For the Shipping Industry, a Matter of Interest and Indebtedness

Ever since shipping banks (and banks in other industries) have been curtailing their lending to shipowners (and for other banks outside shipping to small and middle-market companies), there has been a big funding gap, a market need, that has to be filled for the economy to grow. Many credit funds or alternative capital funds have popped in shipping that lend money for those who look for financing to buy or refinance ships. On a broader scale, many brand-name private equity funds have been setting up credit funds in order to serve the market need of lack of debt financing in numerous industries; with more regulation for banks (among other things), un-regulated lenders step in to serve the market.

There are substantial differences in the way a bank evaluates a loan in shipping than a credit funds approaches the market; although effectively they both look to undertake credit risk (they both lend money), there are always more types of risk entangled around credit: asset risk, operational risk, counterparty risk, etc No doubt that credit funds, as non-regulated lenders typically, have much more flexibility of the structures and the terms of the loans they can underwrite. For starters, credit funds can also take a little or a lot of residual asset risk (balloon payments, etc), market risk (profit sharing, etc), asset risk (finance older vessels, etc), that is, they can think outside the “credit risk” box and provide commercially more flexible structures (of course, at a higher cost of capital.) Also, since credit funds are not regulated, when there is a default of a loan, there is no reporting to a regulatory body which would have consequences on ratios and strategy; a credit fund would have the precious luxury to convert late payments to equity or accept payment-in-kind (PIK) or impose a higher profit sharing scheme and eventually take over the asset, if things really go bad. To be sure, a default for a loan is a painful experience for all those involved, for the shipowner / borrower of course, and also for the financier / creditor, whether the creditor is a regulated bank or a credit fund as practically no-one wishes for such an outcome of default (unless the lender is really a niche vulture fund specializing on feeding on carcasses and liquidation, but honestly, this is the exception than the rule.)

The typical credit fund these days would charge approximately 8% interest for a first preferred ship mortgage; for some, this is expressed as annual interest in absolute terms, but for others, it’s the spread over Libor (L+800 bps), meaning that the borrower also undertakes interest rate risk (at a time when the Fed and other central banks shifting to a tightening mode.) The amount of leverage is dependable, but most likely it populates in the 60-70% range, inlying that still a respectable percentage of equity is required; of course, more equity means that the shipowner has to be selective with their projects and also that the credit risk for the creditor goes down as the percentage of equity goes up. Although some credit funds can accept a bullet payment of the principal (under certain circumstances), a certain level of amortization is required for most cases. And, there are the usual assignment of earnings, minimum value clause, minimum liquidity clause, negative covenant clauses, and also pledge of shares, undated signed director resignations, and, more frequently these days, demands for a personal or corporate guarantee. All in all, the loan terms these days seem to be the extreme opposite of the easy credit days of a decade ago of name lending and loans agreed on a handshake.

Although a few short years ago shipowners would never had conceded to a first preferred ship mortgage with an interest rate above 4-5% or other funky terms, these days there are few options, and thus the reason that 8% has become the prevailing cost of the debt for ship mortgages. Different types, different norms, as said before.

For a theoretical example of a five-year modern panamax bulker valued at $22 mil and 65% leverage and five year term, at 8% annual interest, the daily interest payment alone is appr. $3,000 per diem; presuming that there is a requirement for the principal to be amortized by 50% over the term of the facility, then another $4,000 pd had to be added to the financing payments. Based on a back-of-the-envelope assumption of $6,500 pd vessel daily operating expenses, the cash expenses for operating such a ship range from $9,500 – $13,500 pd; just as a reminder, only in the last eight months panamax freight rates sustainably moved above $10,000 pd, meaning that many borrowers, at best, they were breaking even in the last eighteen months. Of course, there is the hope for higher asset prices and higher freight rates, but, as they say, hope does not make for a good business plan. This model of 8% cost of debt financing would never work with modern, expensive ships (as the interest payment would become exorbitant in today’s freight market), while older tonnage (to the extent that a credit fund can be enticed enough to consider it) has more favorable economics.

