Neo-panamax containership MV ‘Hanjin Namu’ entering the Port of Piraeus in better days. Image credit: Karatzas Images

There has been moral hazard in reference to financing and outstanding shipping loans. When the principal amount of the ship mortgage is materially higher than the present value of the vessel (and any hope of market recovery thereof), the shipowner has little incentive to make any effort to fulfill their obligations according to the loan agreement. There is very little hope that they will ever see their money back and thus little incentive to behave. Several owners we know had been making good, more or less, on their loans for the last couple of years in the hope of a market recovery. Two years later, having thrown good money after bad money, and reaching the bottom of their cash reserve piles, now they are barely inclined to keep performing. There have been cases of shipowners who have stopped paying interest and principal of their loans despite having the financial capacity to do so. They are better off with shipping loans in default than with performing loans. First, they reserve capital, which they can deploy to new clean-slate shipping investments and let the legacy transactions sink. Second, for loans in default, shipping banks seem keener to grand concessions to shipowners with non-performing loans while they seem to uphold ‘good’ shipowners at a much higher standard. Thus, it pays to be bad. Thirdly, there had been traditionally an unspoken law in shipping that for a borrower defaulting to a shipping bank, effectively they were ostracized for life by the ship banking community, thus a very high incentive to behave: not to borrow more than one could afford, and, even when things turned sour, to make every effort to see the lender to recover as much as possible of the principal outstanding. Now with several executives at shipping banks being corporate officers with little knowledge of or affection for shipping or with a great deal of shipping banks actively exiting shipping, there is no longer the self-watching ship banking community to ensure proper borrower behavior and thus, plenty of room for moral hazard. Sort of, ‘what they can do to me?’

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Image credit: Karatzas Images

There has been moral hazard in reference to the maintenance of the vessels as well. When the freight market is low, economizing by cutting on expenses is required to make do with less and ensure survival in a challenging market. First goes the ‘fat’ and then ‘discretionary spending’ (spare parts onboard the vessel is the classic case) and then laying off people ashore, and then keeping vessel maintenance only to the extent that the classification society requires in order to renew the certificates. Talking to inspectors boarding vessels on behalf of charterers, the technical quality of the vessels has become a concern; and, this concern is highly troubling for tankers and for oil companies given the level of liability in the event of an accident involving pollution. Talking to inspectors boarding vessels on behalf of the port state control (such as the US Coast Guard), there is real concern about vessels that have been under-maintained. Talking to inspectors boarding vessels on behalf of buyers of ships in the secondary market, there is lots of concern about vessels that have been neglected for too long. With the freight market too weak for too long and with many vessels afloat ‘depending on the kindness of strangers’, there is little incentive to do anything above the absolutely minimum required in terms of maintenance.

There has been moral hazard in reference to seafarers and the environment as well. There have been several stories recently in the trade press about seafarers getting abandoned, gone unpaid for months and malnourished, and even stories of vessels arrested due to outstanding crew wages. And, in a market place where the shipowner does not care much about the asset or the lender or the crew, it’s hard to envision how or why they would care much about anything else, such as the environment or adhering to sound navigational practices. Such is the risk of moral hazard.

There is no doubt that we are living through unique times in shipping; the present shipping crisis has been much more monstrous than others in the past. Examples of moral hazard is a known consequence of rapidly shifting economic structures and defaults (think of moral hazard in the subprime real estate in the US a few years ago). However, given that there is low expectation of a market recovery in the near future, issues arising from moral hazard will only get more complicated and perilous. After all, moral hazard in shipping can affect trade, human lives and the environment. When contemplating actions in shipping at present, one has to be cognizant of addressing alignment of interests and dissipation of moral hazard.

There is an anecdote of Shipowner A confiding to their friend, Shipowner B, that Shipping Bank X arrested four of their vessels. ‘Oh dear,’ replies Shipowner B, ‘I am so sorry to hear. And now, who is your best banking relationship?’ he asks, to which, Shipowner A dryly replies with relief: ‘I think I already told you, Bank X’!

As funny as the joke is, a market cannot function on such a basis.


