Where Money in the Maritime Industry Will Come From?

Ships are expensive assets, even small pleasure boat owners know. A small handysize bulker of 32,000 dwt has cost no less than $20 mil as a newbuilding even during weak markets; on the other hand of the spectrum, crude oil supertankers (VLCCs) currently cost appr. $85 mil brand-new, while LNG tankers cost almost twice as much.

Being a successful shipowner, therefore, requires access to capital, as plentiful and as at low cost as possible. Even flamboyantly rich shipowners do not have enough money to own outright their fleets (in most cases), and they have to depend on financial “leverage” and financial partnerships.

Banks traditionally had been providing most of the financing in the maritime industry; throughout business cycles, banks could be depended upon to provide 50-80% leverage, usually in the form of a first preferred ship mortgage – just like a bank would provide a mortgage loan for a residential property, with the asset as collateral. There have been dedicated banks to shipping (typically Scandinavian, British and German due to maritime history) and several more banks were transient in the industry when times were good. And, while easiness of financing varied depending on the phase of the business cycle, it was always available, as long as the shipowner had an impeccable record honoring previous commitments to the banks.

A decade after the Lehman Brothers collapse, banks are heavily regulated (although there is talk of late of loosening banking regulations, at least on one side of the pond), and ship mortgages and asset-backed financing are not the preferred line of business any more. In addition, many banks with shipping exposure are actively still selling shipping loans, trying to cut their exposure to the industry to nil. And, for many shipping banks with big losses from their shipping portfolios, it’s hard to convince senior management and shareholders on the appeal of the shipping industry these days anew; in some corners, shipping and maritime have become dirty words.

Besides small lending on a very selective basis by a handful of small banks for ship mortgages, so small that almost does not matter, traditional lending by the banks is a dead business. There is much more activity in terms of corporate lending to shipowners with big balance sheets and consolidated financials, and with long term and “bankable” charter employment, but there are relatively few such shipowners. The majority of the shipowners are smaller companies, trading their vessels in the spot market, and taking preponderous exposure to the vicissitude of the freight markets.

It has been estimated that shipping banks loan portfolios stood at close to $600 billion at the peak of the market in 2008, which is a very big funding gap to fill.

There has been a plethora of so-called credit funds entering the shipping finance market and aiming at filling the funding gap left behind by the shipping banks. Credit funds has been a new mania on the Wall Street, as such funds try to exploit the inability and inefficiency of the regulated banks to service small and mid-sized companies and companies that cannot “tick all the boxes” of a traditional lender. A recent article in the Financial Times states that between 2010 and now, credit funds based in North America doubled in capacity from app. $75 billion to more than $160 billion, so much so that “shadow banking” started being a concern. Credit funds active in shipping are usually funds dedicated to the industry and not part of multi-industry funds, and often are set up and managed by private equity funds and institutional investors with prior exposure to shipping. Fine print aside, credit funds usually charge at least 7% spread over Libor, with several of them well into double-digit territory. No-one expected credit funds to be as “cheap” as bank loans, but at 700 bps minimum margin, shipowners can barely claim that they have access to effective capital. After the honeymoon period of the first entrants to the market, credit funds cannot be the dependable source of capital the shipping industry requires, it seems.

Looking into equity, in the last decade, when the freight market was the best in a lifetime and equity markets were buoyant, there were several attempts of Initial Public Offerings (IPOs) by several shipping companies. Their track-record aside, public equity markets at present are looking for only large (billion-plus balance sheet, etc) and well established shipping companies with a “story”, hopefully a story of growth; for many of the smaller shipowners, the public equity (and debt) markets cannot be considered a source of capital, another dead-end for shipping financing.

Chinese leasing recently has been in the news as many Chinese lessors are looking into expanding aggressively in the international shipping market, and they have been active with sale-and-leaseback transactions. Although more bureaucratic than western financing, their overall terms are rather lenient – but again, for shipowners with sizeable fleets and consolidated financials.

Many industry experts have been contemplating what the source of capital will be for shipping. It’s really a very critical question to answer, and we think, it will affect the nature of the shipping industry in the years to come. Karatzas Marine Advisors & Co even held a shipping finance conference in Athens in early 2018 focused on just such question, and a follow up conference is already in the works for January 2019. Because of shipping finance (and also new regulations, etc), we believe that the shipping industry is at an inflection point where drastic changes are about to take place. Likely shipping in the next decade and the decades to come will be of a different nature, and that’s mainly because the nature of the shipping finance is a-changing. A great deal of shipowners will be materially affected by it, unless they start being pro-active right away.


© 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 “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.