There are a few corollaries to the prevailing market practices that need come elaboration:

  1. the cost of debt financing has moved to such high levels that it’s barely economically feasible to undertake new projects or buy ships for the smaller, independent shipowner
  2. borrowers undertake severe interest rate risk at a time when interest rates are moving higher (unlike a shipping bank with its interest rate swap desk that offered a full package, credit funds do not offer such service, and the borrower has to search a dis-incentivized market for this product for effectively project finance and small amounts)
  3. there is a lot of risk for both the borrower and the creditor under such scenario of high interest rates, and it will not take much for many of these financing projects to be underwater, so to speak
  4. as several more tight covenants have been added to these types of loans, in the event of defaults, it can be really ugly; if the overall market turns south (an unlikely scenario for now, but as we have learned, in shipping even unlikely scenarios are probable), there will be a massive cascading problem (credit funds will not be as cavalier as shipping banks with arresting ships, but then how they would be operating them or sell them in a declining market?)
  5. with so many credit funds having been set up for shipping, potentially there could be the possibility of them having to compete and lowering their standards in order to gain business; we are well aware of at least one credit fund that between April and October 2016 made a complete U-turn on their credit underwriting as they could not get one deal done.
  6. as cost of debt financing is too high, many financial sources keep looking entering the market which likely would undermine the credit fund market; we are working with a Chinese-originating fund providing first preferred ship mortgages at 5% interest for 50-60% leverage and very normalized covenants.
  7. disappointedly, for credit funds being private equity funds and well versed in structured finance, their proposed structures are extremely monolithic and inflexible, which will cost them a lot over the long term; being unregulated and flexible, only imagination could limit structures where they could make big returns if they were willing to be flexible and exchange some credit risk for some market risk and some asset risk and some residual risk and some counterparty risk and some… All credit funds have been pigeon-holed into credit, they compete heads-one with every other credit fund, and the only reason they do business now is that shipping is desperate for capital; this market could easily move away. But again, most of these credit funds have been run by former shipping bankers with some trying to exonerate themselves for the shipping bank mistakes of the last decade…

For now for sure, shipping debt is an interest-ing market to watch…

For some, a foggy market… One World Trade Center in Downtown Manhattan. 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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Shipping’s Best Hope of Forgettable Years

By all accounts, 2017 was a forgettable year for shipping – which it may be the best characterization the industry could possibly have at present. Recent memorable years in shipping have not been very uplifting. Probably many people in the industry are still struggling to forget 2016 and its 296 BDI and 161 Capesize readings in March of that year, the lowest ever readings by the Baltic Exchange.

2017 was rather good for dry bulk (pleasantly great if one opts to compare it to an abysmal 2016) while tankers, containerships and offshore were mildly disappointing markets. Shipping segments are not often in sync with each other and segment gyrations are to be expected. Although the fundamentals driving each segment differ nominally, there have been a few common underlying trends across segments at present: the outstanding orderbook has been low in each and every segment, actually the lowest in recent memory. Tonnage demand keeps increasing on the strength of global economic growth. Tonnage supply keeps growing but at lower levels, so much so that tonnage demand hesitantly exceeds tonnage supply growth in certain markets. And, lack of shipping finance negatively affects all segments of the industry, further curtailing the possibility for an exorbitant wave of newbuildings. When one examines shipping closely, as a pure tonnage supply and demand equilibrium, 2018 and the near future seem rather promising.

However, shipping is an industry known to get people by surprise and looking forward there are reasons for a market participant to be concerned. Several factors, complimentary to the industry, are cause for concern; probably not as bad as to make the proverbial list “what keep’s you awake at night” but again, not an era of assured smooth sailing.

The shipping finance market has been dysfunctional for the last few years, but at present, the dislocation in the market is reaching unprecedented levels. As traditional shipping banks keep leaving the industry and institutional investors have lost any interest in private equity investments and some public market investments as well, the cost of capital keeps increasing steadily. It’s not unheard of for independent shipowners to be borrowing at 8% spread for first preferred ship mortgages with tight covenants and terms these days. For a capital intensive industry, the high cost of capital is an accident waiting to happen for shipowners and financiers alike. Also, lack of debt financing is shifting the market, even forcing smaller players to shut down and slowly driving a consolidation wave. Probably too soon to notice any immediate effect in 2018, but watching the Greek and German markets over the last few years, one can note the trend forming.