The above article was originally published on The Maritime Executive website on August 30th, 2016, under the title: “Shipping’s Moral Hazard”. We are thankful to the Editors of The Maritime Executive for hosting our article.


bmti-1An abbreviated version of the article suitable for the weekly market report was published on September 2, 2016 by BMTI in Germany, under the title: “Concerns About Moral Hazard in the Shipping Industry”. We are thankful to our friends at BMTI (a well respected dry bulk market data provider, with special focus on smaller tonnages and MPP vessels, and the short sea market) for hosting our article. For more info on BMTI and their services please click on the image of their homepage to the right!


© 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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Shipping’s new dislocation: the banking system’s ‘safety trap’

Times for most shipping sectors are very tough, by many standards, even if one takes a long-term historical perspective. The Baltic Dry Index (BDI), the proxy for the broader shipping industry in many ways, is almost 100% up in the last forty days – and still, dry bulk vessels barely achieve operating break-even rates on the spot market.

Dry bulk asset prices, despite the recent rejuvenation of the last two weeks, are very low; bulkers older than ten-year-old typically change hands at multiples of their scrap price. The dry bulk freight market has taken most of the blame, since what kind of buyer would like to buy a vessel – irrespective of attractive pricing – and start losing money from the minute they touch them when the closing and delivery of the vessel is in effect.

No doubt the weakness of the freight market deserves lots of the blame. But, anyone, who has been involved with vessel valuations and shipping investments, knows that vessel asset prices are also materially influenced by several more factors, availability of cheap capital being the primary driver among them.

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Shipping’s Old Model. Image Credit: Karatzas Images

Financing for shipping projects at present is typically rather very expensive. Most shipping banks have already left shipping and a few more have been divesting shipping loan portfolios as fast as practically possible. For the banks still active in shipping, very few and precious, they mostly stay away from soliciting new clients – since their existing clientele can absorb their curtailed availability of funds, and without having to undertake the always challenging KYC approval, etc. For new clients to be considered, they have to be “strategic”, with critical mass of fleet of vessels, sound prospects of business success, and sometimes, already recognizable names from the bank’s private wealth departments. Lending against dry bulk vessels is of no interest to the shipping banks now, tankers older than typically eight years of age are too old to lend against, crude tankers are too risky to touch, containerships need to have long term charters, and offshore is off a cliff for now. In short, for a shipping project to obtain new financing from a shipping bank these days, the ship will have to walk on the water, not just keep afloat!

Obtaining equity for shipping is no much easier, as most funds have lost billions and billions chasing a market recovery in 2013 that never came – or was run over by their exuberance optimism and newbuilding contracts, and now they stay away from the industry. Also, equity funds often invest pro-cyclically, when the market is in recovery, and thus the dry bulk’s negative cash flows are a serious deterrent. There are many funds (credit funds) that provide lending in the shipping industry, and they often charge 6-10% interest rates plus some degree of equity participation. And, the market is so constrained for debt financing, that we know several owners (and actually our firm has arranged such financing for a few more), where shipowners are borrowing at such high terms in order to be able to expand and exploit the present state of the market and the historically low asset prices.

The difficulty of obtaining financing for shipping projects has to do with many factors, some originating from the shipping industry but some not. The excesses of the shipping banks, for example, of the pre-Lehman credit boom still have not worked their way through the banking system. There is still an amazing amount of shipping loan portfolios that are priced close to original cost basis, allowing for little else for the banks but to play for time and hope for a market recovery. There are cases where the ‘non core’ bank is not allowed in any way to assist a potential, legitimate buyer of assets with the ‘core’ department of the same bank – forcing many times deals to be scrubbed or consummated at terms clearly inferior to what could had been achieved if the ‘core bank’ could be engaged; the legal limitations and other considerations for need of lack of coordination between ‘core’ and ‘non core’ are appreciated, but one may be tempted to say that regulators have been overshooting in order to compensate for their undershooting a decade ago.

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A newer, better model… Image Credit: Karatzas Images

Another interesting observation on misplaced actions by banks (shipping banks in our case) due to regulation is that at a time of low or even negative interest rate policies (NIRP) and still extensive quantitative easing (QE) by the European Central Bank (ECB), banks go for few, selected, concentrated credit risk, especially when such risk is perceived to be superior that would lead to no losses for the bank. As a result, banks (shipping banks) end up chasing a handful of accounts, whether super-major independent shipowners or top-tier corporates, at razor thin margins. Banks these days would rather lend US$ 1 billion at no more than 150 bps spread to an account they deem superior rather make originate several mortgages of US$ 20 mil each, to solid accounts that do not tick all the boxes, at spreads of 500 bps. For the sake of being optically correct and allegedly minimize the probability of originating a loss-making mortgage, banks concede to cut their margins to the bone and accept concentration on a handful of accounts, while 90% of the lending market remains virgin territory. It’s amazing that our office, in our capacity of advisors and private placement agents, habitually is fielding calls these days from American and European and Asian banks desperate for new projects, but always for deals where credit is superior and always at increments of hundred millions. No project finance, no small or medium owners, no private companies: oil companies, large corporates, stand-out clients of private wealth, substantial end users.

