US LEASING PRODUCTS RECONSIDERED

by Richard C. Cosse

Over the past several years, companies in the maritime and offshore industries have demonstrated growing interest in developing leasing structures to finance newbuilding programs and existing fleets. While shipowners have been somewhat preoccupied with the coming and going of the high yield and private placement markets, increasingly the use of leasing products, specifically US leasing products has provided the shipowner with viable financial alternatives to financing fleet expansion.

Recently, a major German shipowner financed a new 33,000 dwt chemical tanker utilizing a US leveraged leasing structure (“Pickle Lease”). The use of this structure enabled the company to minimize its lease payments and fix its cost of capital finance to reflect current market charter rates. While the preference items and respective present value benefit of the lease structure were modest, the lease did provide for 100% of the acquisition cost of the vessel and featured a fixed price early buy out option for the lessee.
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Lubricating Transactions with Ship Mortgage Indemnity

As every owner knows, when the commercial bank market is tight, it can be difficult to obtain sufficient gearing levels to finance either a newbuilding or a second hand acquisition. However, a new financial instrument has now been made available, known as Ship Mortgage Indemnity or SMI, which has been designed to assist owners and lenders in getting deals done. SMI helps lenders and ship owners achieve the common goal of arranging secured loans on viable transactions where the lenders might not otherwise have been able to lend the amount needed by the owner, due to the borrower requiring higher loan-to-value levels.

On viable transactions, shipping banks will normally lend 60-70% of the value of a vessel, leaving the borrower to find the difference from other sources. Whether the company concerned is large or small, financing this 30-40% shortfall can represent a substantial portion of available capital, locking up funds which could be applied more profitably elsewhere in the business.
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The State of the High Yield Market

by Hamish Norton

The high yield debt market has become an interesting place for shipping companies and investors. Issues from only three companies are trading with single-digit yields – International Shipholding, Sea Containers and Teekay. Every other issue trades to yield above 10%, approximately 500 basis points above the comparable U.S. Treasury bond or more. A spread of 500 basis points is not unusual for securities rated in the single-B category, but is not historically very attractive for a double-B rated bond issuer. However, none of the single-B bonds (so rated by both Moody’s and Standard & Poors) are trading to yield less than 15%, or 1000 basis points above the comparable Treasury security. Single-B shipping companies are not clamoring to issue debt at such yields, and interestingly, the market probably would not buy similar new issues at such yields in any case. For reference, the average yield of the entire group slightly exceeds 20% at current prices.

ISSUER’S POINT OF VIEW
What does this state of affairs mean for a shipping company? First, unless the company is International Shipholding, Sea Containers or Teekay, it probably should not try to access the high yield debt market right now (though I do not mean to imply any recommendation to these three). If the company is not in this group, it may be concerned about how to get investors interested again in high yield bonds of shipping companies. Investors will learn a lot from the troubles of the current crop of bonds, and will apply those lessons in the future; companies will have to make these investors happy.
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THE EFFECT OF BANK CONSOLIDATION ON SHIP FINANCE: Analysis, Views and Trends

by Ted Petropoulos, M.D. of Petrofin S.A., Greece, Financial Consultants

Over the last decade, the process of bank mergers and takeovers has gathered pace as the chart following this article shows. This consolidation has taken place both within the boundaries of each nation as well as internationally.

The theory behind consolidation is that bigger size brings with it the opportunity to:

• Dominate the market, either nationally or internationally;

• Enjoy economies of scale both in bank operations, as well as in marketing, technology and efficiency;

• Be able to geographically diversify across regions, countries or continents;

• Be able to develop worldwide products and services on a standardized basis;
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1999 Maritime Equity Outlook