Many hopeful shipping business plans and corporate presentations pride on the industry’s low outstanding orderbook. It’s absolutely marvelous that shipowners have shown self-discipline in the last few years and abstained from speculative orders; however, the counter-argument is that shipbuilders are immediately ready for new orders and can deliver new ships as soon as within nine months. Low outstanding orderbook implies plenty of spare shipbuilding capacity. And, while there has been talk about inconsequential Chinese shipbuilders getting weeded out in the last couple of years, the truth of the matter is that shipbuilding capacity is highly elastic and all those now defunct shipbuilders would be entering again the market the minute that hot new orders start arriving. It’s a good thing that institutional investors and shipowners have lost interest in “speculative” newbuilding orders, but a strong freight market could likely incite many new orders that can start flooding the market very soon and thwarting a full market recovery. Barring an exogenous stimulus such as export credit incentives or materially lower newbuilding contract prices, a “forgettable” and un-inspiring freight market may be the safest way of navigating these narrow shoals.

While when talking about shipping the focus is on freight rates and asset prices, one cannot neglect the regulatory and operational nature of the business. The ballast water treatment management plants (BWMS) have already been costing the industry additional capital, and new emissions regulations are fast afoot. New regulations are costing the industry billions of dollars when the industry can poorly afford them, and one would expect even tighter standards going forward. Higher standards for vessel performance, tighter standards for safety and security, likely soon IT security to make ships relatively secure from hacking and ransomware, and all these, before one takes into consideration technological obsolescence factors: if for instance natural gas bunkering is the way of the future, what would happen to today’s modern world fleet? We do not want to be the Cassandras and the pessimists of the business, but one has to think about the long future very hard when ordering vessels that have twenty-five years of design life.

Further, while the vessels themselves can be the subject to higher standards and technological obsolesce, how about the cargoes and the underlying trading trends themselves? The cost of producing solar and wind energy has been dropping precipitously and jeopardizing the importance of coal, and possibly crude oil, as the world’s primary energy sources. Electric cars have slowly been passing the “novelty” phase of new products and becoming mainstream that would further impact the energy transport market. And, as shale oil and natural gas keeps improving lowering its production cost, likely to be less need for transport. Probably an isolated example, but the current polar wave of freezing weather in North America barely registered on the crude tanker market; there was a time when crude tanker rates were shooting skywards as charterers were scrambling to import more oil to the US to cover increased energy demand every time there was a cold front in North America. Energy trends take a long time to materialize, but on the other hand, one cannot dismiss that a new baseline that’s forming for the immediate and distant future.

We do not want to be pessimists and do not want to be the ones who are pointing to a half-empty glass. 2017 has been a respectable year, and, with a bit of good luck, 2018 would be equally fair. After many years of persistent fireworks in the industry, some “forgettable” years would be a welcome change. But just like navigating in unchartered waters, one has to keep paying attention to the dangers lurking in the ambient environment and under the surface of the sea.

A Happy New Year to all, especially the seafarers in the middle of the ocean an away from their families!

Happy Shipping and Happy New Year! Virginia Beach, VA. Image credit: Karatzas Images


An edited version of this article first appeared on Splash 24/7 on January 3rd, 2018, under the heading “A forgettable year is our best option”.


© 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.

Sailing the Seas Depends on the Helmsman

Once upon a time, there was an independent shipowner with, let’s say, ten modern product tankers. Three of their tankers were mortgaged with a major European bank, a very well-known name and with proven past commitment to the shipping industry. And, the shipowner themselves, have been in the shipping business for more than a couple of decades and enjoying a solid reputation in the shipping community and with charterers. These, being legacy shipping loans, their terms were highly competitive in this market despite some success of the bank to tighten the loan terms since the market collapse a few years ago. Actually, the terms of these loans were exceptional, by today’s standards, as the spread was just 300 basis points. And, of course, the shipowner had watched these loans like the apple of their eye, and they were current with interest payments and principal repayments and the loans were comfortably meeting the loan-to-value (LTV) covenants.

