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.

Shipping Finance Elements and Concepts

Following Presentations on Shipping Financing have been found on the internet. They are reproduced here as a matter of convenience for readers interested in the subject of how ships have been financed under different structures and different business models, at present and over time.

MV NEPTUNE THALASSA 13 BMK_5610 @There is debt (senior or first preferred ship mortgage, second lien, junior loans) and equity (owners’ equity or sweat equity, friends-and-family money) for the archetypal structure available to independent (individual) shipowner. Shipping banks over time had been the prime financiers of the shipping industry mostly in  the form of asset-backed financing (mortgage). There is leasing whether operating or financial leases, sale and leaseback, or uniquely structured Japanese Operating Leases (JOL), and financing earned via long-term charters (time charters and long-term bareboat demise charters). Independent shipowners have been dealing with shipping banks and often financed vessels via project finance, and when circumstances fertile, dealt with private equity as well. For owners who sought public equity and underwent an IPO process, the capital markets for equities and for bond (shipping bonds) have offered more alternatives. Shipping finance has been experiencing tectonic changes since 2008 and has moved from relatively self-explanatory terms of vessel valuations and Loan-to-Value (LTV) to terminology to accommodate Basel III with its Tier 1 Capital (CET1) to Risk-Weighted Assets (RAW) and the Capital Adequacy Ratio.

Copyright to the presentations and articles listed herebelow belongs to their perspective owners, and hereby duly acknowledged. Presentations have been found posted freely on the world wide web, and reproduced here as a matter of convenience.


Elements of Ship Finance
Zan Yang and Jian Chen
Department of management, Dalian Maritime University                                                  Last accessed on the internet on July 26, 2016.                              http://www.paper.edu.cn/scholar/downpaper/yangzan-2.html


Risk vs Return for Lenders and the Economics for Borrowers
by R. Philip Bailey, June 2015
Last accessed on the internet on July 26, 2016.

By Allan D. Reiss, Morgan Lewis & Bockius LLP, 2014

Last accessed on the internet on July 26, 2016.

Deloitte, 2011
Last accessed on the internet on July 26, 2016.

Irish Maritime Development Office, 2015
Last accessed on the internet on July 26, 2016.

Shipping Finance: A New Model for a New Market                                                  Citi, 2015                                                                                                                       Last accessed on the internet on July 26, 2016.                                    https://www.citibank.com/tts/trade_finance/financing/docs/citi_ss_v2.pdf


The Impact of the Basel III Capital Accord of Asset Finance
by Angelo L Rosa, 2012
Last accessed on the internet on July 26, 2016.

by Basil M Karatzas, 2010
Journal of Equipment Lease Finance
Last accessed on the internet on July 26, 2016.

Dissertation by Alex Orfanidis, 20014
Last accessed on the internet on July 26, 2016.

Ariff Kamarudin, 2012
Lehigh University
Last accessed on the internet on July 26, 2016.

© 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 Banks and Credit Funds

For anyone who approached a shipping bank in 2015 requesting a shipping loan (mortgage), the reality has been as rough as the waves of the North Atlantic in the winter season. Shipping banks have been leaving a large funding gap behind them, and a few new entrants to the market, whether banks, lessors, or more prominently credit funds, have been making waves about. In the current issue of the Cayman Financial Review, Basil M. Karatzas with Karatzas Marine Advisors & Co explores the new reality.

The article can be accessed online at the website of the Cayman Financial Review by clicking here, or a pdf article of the article can be access by clicking on the picture herebelow. The article has been reproduced courtesy of the Cayman Financial Review where the copyright belongs to. We are thankful to them for hosting us for the second time in a year, testament to the Caribbean Islands being hospitable to maritime and shipping finance insight!2015 12DEC CFR Credit funds in the wake of departing shipping banks

 


© 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.

2015 12DEC CFR Credit funds in the wake of departing shipping banks

Doubling Down as an Exit Strategy?

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

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

MV SEAGO PIRAEUS 2

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

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

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

MT AEGEAN VIII_7

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

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

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

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


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


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

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