Sailing Winds on Wall Street

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

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

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

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

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

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

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Smooth seas… Image credit: Karatzas Images.

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

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

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


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


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


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Where the winds are strong… Image credit: Karatzas Images

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Shipping, Private Equity and the Theory of Agency

The involvement of the private equity in the shipping industry has consumed plenty of ink and has rekindled not too little of a hope for an industry in distress; since the collapse of shipping market in 2008, private equity investors (and by extension, institutional investors wholesale-ly) have been accorded a portrait ranging from guardian angels and saviors of the industry to the “locusts” purveying industries in distress. A lot second-guessing can be excused when markets are dislocated and survival takes precedence over form or order. However, seven years after the instigation of the crisis and more than $30 billion in investments in shipping, people have been trying to take stock of what they had, what happened and what they should had. The fact that seven years after the instigation of the shipping market’s collapse still major shipping industry indices are flirting with all time lows does not make attempted assessments about the industry any easier.

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MV ‘Prince Joe’ in Piraeus – Your typical princely ‘Joe’, today in Piraeus, tomorrow on Wall Street… Image credit: Karatzas Photographie Maritime

As a matter of fact, the precipitous drop of the market and the establishment of thirty-year lows for indices like the Dry Baltic Index (BDI) have brought the concern of industry stock-taking to the pages of the mainstream business press. Most prominently, recently the Financial Times run an opinion article on shipping and the involvement of the private equity in shipping, and what it may have gone so awry; after all, the best and the brightest of the industry have poured their greyest of their gray power into alleviating the troubles of the industry. So far, the foray of institutional investors into shipping has not gone as modeled (at least up until now), and the aftershocks of such involvement are widely expected to make waves in an industry used to be dealing with physical waves.

Blame has been laid on the shortcomings of the agency theory as managers may try to put their own interests ahead of those of their principals and investors. The agency theory has been offered as a management or administration class in business schools, but actually applies nicely in the shipping industry, and actually twice. Corporate officers and corporate managers are running the shipping company on behalf of the investors – who are not involved with day-to-day operations, and in their absence, corporate managers may make decisions that have the managers’ best interests at heart instead of the shareholders. The potential conflict is clear.

In a model often adopted in shipping, the vessel management of the company’s fleet is often outsourced to a vessel management company often affiliated with the corporate officers or at least the ‘sponsor’ of the company when the shipping company was IPO-ed. Many shipowners – both operating and financial shipowners – outsource their vessel management to third parties, for many reasons – including benefitting from economies of scale, etc, and there is nothing inherent wrong with outsourcing; however, when the vessel management company is affiliated with the company’s management, and the earnings of the steady, market-neutral cash flows of the vessel management are unilaterally benefiting private the corporate management, then there may be a concern. It’s apparent that the potential for conflict arises twice when the agency theory is applied to shipping.

Now that several publicly listed shipping companies have become ‘penny stocks’, not mentioning several restructurings and bankruptcies and many investments by institutional investors gone sour, the conflicts of interest get front and center attention. It took a shipping cycle of a lifetime to burst in 2008 and a dip to 30-year low for the Baltic Dry Index (BDI) for concerns to be raised, as such in the article in the Financial Times.

The truth of the matter is that it’s unfortunate that conflicts of interest let the managers on occasion get the better end of the deal; it’s part of the human nature that such things happen, and the managerial science has been at work on how best to optimize corporate governance, motivate sufficiently the managers but not at the undue expense of the shareholders. However, this is not the first time that managerial abuse may have taken place, and shipping is not the only industry having such ‘privilege’. Just recently in the news, former CEO of Tyco International Dennis Kozlowski was looking for absolution for the managerial excesses of ice sculptures decorating corporate events in Sardinia of an era past (hopefully).

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Lighthouse ‘Point Judith’ in Rhode Island; image credit: Karatzas Photographie Maritime

The truth of the matter also is that in reference to managerial excesses in shipping – and mostly when it comes to vessel management – the news about the abuses are often pre-announced and occasionally never exaggerated at all. One only has to peruse the filings and the prospectuses of shipping companies – mandatory information for publicly listed companies – to see that in many cases, there have been a garden variety of excesses and conflicts, including exorbitant vessel management fees. There is no digging, begging, suing, etc to get access to such information; it’s in black and white, publicly filed, and available on any computer with internet access. It only takes a few phone calls to market experts and other vessel management companies to get a sense of the going market rate for vessel management fees, which coincidentally is less than $500 per diem; however, on average for most publicly listed shipping companies, the shareholders are paying more than twice as much to affiliated companies to have their vessels managed; There are actually publicly listed companies that they have proposed as high as $1,800 per diem vessel management fees. Why? Why anyone would accept such without qualifying the service or attempt to negotiate better pricing or shop the market? And of course, vessel management fees is only one form of conflicts and managerial abuse; there are commissions for the sale & purchase of vessels managed, for the chartering and the commercial management of the vessels, for ordering the vessels at the shipbuilders, for supervising the construction, for … for… Back-of-the-envelope calculations for last year’s darling of shipping companies on Wall Street is that the management of the company has earned close to $100 million in fees alone, risk free and captive proceeds effectively for doing their job; and this is before executive compensation and other benefits. And a few years ago, executive compensation for another certain shipping company amounted to $75 million out of $125 million operating profit in the course of a few years. Again, such information has been filed publicly and it is not news, or it should not be news.

We can talk about the excesses of the shipping markets, but as in many things in life, there is the overarching principle of caveat emptor, buyer be aware; pertinent information is made publicly available, and let the investors make their own decision, and let them be prepared to take certain risks, let them benefit or suffer from the consequences. And, shipping is a very volatile industry with lots of inherent risk and meaningful chance of one losing their investment. Heightened management fees and other conflicts have exacerbated the results of the crisis but cannot be blamed for the crisis. And, placing the blame solely on the management teams doesn’t advance the debate about better corporate governance. After all, these prospectuses are primarily filed and intended for institutional investors who are well educated and experienced and compensated to invest money professionally; they should have done their due diligence, they should have checked the market, they should have ‘kicked the tires’ as they say, or in shipping, possibly they should have boarded a vessel or two. The truth of the matter is that sometimes investors are blinded, motivated by deal pressure and the need to deploy their money under management and start earning their own fees, they sometimes think monolithically and chase the same story, and unfortunately, very often, minimizing their due diligence to a box to be checked, and not a real in-depth search of the real events, causes and relationships. Unfortunately, we have seen it too many times in our business life, including most memorably once getting a call from Sydney, Australia from a firm where a US-institutional investor had outsourced their due diligence ‘box’ – the heavily Aussie-accented gent was calling to ask about a Greek shipowner; when the reply was ‘Well, they are not exactly Angelicoussis’, the follow-up question was ‘What’s Angelicoussis?’

Putting the blame solely on managerial abuses and conflicts of interest on the management and sponsors of shipping companies reminds of the joke where a prostitute, failing to collect the earnings after rendering certain services, yells ‘Rape!’ When professional fund and asset managers depend solely on screens and models to make their decisions and fail or turn a blind eye to conflicts in pursue of a quick return to be booked in this quarter, and follow a trend because everybody else is doing it (‘eco design’ newbuildings come to mind), it’s a disingenuous service to the shipping industry and a disingenuous service to the shareholders on behalf of whom institutional investors are acting. When short-termism and herd mentality guides investment decision-making, when due diligence is a box to be ticked, one has to wonder whether shipping will get to see better days soon… or more respectable days…


 

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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.