High-Yield On the High Seas: Keep Your Life Jacket Handy!

The rebirth of the high-yield market has lured more nontraditional issuers than ever before to test the previously shunned waters on the capital markets. Several ocean transport companies, the historically introverted and highly secretive empires, were among those which found the attractive financing opportunities of the of the junk-bond market too hard to resist. While these issuers may have found a fountain of youth through issuing long-term, fixed rate and non-amortizing paper, the high-yield shipping investor should at all times be prepared for rough seas ahead.

Seemingly bottomless cycles, thin profit margins, contingent environmental liabilities, and the persistent demand/supply imbalances, may leave investors wondering if this industry is not a bit more inhospitable than originally anticipated. This was certainly the sentiment of the big commercial banks a few years ago as they watched a brutally competitive market erode the asset value of the ships they financed. Although this debacle was largely contained to the super-tanker crude oil carrier segment, one cannot ignore the chilling message sent by the experience of one vessel owner who took delivery of a new crude-tanker in the late seventies, then failed to place the vessel on a revenue generating voyage for over a decade. And just when things seemed to be improving, the shipping industry collided with 1992, which, arguably, has been one of the most difficult of the past ten years for bulk ship operators. Charter rates for all major categories of oil tankers dropped substantially, and rates in the international dry bulk markets were considerably lower than 1991. Although the sudden drop in charter rates was not necessarily an anomaly, it does underscore the highly cyclical nature of this industry that is caused by often unpredictable factors affecting the demand and supply for vessels.

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