There is a natural interest in the maritime industry. As children we enjoyed the adventures of walking the plank, playing battle ships and imagining the gold to be found from sunken treasure. This childhood passion of risk and reward still holds true for many in the commercial shipping environment. The reality remains that a small well-placed Shipowner can go head-to-head against a listed corporation to fight for the same cargoes in the same market space and has just a good chance in winning. There are no guarantees that size is security when playing in the vast global waters; anyone can sink or swim.
This short extract will look at the first of three key areas that are needed to make a start in a maritime adventure; capital, contacts and timing. The fourth critical component, ‘lady luck’, is a mistress beyond control.
Traditional finance pre-2008 has lost their sea legs
Sources of capital have dramatically changed since 2008. Whilst most industries suffered the crash and recovery over the past 10 years, allowing traditional lenders and investors to remain, the opposite holds true in shipping. The crash came about but a true recovery is still arguably on the horizon.
RBS, pre-crash, was the world’s largest finance bank in shipping; however, they have now pulled out of the market and only hold onto a handful of legacy clientele. As a traditional lender this withdrawal is not a one-off but a sign of normality. Currently there are a bunch of banks, especially in Germany, selling off billion dollars’ worth of shipping portfolios. These are made up of mixed asset classes, covering all main sectors from tankers to containers, bulk carriers and offshore vessels. This has put blood in the water and Hedge Funds are circling for opportunities.
Traditional sources of capital have and are still looking to deleverage their total maritime exposure, even if individual mortgages are performing well. Whilst the reasons are many and a separate conversation in its own right, this has created a gap and allowed the mid-markets to have a shot at sourcing the chest of investment gold for the Shipowner. Unfortunately, the interest rates offered are high and T&C’s extremely unattractive. The majority of this new alternative debt financing is actually re-financing packages and not for new asset projects.
If big enough, shipping firms have the ability to attract funds from Asian financial institutions. This play is purely down to their size and historical relationships. Repayment rates are in the low single digits and leveraging assets above 80% can be a possibility. This is great if you can get it but only available to the lucky few today.
“I have letters after my name, so I know more than you!” (Anon financier) 2010 – 2015
Due to the withdrawal of traditional lenders an influx of new money also entered the arena in the form of Private Equity around 2010. The thinking here was simple: Mr Wall Street and Mr City realised that shipping in its nature was very cyclical and the average market cycle lasted approximately 5 – 8 years. Current conditions at the time were at historical lows in terms of asset pricing. So, buy low, sit back, wait a few years and then exit on a high. Easy returns. The excel spread sheet had be written, the models re-examined and cash was in hand. The PE firms spoke to the unsophisticated traditional Shipowner (whose father was a fisherman) and needed the money to modernise their fleet. The perfect partner. Mr Suit knew they could do a better job controlling the balance sheet and would then exit when they wanted to. What could go wrong?
Shipping companies lapped up this new injection of capital from PE firms and were willing to take someone else’s money as long as they could receive their address commission by running the day to day business. The PE investor had no background or interest in demurrage claims, operations, piracy regulations, ship management, crewing provisions … so let the Shipowner deal with it.
However, what the Shipowner’s knew from generations of hard experience, what the traditional banks had only recently re-learnt and what PE had yet to realise, is that the real trick for shipping investments is to focus on not when to enter but how to exit. The lyrics from Hotel California should be cautionary note to anyone looking at investing in shipping ‘You can check out any time you like, but you never can leave’!
This influx of new money created a surge in new orders for vessels being placed. This created an oversupply, which subsequently flooded the market with tonnage and ultimately depressed the earning potential that the global fleet could make. Whilst commodity markets were on the rise the shipping market did not stay in correlation as too many vessels were fighting for the same cargoes. Earnings were now lower than before due to investors. It should be noted that it takes 1.5 – 2 years to build a vessel from scratch. So the original Discounted Cash Flows calculations failed to account for depressed earnings due to buyer’s greed.