Consolidation and Shipping: A Cure for All?

Since the initial collapse of the shipping industry in the second half of 2008, many remedies have been proposed for a market recovery, ranging from pragmatic (slow steaming, etc) to utopic (accelerated demolitions for older tonnage, shipowner self-discipline and abstinence from newbuildings, etc). Depending on the point of view, remedies proposed included M&A, market consolidation, selective financing from banks and financiers, etc

The consolidation theme has been particularly in the news for the last several years, and now that five years into the crisis there is no clear light at the end of the tunnel, consolidation once again has been commanding the headlines. At a recent shipping conference in New York City, eminent institutional shipping investor Wilbur Ross once again re-iterated the need for market consolidation.

Consolidation definitely has its usefulness as any investment bank can attest to. An industry with a relatively low number of companies controlling a rather large market share can have a better control of the cost structure, quality, product differentiation and more importantly better pricing power than an industry that is fragmented and controlled by numerous small players. Shipping, especially the dry bulk market, has often been offered as an example of perfect competition with minimal barriers to entry, minimal regulatory and taxation concerns (at least until recently), an internationally open and competitive market; in other words, a industry as antipodean to consolidation as one can get.

Many ship-lending banks have repeatedly raised the point of market consolidation: supposing that as a lender one has a portfolio of several similar vessels in default with several borrowers, it makes sense to consolidate the borrowers (shipowners) simply from a cost basis benefit: instead of having to deal with several borrowers and explaining, negotiating, formalizing the same ‘procedure’ several times over, there will be just one discussion with one counterparty; such an approach not only saves time, overhead and bank resources, but sometimes putting several problems together to form one big problem, the big problem can have solutions not available to many smaller problems of the same kind – critical mass is an obvious benefit of consolidated owner versus the one- or two-vessel special projects.

Still with the ship-lenders’ point of view, a consolidated owner can not only save resources for the lender, but also can economize for their own benefit by spreading the cost of running the business over a bigger pond of vessel ownership. IT, accounting, admin services are the obvious candidates for cost savings, not to mention that savings can be obtained from suppliers and third party providers based on greater purchasing power. And such savings can be detrimental to survival in a market where many vessels are earning at or below operating break-even levels.

A consolidated industry with fewer shipowners also has benefits when dealing with charterers in terms of maximizing revenue and obtaining favorable terms in the charterparty. Larger shipowners can have better control of the market and provide a better orchestrated approach when chartering vessels instead of having to deal on fixture at a time, one vessel at a time, one port at a time, one day at a time. The benefits of a consolidated market can best seen in markets that have been ‘sort of consolidated’ based on their nature, such as the markets for large vessels like VLCCs and capes, and niche markets with few players like asphalt carriers, cement carriers, heavylift vessels, etc Typically in such consolidated segments, not only broad market trends are identifiable – just like in the commoditized shipping industry – but also the cargoes themselves can be identified and accounted for: i.e. Saudi Arabia’s crude oil production is known or very well expected (barring macro-, political events, etc) and since most of crude oil our of major exporting crude oil countries is on VLCCs (each holding two million barrels of oil), chartering VLCCs is a game of chasing specific cargoes at specific points in time; thus, an owner with fifty VLCCs under control can optimize the fleet position to access those cargoes versus a shipowner of one VLCC who has to be satisfied with what the market would bear each time their VLCC reaches a loading port in Saudi Arabia.

So far, so good. Consolidation then it seems makes great sense and it almost looks like panacea for an industry of distress.

There are more than six thousand and five hundred (6,500) handymax and handysize dry bulk vessels in the world, with more than one thousand (1,000) shipowning groups active in this segment worldwide. The top one hundred owners control only two thousand of these vessels (appr. twenty vessels per owner) or less than 30% of the world fleet, with an apparently very long tail of ownership. As much as consolidation may make sense, it’s impossible to ever get close to a consolidated market from a practical point of view in this market segment. Lots of these shipowners will fail to see any economic benefit from getting consolidated, amalgamated, merged, acquired or otherwise voluntarily get off of their present equilibrium; not to mention that most of the shipyards can build handymax / handysize vessels for anyone who can afford them (and sometimes cannot afford them), thus the market could not stay consolidated for long, even if forced into a consolidation due to poor present dynamics. Further, handymax / handysize vessels effectively can trade any type of dry bulk cargo in the world and can access all the ports of the world, thus there is an infinite number of cargo and port permutations. And, we have not talked yet about the charterers of these vessels, which is an equally impressive of long tail of charterers, with the common denominator among them their desire for the lowest transport cost for their cargoes, condition of the vessels, well-being of seafarers, regulatory environment be damned by a great deal of these charterers – the sorry state of the truth, politically correct or not [this statement is not an opinion or comment in any way, just a sharp-tongued observation]. In certain markets, consolidation seems it is not practically doable given the existing dynamics of the market and the prospects that such dynamics can change in the long run.