Eighteen months ago, the shipowner got a note from their mortgage bank that since they (the bank) were exiting the shipping industry, the shipowner was given notice to make arrangements to pay back the loans (there was a small discount offered) or the bank would had to take matters in their own hands. Since these were performing loans, the mortgage bank could sell the loans at close to par, likely to a credit fund or an institutional investor, or possibly even to another bank if there were still banks out there buying shipping loans – not a likely cozy prospect under any circumstances.

It took a few months for the shipowner to recover from the first shock, having a brand-name bank giving them notice on performing loans. And, it only got worse from there. The shipowner’s shock got greater as soon as they started “shopping” the market for new financing: few shipping banks had interest in new clients or business or the capacity to finance a three-vessel package. While approaching institutional investors, the strategy was modified to squeeze the mortgage bank for a hefty discount of the loans, but with the institutional investors sharing (a great deal of) the economics of the transaction and not just to provide new loans. Almost a year passed since the mortgage bank had given notice and the shipowner could not find a new “deal” good enough. But again, having to replace shipping loans priced at L+300 bps in today’s market, one feels like they have been punched in the stomach.

And, while the shipowner was taking their sweet time to find the perfect financing they thought they deserved, the product tanker freight market started deteriorating: first freight rates dipped and then halved, and, as one would expect, secondary market product tanker sales started taking place at lower price levels. While the shipowner had a few million in cash in the bank, dry-dockings and other expenses started chipping away on the balances. And, the lower asset prices triggered LTV defaults now, giving much more leeway to the bank to sell the vessels themselves, and not just the loans – an even worse prospect for the shipowner.

And, lower freight rates and lower asset prices were making financing the original loans more difficult: cash flows now would only support lower financing, and institutional investors lost appetite since any discount now had less value in a weakening market.

All being told, the shipowner managed to finance just two of the vessels at today’s prevailing conditions (lower leverage, tighter covenants and cost in excess of L+600 bps.) And, the third vessel was let go and was sold (at a small loss) since no financing could be found within the parameters of a weak freight market and limited “sweat equity” from the shipowner.

This is a real story (unfortunately) and no names or other details can be divulged; but, such details do not matter really. If there are lessons to be learned is that first, in this market, shipping finance is the “determining factor” of the shipping industry, the independent shipowners. Shipping finance is the new battlefield where shipowners will be called to fight; if they cannot sort out their shipping finance game in the new market, they will be driven out of business – as simple as that. Second, in this difficult market, it’s not only “bad shipowners” who have problems; if your bank is not committed to shipping or you or they are having higher priorities unrelated to shipping, that’s the weakest link in the business, even if the loans are good and performing. Third, it pays to be pro-active in this market and tie loose ends as soon as possible; looking for the perfect financing at the expense of time, one can lose much more than a few hundred basis points – not arguing that two hundred basis points are not worth fighting for, but again, this is not a time when banks and lenders can bend much, if at all. And, lastly, independent shipowners had become a substantial part of the industry based on their shipping and operational expertise and efficiencies and not on their financial expertise (shipping banks were lending in the past liberally and just on the basics of how to extend credit); the present market is much more sophisticated than that and hiring competent shipping advisors may very well be warranted; trying to avoid paying an advisory fee can cost one whole ships.

“Sailing the Seas Depends on the Helmsman” was a revolutionary, patriotic song for Mao Zedong’s Red Guards in the 1960’s and 1970’s exemplifying the Chairman’s leadership skills, metaphorically speaking. For an independent shipowner these days, sailing the seas depends on the helmsman navigating the new reality of the shipping finance markets.

A long shadow over one of world’s most important shipping cluster. 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.

Is the Dry Bulk Tramp Shipping Industry at an Inflection Point?

As punishingly brutal as the shipping industry can be in bad times, it’s fulfillingly rewarding in good times. Who can forget the days from a decade ago when capesize bulkers were earning $250,000 per diem and the ships themselves were changing hands in excess of $150 million? We are a long way from those good old days but memories of and even hopes for prompt arrival of great times keep many a shipowner persevering in this business. It’s known that sweet memories and often hopes have on occasion been used to spruce up many “investment theses” in investment presentations.

The dry bulk tramp trade – whereby ships do not sail on a fixed schedule or published ports of call – has long been considered a textbook case of perfect competition in economics with its low barriers to entry and exit, minimal government and regulatory interference and taxation, an international market of price-takers for an un-differentiated product where no individual player – whether shipowner or charterer – has controlling influence on the market.