We cannot name names but one can peruse the list of serial buyers of modern tonnage, often tonnage unloaded by publicly listed companies and private equity investors, to get an idea who are the clients the banks (shipping banks) want these days as clients. Rumor has it that such names have billion dollar lines with banks at barely higher than 100 bps spread; a ridiculously thin margin and a ridiculously low cost of funding given that interest rates by central banks are at almost all times lows.

Banks seems to have been boxed not by a “liquidity” trap but by a “safety trap” where regulators and central banks demand high credit assets as collateral, pushing banks to do business for what it is considered safe and not necessarily economic (at a price); some say that present policies have even been contributing to stagnant growth overall. Taking a narrow-focused group on shipping, one may wonder whether the banks (shipping banks) are shooting themselves on the foot and whether they are laying the ground for the next bubble: banks prefer to lend US$ 400 mil to one lender for the purchase of ten modern cape vessels at excess 80% leverage and at 150 bps spread, while will not even contemplate doing forty (40) mortgages at 50% leverage at 500 bps spread for ten-year old bulkers priced at 3x scrap value. Over-concentration on one account and asset class and trade at historically low margins (that likely to hurt the banks when interest rates increase) are clearly preferable, in bank’s point of view today, to broader diversification at robust margins that offer better prospects in the long term but also support the shipping market (including the shipping banks themselves in the short term).

In our humble opinion, the shipping finance market is highly dislocated at present (offering many investment opportunities), but more crucially, it seems that the elements of the next crisis are already incipient in the waters.


Article was originally published in the Maritime Executive Newsletter on May 2nd, 2016, under the title: “The Banking System’s “Safety Trap”“.


© 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.

Shipping’s “This time it’s different…”

They say there is never a boring day in shipping, but, at present, we suspect that there are a few people who could do with just a tad of less excitement in this industry. The overall shipping market, as encapsulated in the Baltic Dry Index, has been on a race to the bottom.

Talking with shipowners worldwide, even with the ever ebullient shipowners in Greece, the mood for the market is of doom and gloom: persistently weak freight rates in the dry bulk market have burned cash reserves, eroded vessel values and brought on charter defaults and unilateral demands for negotiating down rates; filings for protection and announcement for restructurings are daily fodder of the trade press; a relatively young world fleet that may look prematurely old by an approximate 17% outstanding orderbook; mining companies have been warning investors for several years of weak cows in terms of recovery for commodities; anemic world economic growth and bloated balance sheets of central banks – courtesy of the credit boom years of pre-Lehman days – and interest rates in negative territory; and above all, the greatest riddle of all, a Chinese economy that has only been managing to deliver negative surprises of recent.

No doubt, the market is bad.

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The way it was… Image Source: Karatzas Photographie Maritime

Volatility is the shipping industry’s daily seascape, and bad days in shipping are nothing unheard of. Low freight markets happened in the 1980’s and 1990’s in recent memory, and actually the downturns in those times were bad enough to bring the undoing of many a ship-owning company and respectable names in shipping. The market collapse in 2008 was also ferocious and precipitous, and caused a few owners to seek protection or even go under. However the present down-cycle seems to be uniquely viciously painful.

For starters, this is the first real down-market that a whole new generation of people in shipping (including ourselves) have ever experienced. In 2008, the market dropped fast and ferociously, but it was a time of great uncertainty overall, and there was a synchronized effort to keep the broader system afloat; young people in shipping only got a chance to see a flash of a bad market. This time in 2015, there are no flashes but only fireworks from every direction, and there seems to be a limited arsenal of options to face this market, especially in a novice’s mind.

Post-2008, shipowners were still cash-rich from the great days of the cycle. Shipping banks only had to ‘extend and pretend’ and buy themselves some time, and central banks and regulators were still easy to accept amended definitions of valuations and performing loans. And, institutional investors and private equity funds were salivating to enter an industry that came down to earth, and plenty of money was on the sides. The collapse of 2008 seems, in retrospect, was a prova generale for a freak show that never arrived, or possibly arrived seven years later.