Provided by ING Baring Furman Selz’s Equity Research Department

A look at the Overall Markets

Since our last Maritime update in the fall of 1998, the bleak fundamentals have remained flat at best. The confluence of a slowdown in worldwide economies and an oversupply of tonnage in each of the major shipping segments has placed significant downward pressure on the profitability of most shipping concerns globally. Our maritime stock price index (market capitalization weighted), shown on the following page, is representative of 10 domestic shipping stocks that span all sectors of the group. As indicated, the maritime index grossly under-performed the S&P 500 in 1998, falling 27.1% versus an increase of 26.7% in the S&P 500. Additionally, in the latest 12 months through February, the numbers are even more staggering with the shipping index dropping an egregious 36.2% compared with an 18.1% increase in the S&P 500 over last year’s levels. The bad news is, we expect the stocks in our universe to continue to under-perform the S&P 500 in the first half of 1999. The good news is that this could potentially create the most compelling buying opportunities for select names by tail-end 1999/early 2000 since 1991/2 (and more appropriately 1986/87). Continue Reading

Movers and Shakers – March, 1999

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The Increasing Importance of Spot Markets

by G.E. Kurz, President, Mobil Shipping

This is not the most propitious time to talk about the charter market for product tankers, or any other tankers for that matter. We certainly have seen better times than what we are confronted with right now. It’s not a rising Dow Jones by any measure, but then who knows how long that is going to last.

Frankly, I am not happy when the news is not good, and it is hard to find good news in today’s market environment. We have low spot rates, a languishing, practically non-existent time charter market, and an overhang of newbuildings for delivery or on order. Add to this a less-than-rosy near-term demand outlook and you have all the essential ingredients for a pretty unattractive market scenario as we enter the new millennium.

Rather than speculate any further about market trends, I would like to explore how the product tanker market has evolved to provide some insight of the underlying market forces.
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Purchase or Perish: Finding a Yenta in the Liner Business

by Nicolai Heidenreich

Consolidation in the container industry is not newsworthy; however, we believe that consolidation will take the form of mergers and acquisitions rather than strategic alliances and pooling arrangements in the next 18 months. In the following analysis, we will demonstrate why consolidation will accelerate, why alliances are often not good alternatives for stronger players, and why we think mergers and acquisitions will dominate the consolidation landscape going forward. In the end, we will argue that liners, commonly thought to be above the vagaries of the asset play, can learn a very valuable lesson from their swashbuckling cousins in bulk sectors.

A volatile cocktail of immense debt, intense competition and the erosion of margins, coupled with a lack of strategy and yield management, will result in many smaller companies going bankrupt over the next two years. In short, we view Maersk’s acquisition of Safmarine to capture roughly 40% of the container transportation trade between Europe and South Africa, as the tip of the iceberg.
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Equity – March 1999

Equity – March 1999

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INNOVATION AS AN ALTERNATIVE TO DEEPCHANNEL DREDGING

Presented at PORT FINANCING:Challenges & Solutions for the Americas, Miami, FL

by Geoffrey F. Uttmark, TransTech Marine Co., February 1999

The subject of my discussion today is innovative technology as an alternative to deep channel dredging. That’s the formal title. As I was listening to this morning’s speakers and some of your remarks, I concluded one of my slides more dramatically frames the issues. So the subtitle for this paper is “Some Healthy Heresy – Are Today’s Heretics Tomorrow’s Iconoclasts?” Before I get to my subject, I would like to dedicate my remarks today to the memory of Captain Bengt W. Tornqvist (1915-1998). Many of you have heard of this gentleman. He envisaged a type of ship that I am going to talk about today. He conceived it about fifteen years ago. As a consultant I had the privilege of working for him. Captain Tornqvist passed away last year and with his estate’s permission I am using some of his ideas today.

The ten heretical questions (Figure 1) were originally intended for the end of my presentation. But I was pleasantly surprised to learn this morning that the ‘natives are getting restless’, that questions are being asked at this point that should be asked as to whether or not we are going in the right direction regarding port redevelopment in the US. These questions, of course, apply to ports at both ends of a shipping line. So I think the ten heretical questions are broadly valid. I haven’t heard them articulated before. I’ve heard some of them today for the first time, and I think that is encouraging.
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