And for the markets where consolidation can be feasible, the argument’s prime mover is that larger fleets call for efficiencies, efficiencies ad infinitum according to certain presentations. We all know that life and business is not a straight line, and a fleet of forty uniform vessels is not twice as efficient as a fleet of twenty vessels which is not twice as efficient as the fleet of ten vessels, etc Clearly fleets of fewer than five vessels are completely inefficient, but where the marginal benefit of adding more vessels to a fleet stops being worthy the additional consolidation? We are not aware of any academic studies but empirical evidence from many markets concentrates around the number of thirty vessels. Some publicly listed companies want us to believe that fleets of one-hundred vessels are the most efficient, but we are not convinced that the magic number one hundred is the result of business amalgamation rather than a convincing coherent business strategy.

There are so much in savings from IT and admin to be derived and so many synergies and discounts to be obtained, that a lousy freight market can save. A shipping company in a consolidated market segment may have a higher probability of survival in a bad market, but the law of gravity is universal and when gravity exceeds buoyancy, the result is a downward movement.

Consolidating or not, the shipping industry has proven that it’s not always like other industries; what has worked in other industries is not always applicable to shipping, at least not for the broad ocean of vessel ownership in all markets and corners of the word.


© 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.

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A Porthole of an Exit Window for Shipping Investments?

Momentum and, to a certain extent, freight rates and shipping asset prices have improved meaningfully since last year; while this time last year most vessels – including large vessels such as capesize bulkers and supertankers – were earning barely cash break-even freight, there have been a few windows of opportunity here and there since then.

After a rather prolonged weakness in the markets – that actually has tested some market players like shipowners, bankers, brokers, etc. – it was great just to see the freight market hitting $40,000 pd on occasion and the BDI topping the psychological level of 2,000 points at some point, actually tripling in less than a year. To the extent that the second-hand market for vessels is reliable, all shipping asset classes – across all vintages – have improved by 10%-40% in the last year, with older capesize vessels showing the strongest performance (admittedly, some of the ‘market’ sales of last year were textbook cases of ‘motivated’ selling.)

So much so momentum in shipping has improved since last year that the words Initial Public Offering (IPO) have come back to our vocabulary in shipping. While still ‘distress’, ‘restructuring’ and ‘bankruptcy’ are still part of daily life in shipping, it’s encouraging seeing that smaller shipping companies – even ones sponsored by smaller independent shipowners and ‘wet behind the ears’ – are lining up for the public equity markets; 2013 and the years before were ‘decent’ in terms of shipping IPOs offerings – given the circumstances, but absolutely all IPOs were focused on LPG, LNG, offshore, energy (rather than mainstream shipping) or had heavy-hitters as sponsors (Ardmore Shipping, a typical case) or both advantages (Navigator Gas with WL Ross as the sponsor in the LPG segment another typical example.) More than ten companies at present have filed or are actively exploring a public offering, at least half of them are smaller names, and one may be tempted to commend, with thin resumes or credentials.

Some of the IPO hopefuls are sponsored by big private equity (PE) funds that have entered the cycle relatively early and approaching the fund’s typical five-year investment horizon, and thus in need of exploring liquidity and gradual exit from their shipping investments; whether the PEs are reaching their investment horizons or not is irrelevant in a respect, as in any event, they have been eyeing for the exit and the public equity markets from the time of committing money in shipping. The smaller PE funds that have invested in shipping on a smaller scale or on a project basis – and thus not ‘IPO-able, have also been discreetly ‘shopping’ the market to sell their vessels in the second-hand market at today’s pricing or ideally at a small premium, and thus exit for a quick and decent return without having to stay around for long to see how the shipping markets eventually will play out. In short, sooner or later, smaller and larger private institutional investors will be looking for the exit, which is great; it’s called capitalism and an efficient market.