At present, after almost of two years of negative cash flows, many shipowners have burned a lot of cash just waiting for the market. Many have also bought dry bulk vessels in the interim, which at present, it seems to had been an overly optimistic act as both asset values have been decimated and also these acquisitions turned out to only burn cash, at least so far; thus, there has ‘negative carry’ for both old and newly established positions. While in 2008 shipping banks, for their own reasons, were willing to offer a helping hand, at present, many shipping banks have actively their shipping loans up for sale and they have been sealing their way out of the shipping industry. Shipping banks not only do not offer a helping hand any more, but they have left a huge funding gap behind them, with an immediate impact seen in asset pricing where buyers stay away from new acquisitions, partly due to lack of financing; partially, vessel prices have collapsed further feeding the negative loop. And lack of financing has been affecting newbuilding deliveries and further deterioration of the cash position of shipowners; the undesired result with such deliveries is that while they cost too much money for the owners and likely will cause some owners to default on a project or corporate basis, these vessels will eventually find their way to the market, providing more competition. And this is a market when mining companies warn for several years of weak demand, and a market where the balance sheets of central banks are bloated with assets-of-less-than-stellar quality while experimenting with negative interest rates in a desperate effort to kindle growth.

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„Flüsternde Wellen“ (Whispering Waves): Image Credit: Karatzas Photographie Maritime

The presently bad shape of the market will take some time to play out given the structural imbalances in shipping, but also in the commodity and financial markets. Fiscal policies world around have little room to bring around a miracle. The crisis of 2008 that never came has fooled many people and pulled them into aggressively going long on the market. Shipping always has turned around in style, and it will happen again. However, this may be the time for shipowners to think strategically and with a long term in mind; the trading and transactional nature of shipping played well when ‘risk on’ was the theme, but now it’s the time – a bit late actually, but better late than sorry, to minimize risk and position strategically for a market driven by a new set of variables.


This article first published in February 16th, 2016, at Splash 247 under the title: ‘Shipping Reset’.


© 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.

2nd Naftemporiki Conference

                                                      Basil M Karatzas

                                                        presenting at

                                     2nd Naftemporiki Shipping Conference

                                        Athens, Greece, January 26th, 2016

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A crisis is a terrible thing to waste, it once has been smartly said.

Ever since the collapse of the freight market in 2008, the shipping industry has been struggling to establish a new baseline. It was not only the precipitous decline in the freight market, but also geo-political and macro-economic developments, fiscal and monetary actions and reactions, financial and banking industries’ new enhanced regulations that have been causing stormy waves for the maritime industry.

The recent establishment of all time lows by the Baltic Dry Index has been a chilly reminder that the industry keeps facing an inflection point. The present crisis may be an opportune time for the industry to strategically face and position itself for the new parameters that will set the work-frame for the industry for the next decade, especially for shipping finance, a crucial variable for this capital intense industry.

Naytiliako_728At the 2nd Naftemporiki Conference, the shipping finance panel will address the latest developments of the industry, and especially:

  • Shipping banks are ever more selective with the shipping industry. Is this the end of the ‘ship mortgage’ era? Would corporate finance be a better replacement?
  • Who and how the funding gap left by the shipping banks will be covered? Are alternative and credit funds a temporary solution?
  • Private equity investors have not fared well so far, on average, with their shipping investment. How they could react to their underwater positions? Will they double-down or exit massively at a loss?
  • What happened to the capital markets and the promising wave of Greek shipping IPOs of the last decade? Has the well gone dry?
  • Are the capital markets the way of the future?
  • Are presently the shipowners properly prepared to navigate today’s financial markets and requirements? How can they position themselves best?
  • Would a changing financial and banking market will force some shipowners to leave the industry?
  • How a small / medium-size independent shipowners office will be defined in five years and how such an office will be structured?

These and many more relevant question will be addressed and discussed in-depth at the shipping finance panel of the 2nd Naftemporiki Conference.

We are hopeful that the challenging times of the industry will be resourcefully navigated by the descendants of Odysseus, and the present crisis of the industry will be the springboard for ever greater success for our national industry.

We hope to see you at the 2nd Naftemporiki Conference.

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