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Capital Availability – For Core Clients or Key Relationships Only?
By Jim Lawrence & George Weltman
In this article, we attempt to synthesize the responses to a number of variegated questions, which all centered, ultimately, on the crucial question of the availability of capital. There are a number of factors affecting global capacity of capital, some of which may be classified as either internal or external. In turn, these may also be controllable or non-controllable items. In whatever form, they are omnipresent.
Based upon respondent replies, it is evident that funding capacity rests on a three-legged stool. On the regulatory side, Tier One capital requirements will have a substantial impact. Wearing the hat of shareholders, governments, too, as a consequence of a multitude of bailouts, will have a say as to where this likely limited resource will be allocated. While all talk the talk of globalization, governments are thinking parochially. The expression “NIMBY” (not in my backyard) has become “IMBY” as governments show a preference for the credit they have created to be used locally to benefit the citizens who are picking up the tab. The final leg of the stool relates to the bank’s philosophy and policies. There will be an allocation issue as banks face demands for capital from their multitude of clients representing many different businesses. Fortunately or unfortunately, depending on your outlook, the recession has leveled the playing field, leaving all in the same boat. With no standout safe business, banks will have to carefully diversify their portfolios while making sure there are no large exposures. The latter is a critical issue as we saw banks becoming complacent and over-confident lending against ships and real estate as if the cycles had been smoothed out. When money begins to flow back, it will be a different world. Regulation will replace the constantly failing short-lived institutional memory.
Invest For the Short-term?
We begin this article with the caveat that we have no intention of stepping into the shoes of the investment bankers and analysts who better understand these issues and can likely explain them better than we can. Nevertheless, we were intrigued by a number of disparate things we read this weekend and how they might all relate. Here we ponder such apparent non sequiturs as management’s obligations to shareholders as well as the possibility of recovery of what we lost in the market.
We start with the big picture. In an article entitled, What Now?1 Jeffrey Goldberg, representing everyman, sought advice from the “masters of Wall Street” on how to overcome his financial paralysis and what to do now. The answers were bleak. Not only are the markets stacked against the individual investor but also more importantly not many of us are suited to be investors, whether because of the size of our portfolios or our nature. The thesis is best articulated by the following quotes:
BNP Fortis Union is a Case of 2+2 = Huge Potential
Fortis won investor backing for the sale of banking units in Belgium and Luxembourg to BNP Paribas SA, overcoming seven months of shareholder opposition to the breakup of what was once Belgium’s largest financial-services firm.
For the shipping community the transaction marries two superb shipping teams. The combination offers the industry a robust product line, including strong equity and debt capital markets expertise and of course a strong bank. There is also a track record of success on both sides.
JPMorgan Enters Shipping Fund Arena as the 500-Pound Gorilla
The formal announcement this week of the Andy Dacy led JPMorgan shipping fund provides a fine opportunity to survey the field. But it must be said at the outset that JPM’s entrance is important for its size, ambition, confirmation of the concept and for the industry whose mantra is Marine Money Week’s title: Liquidity, Liquidity, Liquidity.
It is also probably a challenging development for those funds not yet up and running, as JPMorgan is a powerful brand, US banking woes not withstanding.
It was interesting that Reuters in writing about the effort described JP Morgan Asset Management executive Joe Azelby, who made the formal announcement of the Fund, as a former US Football player rather than a Harvard grad. No doubt, success in investing does come down to blocking and tackling well, in other words, paying strict attention to detail.
From $350 million to 0
Having now finalized the agreement with the Japanese shipyard, Eitzen this week announced this week that it had sold, for $124 million, its three remaining newbuildings from Croatia to Laurin Marine through a novation agreement, whereby the buyer will assume all rights and obligations the company has to the yard, including all further payment obligations. The agreement is conditional pending approval from the yard and its refund guarantors.
Danaos Re-jiggers
In its first quarter report, Danaos provided further clarification with respect to the re-arranged delivery schedule of its newbuildings. China Shipbuilding Trading Company agreed to delay by 200 days on average the delivery of five 8,530 TEU containerships currently under construction. In addition Hanjin Heavy Industries agreed to delay the deliveries of five 6,500 TEU and the five 3,400 TEU containerships under construction by approximately one quarter each. In terms of the schedule, as of today, Danaos is expecting to take delivery of six vessels this year, twelve in 2010, of which three can rollover to the following year as they are scheduled to be delivered in December 2010, and eleven in 2010. Presuming the three 2010 deliveries roll over into 2011, the remaining capital expenditure installments are approximately $465 million for the balance of the year, $875 million for 2010 and $785 million for 2011.
Rashomon – As We See It
It began with the movie “Rashomon” and evolved into a concept. “The Rashomon effect is the effect of the subjectivity of perception on recollection, by which observers of an event are able to produce substantially different but equally plausible accounts of it.” Or as the movie asks, who is telling the truth and what is the truth?
Our version of the script calls for a look at Seaspan’s first quarter earnings announcement to elicit the main takeaways. We then turned to our favorite shipping analysts, including Natasha Boyden of Cantor Fitzgerald, Gregory Lewis of Credit Suisse, Omar Nokta of Dahlman Rose, Douglas Mavrinac of Jefferies, Urs Dür of Lazard and Justin Yagerman of Wachovia, for their views and calls. This becomes a very interesting exercise because, as the analyts tell us, there is no company that is easier to model given their strategy to lock-in costs and fix revenues for the long-term.
No Surprise Whatsoever
Yesterday, U.S. Shipping Partners voluntarily filed for relief to reduce and restructure its debts in a “pre-arranged” filing under Chapter XI of the U.S. Bankruptcy Code. The filing incorporates a “pre-arranged” restructuring plan that will reduce its leverage and improve its liquidity and is supported by the holders of more than 2/3 of its first and second lien debt. Under this filing, the company continues to operate in the normal course through the financial restructuring process, thereby providing uninterrupted service to its customers.
Old Faces, New Places
Nick Davies, formerly of Jefferies, has accepted a position working for Michel Bourgery at DVB Bank in its capital markets business.
Dahlman Rose announced the appointment of Elliot Etheredge as Managing Director and head of the firm’s Marine Transportation Investment Banking group. Previously, Mr. Etheredge was at JPMorgan.
What’s a Ship Worth? In This Instance, Only a Mathematician Can Tell You!
How do you know when a covenant, the LTV in particular, has been breached? The global financial crisis aided and abetted an economic downturn, which in turn cratered shipping demand and rates. Normally, values tend to follow rates but in this instance they did not. Borrowers had sufficient liquidity to repay debt and banks had no interest in foreclosing. These were uncontrollable events and owning or moving assets to others, while absorbing the costs accomplished nothing. A more jaundiced view might suggest that banks did not want to see a floor established on values, as it would crater a veritable house of cards.
With sales few and far between, there was no benchmark on which to value a ship. The chasm between bid and asked rivaled the Grand Canyon. There were sellers and buyers but none of them willing. Sellers believed prices were virtually unchanged while buyers were looking to steal the vessel for a few cents on a dollar.
Even the few sales that took place were perceived to be forced rather than market related. Brokers were at best hesitant to provide values and more often than not refused. In October, Clarkson’s Shipping Intelligence Weekly, exhibiting the acumen attributed in its name, ceased to publish indicative values for all vessel types. The market was silent, with no one opining. Yet clearly there were valuations or a thoughtful process of some kind, as banks continued to uncover breaches of the LTV covenants.
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