In such an individualistic market environment, fortunes have been made – and occasionally lost – when independent shipowners took timely risks and positioned their companies favorably on the dramatic upswing of the business cycle. Now that the dry bulk market is closer to the bottom than the peak of the cycle, there are calls to take risks for a market upswing.

Probably the timing is opportune for buying bulkers in expectations of an upswing in the market but one has to consider whether the dry bulk tramp market still is a market adhering to the rules of a perfectly competitive market. The last decade has seen many fundamental changes in the market that one has to wonder whether the old playbook is still working.

The greatest barrier to entry the shipping industry has been capital, given that this is a capital intensive industry. However, in past times shipping banks were providing generous financing in terms of financial gearing (leverage) and covenants, and even there have been cases of “name lending” and financing agreed on a handshake. Now that shipping banks have been departing the industry, and with the capital markets veering away from project finance and commodity shipping, private equity and other institutional investors have been depended upon to provide capital to shipping but at a much higher cost of capital, tighter terms and covenants and often for a share of the economics. The barriers to entry in terms of accessing capital have definitely been affecting the industry in an adverse way, in this respect.

In reference to government interference and regulation, for vessels having open registries (flags of convenience), the burden is still low in comparison to other onshore industries, but one can see the writing on the wall of higher regulation (and higher costs.) Emissions and the quality of bunker fuel have been making headline news in the last year resulting in both a higher financial component to the business and also technological and regulatory risk. Likewise for ballast water treatment plans, past the official deadlines, technology and approvals only now are getting sorted out. Likely, there will be higher risks for safety and security and ensuring that ships and the seaways supply chain are supported by hack-free systems (ransomware NotPetya have cost Maersk a few hundred million in losses in their last quarterly report, while the possibility of “hacked” ships became a prominent scenario in a recent wave of collisions involving US Navy ships in the Pacific.) And, while offshore registered vessels are taxed on the so-called “tonnage tax” system, many revenue-challenged jurisdictions and taxpayers have been taking a second look on the substantial differential in taxation in reference to domestically registered shipping companies and the potential loss of revenue. Taxation is a risk routinely mentioned in the prospectuses of all publicly listed companies in the US-capital markets and that the current favorable treatment by the IRS cannot always considered to be “a sure thing”. Thus, in an increasingly burdensome era of regulations (environment, safety, security, etc) and taxation, another of the legs of perfect competition seems challenged.

In theory, the “product” that dry bulk shipping companies “sell” is a “commodity” and “interchangeable” as all dry bulk shipping companies offer the service of transporting cargoes in bulk over the sea; as simple as that. And, although there are many charterers who only care for the basic good of cheap transport, an ever increasing number of quality charterers demand more than the “basic” service of transport: they demand quality ships and proper management systems and real time reporting and accountability, and also solid shipowners and managers free of financial risk of default. Thus, the “product” of the tramp dry bulk shipping slowly becomes less commoditized and more of a “service” whereby now ships and shipowners are not exactly interchangeable. Quality ships run by quality managers are preferred by charterers, but they still earn market price; and, in order to be profitable at market prices, critical mass of a fleet is required in order to access capital and also spread the overhead among a larger number of vessels. Thus, another tenet of the perfect competition model that dry bulk is a “commodity” good is slowly challenged.

At the end of the day, dry bulk shipowners in the tramp trade are “price takers” and will take what the market pays as there is little pricing power; again, a perfect competition characteristic. However, the case of just buying cheap ships and wait for the market to recovery will not necessarily hold true in this new market environment. One has to wonder whether the tramp dry bulk market, as a precursor to other asset classes – is slowly approaching an inflection point where “value added” services would be a differentiating factor.

“Hope is a good thing, maybe the best of things, and no good thing ever dies”, as the quote goes, but one may has to start thinking that just hope alone of a market recovery similar to recoveries in previous business cycles may not be the case.


Article was originally was published on The Maritime Executive under the title “Is The Dry Bulk Tramp Market at an Inflection Point?” on December 1st, 2017.


Dry bulk vessel about to go under a bridge. 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.