MV GENCO AUGUSTUS - 180,000 DWT Capesize Bulker built at Koyo Dock K.K. in 2007

MV GENCO AUGUSTUS – 180,000 DWT Capesize Dry Bulk vessel built at Koyo Dock K.K. in 2007

This past week, Genco Shipping & Trading Ltd announced that they will be filing for Chapter 11 bankruptcy, a pre-packaged restructuring arrangement that hopefully will save the company.

Notwithstanding the irony that bankruptcies and IPOs can so naturally co-exist in shipping, the fact that caught our attention is that in Genco’s financial disclosures, the company is expecting a 30% freight revenue drop between 2015 and 2016. There is no fleet break-down or additional clarification, but it seems that projections are based on the company’s fleet remaining constant (about 53 vessels, of which nine capes, nine panamax, seventeen supramax, six handymax and thirteen handysize vessels); as such, based on constant fleet, voyage revenue is projected to drop from $302 million in 2015 to about $215 million in 2016; parenthetically, on the other hand, operating expenses are projected to keep growing at 2% annually. The primary reason for the drop in the company’s freight revenue projections between 2015 and 2016 is that freight rate for dry bulk market will experience a meaningful market correction caused by tonnage oversupply. [By association and anecdotal evidence, the same belief holds true for the commodity tanker markets as well, just to a slightly lesser degree.]  Most of the ‘smart money’ expect that the market will fall based on the delivery wave of vessels presently on order that will start ‘hitting the market’ in late 2015 (and early 2016 as likely several deliveries will be pushed forward into the following year.)  The projections in Genco’s filing do not divulge any ‘state secrets’, but they do put forward formally, and rather eloquently, the expectation that any shipping recovery during the present cycle will likely be weak, with no ‘higher highs’ or great volatility; more importantly, Genco’s projections imply that the window of opportunity will be rather very short-lived.

If the window of opportunity is expected to be short-lived, then it will have to be utilized to its maximum potential by likely selling assets and lining up fast on the IPO queue to obtain a public listing. If so, likely the present pool of companies mentioned or considered for IPOs will have to be more numerous than it meets the eye; not bad for advisors and investment bankers, but it will be interesting seeing whether the public markets – and second-hand buyers – will be hungry enough and for a sustainable amount of time to absorb tonnage and shares from all these promising companies.

But again, that’s capitalism.

Ship of Fools - An Old Story!

Ship of Fools – An Old Story!

 

© 2013-2014 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 IPOs: Diamond S Shipping

This past week, the sponsor and primary shareholder of Diamond S Shipping Group, Inc., WL Ross & Co., decided not to proceed with the Initial Public Offering (IPO) due to unfavorable obtainable pricing. The company was planning to issue about 14 million shares at the $14-16/sh range.

Private equity funds have been the rage of the shipping markets recently. The present filing, it is indicative that private equity funds sooner or later will be looking for ways to exit their shipping investments, and the capital markets likely will be the most popular venue. Capital markets may soon be the ‘next big thing’ in shipping as there are already several filings in the US for shipping companies.

The ‘failure’ of Diamond S Shipping to go public at this stage is not a sign that the capital markets are not receptive to shipping companies. Some of the reasons for the ‘failure’ may have been due to circumstances pertaining to this company and issuing, especially concerns about proper pricing, valuation and expectations thereof. There are legitimate concerns that the MR tanker market is getting too crowed – which is affecting pricing; on the other hand, Ardmore Shipping Corporation (ticker: ASC) was successful offering 7 million shares in a follow-on equity offering and raising $90.2 million, still in the product / MR tanker sector, pricing that was in line with the company’s share price – which is at discount on a peer group valuation.

Please note herebelow three articles on the recent developments with Diamond S Shipping from different sources: Shipping Watch, a Copenhagen-based credible shipping trade publication, Bloomberg and the Financial Times. We have had the honor to be quoted in these articles.

2014, March 12: Lukewarm investors canceled IPO of Diamond S, republished from Shipping Watch.

2014, March 12: Wilbur Ross Suspends Diamond S Shipping IPO on Low Price, republished from Bloomberg.

2014, March 13: Ross upbeat after IPO cancelled, republished from the Financial Times.

Diamond S MR Tanker MT "AEGEAN WAVE"

Diamond S MR Tanker MT “AEGEAN WAVE” (Image source: courtesy of Shipspotting)

© 2013-2014 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.