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Shaking It Up
By George Weltman
This year’s group of participants in our annual shipping rankings was shaken not stirred. Through both action and inaction, our grouping was radically reduced this year from 100 participants last year to 88 this year. Accounting for most of the decline was a delay in filling year-end financials. While we delayed running the rankings model to the last possible moment, we still ended up missing Euroseas, Gulf Navigation, MISC, PT Berlian Laju Tanker, Sinotrans, Omega Navigation, Stealth Gas and NewLead Holdings. Absence does make the heart grow fonder and we hope to see their return next year.
In other changes, Platinum Equity took American Commercial Lines private and re-named it Commercial Barge Lines. As a consequence, it fell off our list and we replaced it with Seanergy Maritime Holdings. For some unforgivable reason that company, which had its roots as a blank check company, fell below our radar and should have been part of the rankings since 2009, its first full year of operations. We apologize to Mr. Ploughman and Ms. Anagnostara for the omission and hope its inclusion this year and going forward makes up for it.
A Tale Worth Repeating
By George Weltman
Life was Simpler Then
We have a simple business. We fill empty holds with cargo and move the goods where directed. There is no cheaper alternative to moving raw materials and finished goods globally, leaving shippers at our mercy in what might be considered, in its largest sense, an oligopolistic market. But for the volatility of oil prices, our costs are relatively inexpensive. Operations with foreign crews are cheap and maintenance can always be deferred. A capital market that did not price in risk and insurers who also lost sight of risk while they sought market share. Could there be a more idyllic world?
Certainly revenues are volatile. But believing ourselves capable of timing the cycles, we order more ships in anticipation of the next cycle or a boom which we believe will never end. And like most wished for things, they come at the wrong time. The cartoon character Pogo best describes us: “We have met the enemy and it is us.”
3rd Annual Offshore Rankings – Management Matters
By George Weltman
Background
Tell us the price of oil and we can, generally, gauge the performance of the offshore players. The relationship is not unexpected and the correlation high. Generally speaking, with higher oil prices, the margins are sufficiently rewarding for oil companies to engage in exploration and production (“E&P”) creating demand for drilling equipment and ancillary services.
Perhaps we oversimplify, but the trend shown in figure 1, which illustrates the price of a barrel of WTI over the three-year period since we began the rankings, shows the price of oil rising to record highs in 2008, and then the sharp descent through the first quarter of 2009 with recovery beginning in the next quarter. By June 2009, the oil price had reached $70, a level that is “economic” for the oil companies. From there, an upward trend begins with the price of oil rising to the high $70s until the fourth quarter of 2010, when it breached the $80 level and continued its rise.
Second Fiddle No More
By George Weltman
Looking at the results of the performance rankings, it is clear that there is a direct correlation with the results of the credit strength rankings. After all, four of the top ten finishers (U-Ming, OOIL, Kirby and Knightsbridge) also finished in the top ten in the credit strength rankings. The remainder, with the exception of Malaysian Bulk Carriers, have also made regular historical appearances at the top of those rankings as well. These include Courage Marine, D/S Norden, Diana Shipping, U-Sea Bulk Shipping and Precious Shipping.
Each has a different strategy which accounts for their high finish. D/S Norden and U-Sea Bulk utilize an asset light model while Courage just runs old assets with no debt. Diana and Precious tend to be debt adverse and have built up liquidity for the next opportunity.
When Times Are Tough, Victory Goes to Those Who Control their Destiny
By George Weltman
To appreciate the endgame, one has to look at the bigger picture. In 2010, it was not the economy stupid! The economic recovery was on track, with the OECD economies showing low but positive growth. As a proxy, in the U.S., real GDP growth was 2.8%, the stock market gained 13% and 1.1 million private sector jobs were added. And, most importantly consumer confidence was growing. In the emerging countries, growth continued on a remarkable pace with China leading the way. Growth however created inflation fears and China adopted monetary policies to slow the growth to a more reasonable level. The policies worked but the fallout from the slowdown was felt worldwide. After all, the world had become China-centric and shipping, as a leading indicator, felt the tremors first. So, if the economy was recovering, with demand growing, where was shipping headed? The results in each sector were mixed and the wounds largely self-inflicted.
In its macro view, The Platou Report 2011 first takes a look at overall utilization rates: “After underlying growth in total tonnage demand of 8% annually in the years 2002-08, demand fell by 3 percent in 2009, and the sound market balance through many years collapsed. The utilization rate fell from 90 percent in 2008 to only 82 percent in 2009. This indicates an overcapacity not seen since the 1980s. The very strong growth in tonnage demand in 2010, together with the somewhat moderated fleet growth, lifted the utilization rate from 82 to 85 percent. That puts us back to levels seen in 1992 and 2002, which are not regarded as successful years in the shipping industry.”