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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Credit is due to Shipping Finance

The freight market has been disappointing recently, for dry bulk, tankers and containerships, while asset prices too have been on a softening trend, especially for tankers. As one would expect, traditionally the freight market gets most of the attention in shipping, for signs of strength with the hope that asset prices would be lifted too; however, we are of the opinion that shipping finance may be the key for successfully navigating the shipping markets going forward.

Having traveled extensively recently and having closed several S&P and structured, financial transactions, we can only be more convinced by the day that shipping finance is where the real battlefield lays for shipping nowadays. Access to finance, whether based on own funds or access to financing from third parties, is what sets shipowners apart in terms of survival and growth.

Shipping banks are done with traditional shipping and first preferred ship mortgages. Yes, we have seen a couple of occasions where European banks are still lending at 300 bps spread over Libor, but they are so selective and have such a limited capacity that effectively such lending activity only confirms the fact that shipping banks are not active for most practical purposes. Thus, cheap debt financing is no more.

Shipping credit funds have made lots of noise in the last year, and we estimate that they have deployed close to a billion dollars in the last eighteen months; still, they are too afar from financing the average shipowners, notwithstanding the temptation in this desperate market for debt financing. Credit funds typically look for 8% minimum yield before any fees, equity kickers and other incentives, which limits their applicability to only second hand vessels that are priced at a multiple of the collateral’s scrap value; financing the acquisition of a resale capesize vessel with excess $30 mil acquisition price and paying 8% yield, one may as well try their luck in Las Vegas and try to have a good time while they are at it. Thus, credit funds can have parodical application.

Private equity funds having made ill-timed “bets” in 2011-2014 in shipping (and we consciously use the term “bets”), now they stand licking their wounds and trying to devise ways to cut their losses short. Never mind grandiose plans for IPOs, market consolidation and bringing turn-around expertise and making a commitment to the industry; we have been the busiest we have seen with advisory, market intelligence, valuation, industry expertise services for disputes, arbitration and litigation between shipowners and financial investors. So much for hopes that private equity could feel the funding gap left in the wake of shipping banks leaving the industry.

True, there are still shipowners with deep pockets who have kept buying vessels well into 2017, despite the asset price bounce compared to all time lows in 2016 for the dry bulk market; however, there are few shipowners that indeed still have deep pockets. German owners may feel sick that they lose ships to other markets and especially to the Greek market, and this can be true to an extent, but on the other hand, few shipowners have been buying and can keep buying on a sustainable basis; most shipowners with ‘seed money’ are almost maxed out and looking for third-party money if they were to keep buying.

Shipping finance is really the battleground for modern shipping these days, the industry’s ‘soft underbelly’. While one can keep projecting on tonnage demand growth and developing trade patterns, shipping finance will be the field that will make or break shipowners. Shipping finance is getting to be ever more challenging and there is no realistically any reason that the picture will get brighter in the future. Yes, for few publicly listed shipping companies with critical mass, real business plans and solid corporate governance, capital markets can still be the way to go. But for most of the independent shipowners and several of the penny-stock listed shipping companies, shipping finance would be the critical link in their survival and / or success.

Based on reports from a recent shipping conference in New York – which purposefully we did not attend, we have seen that “M&A” and “consolidation” were the buzzwords of the day. But again, in a market that is as dead in activity as a coffin floating after the sinking of the „Pequod” in Moby Dick, whether for IPOs, etc (even a SPAC sponsored by the blue blood Saverys’ shipping family has failed) or follow-ons, hopes for “M&A” and “consolidation” have to do. And, statements that shipping and commercial banks ought to be considering shipping again, given that the industry is “low volatility”, humored us for reminding us the proposed “Hamburg Formula” for vessel valuations  of almost ten years ago where the shipping industry was suggested to be an industry of low volatility and risk and the suggested cost of capital was a whole of 50 basis points over the T-bill, then.

Solving the shipping finance riddle is really a critical point for most of the shipowners to address going forward, the direction of the freight and asset pricing markets.


This article first appeared on Splash 24/7 on June 23rd, 2017, under the title “Credit is due to Shipping Finance”.


Manhattan, New York City: An ever more critical place for shipping finance. 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.

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.