The 2011 Shipping Banker Survey
By George Weltman
Introduction
“We are open for business” was the constant refrain heard publicly throughout the year from bankers, whether at a conference, a meeting, or anywhere bankers and owners congregated. This, as you might expect, was not an unconditional statement. The criteria appeared in the fine print. These included but were not limited to:
• An existing business relationship – Exposure, performance and experience do matter, particularly to senior management, while the unknown is difficult and risky.
• The relationship extends beyond lending to other services – We need to make money and lending alone just doesn’t do it, although it’s gotten better.
• A large company is preferred to a small one – Even with higher spreads, it is still a volume driven business.
• Public is generally preferred to private – Transparency and access to the capital markets provide comfort.
The Portfolios – Resilient
By George Weltman
Introduction
Perhaps one of the most difficult, but at the same time most enjoyable challenges, we undertake each year is to try to pin down the various heads of the shipping departments to open their kimonos and impart data on the size of their portfolios, along with other related statistical data. Although we are certain a number is readily available, the hesitancy to share comes most likely from our simplistic approach. We ask simply for the size of the loan portfolio. Are we asking for the right number and, if so, how is it correctly measured? Without definition and commonality, the question of whether each portfolio will be fairly portrayed on a comparative basis is a concern to respondents, as the end product could be viewed, but should not be, as a competitive “league table” of sorts.
In banking/credit parlance, the more commonly used term when discussing extended credit is exposure. This number differs in that it includes unfunded commitments, lines of credit, drawn or undrawn, letters of credit and guarantees and currency and interest rate swaps. In our number we do include unfunded commitments and lines of credit but ignore the rest. This year there was a new wrinkle. CA CIB in its submission distinguished between gross and net commitments, with the difference related to securities other than ship mortgages, which mainly consist of ECA guarantees. This bank considers its net commitments as the best measure of the bank’s ship-secured commitments. While we believe this approach has merit, we used their gross number to be consistent with the rest of the sample.
Editor’s Choice Awards West
By George Weltman
There were many non-conforming transactions that came to our attention. They spoke to us differently from our traditional winners. Perhaps it was a different way of looking at things, a new twist, a trend, a lesson learned or simply something buried.
For us, it is the best part of the issue, as we get to use our imagination and have total discretion to recognize what might be lost as mere background noise. And, most importantly it is fun. What follows are this year’s Editor’s Choice Awards.
Teekay, the Bank – Innovation Award
By George Weltman
We’re prejudiced. When we saw this transaction back in July, we knew it was a winner. To describe it as outside of the box is an understatement and therefore it is a perfect fit for this award. It is a product of the times, evidencing that the reduced availability of shipping debt is affecting the cost of capital, the structure through which it is lent and, as result, who provides it. In this instance, what some might view as expensive capital was provided to a shipowner in the form of a loan. And it works.
In a deal structured by Deutsche Bank , Teekay Tankers (“TNK”) drew down $115m of excess capacity under its revolving credit facility and used the funds to provide what is effectively a first preferred ship mortgage bond secured by 2x 2010-built VLCCs owned by TMT, a Far Eastern shipowner. Each of the three year fixed rate first priority loans is in the amount of $57.5 million and will pay a coupon of 9%.
Middle East Meets West – Leasing Award West
By George Weltman
Nominations in this category were few and far between. Whether it was a conspiracy of silence or largely quiescent KG and K/S markets, we are not sure. Also limiting leasing activity was the inability to raise leverage, which meant equity returns were not sufficiently inspiring to attract investors. However Pareto proved both assumptions wrong in putting together a noteworthy transaction with Havila. In this instance, Havila wanted to control two 4,900 DWT PSVs that were for sale from the owner who contracted them. An outright purchase was difficult for Pareto due to its substantial orderbook and the resulting stretched banking relationships. Pareto solved the problem by structuring a K/S that would acquire the two vessels with a project cost of NOK 740 million and bareboat charter them to Havila for eight years. The financing consisted of an equity raise of NOK 180 million and senior debt of NOK 470 million shared between DVB and the Norwegian export credit agencies, GIEK and Eksportfinans. And lastly Pareto provided a mezzanine piece of NOK 90 million. In defense of our thesis on a lack of bank debt, we would note it is a lot easier to arrange bank debt with ECA credit support and a subordinated loan underneath. For the investors, the projected IRR was 20%, an attractive return for this structured deal.
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