Full House in Athens – Part 2

By Kevin Oates

…in the longer term shipping should correct but quality, transparency and financial strength are key to survival.

Despite the tough market and the general lack of ship finance, Marine Money’s Greek Ship Finance Forum again filled the seats in Athens.  With 310 delegates and speakers and some 40 more for the TEN Ltd lunch, there was plenty gossip and exchange of views at the 11th Annual conference held on the 8th of October 2009.

The event had started with a speaker’s dinner the previous night co-hosted by Navios Maritime Holdings and was to end in the early hours of the following morning at the Capital Party co-hosted by Capital Product Partners LP at a well-known Athens nightclub.  Even if the market is tough, we still know how to enjoy ourselves.

Back at the conference, our day began with Guy Verberne, a leading economist at Fortis Bank (Nederland) telling us that the economic recovery has come and it may well be sustainable.  China, he says, has plenty foreign reserves to prolong it’s stimulus package for as long as it needs and he sees no meaningful cutbacks from the stimulus packages of western governments, at least through 2010.  A risk is a double dip in 2011 if we get too bogged down in debt.
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Secondary Opportunity

The German Ship Finance Forum followed last years’ pattern of commencing with a half-day seminar. This year’s topic was focused on opportunities in secondary markets. Chairman Michel Bourgery of DVB started things off with a brief overview of the markets. Based upon his successful prognostications in the past, we listened carefully as he suggested that listed companies would be taken private. He bases this upon the fact that there is no re-cycling of equity and they are locked-in loss making position. Moreover, limited visibility and overall pessimism are also factors. For those who have no fear, he suggested taking a position in the tanker market was too early as the one-year t/c rate is greater than the three year. For bulkers, the time to go shopping will be this summer.

Dr. Albrecht Gundermann of Salomon Invest took the audience through the secondary market in KG funds, which is relatively new. Historically, once you joined the party you could not leave it. Trading remains limited but there is a real market with real prices. Right now it is a buyers’ market. With a total market of EUR 30 billion, only 4% has been traded.

Pareto’s Peter Wallace next gave his insights into the IS/SPC (formerly the K/S) market. The size of the market is approximately $15 billion and is split evenly between shipping and offshore. The basic structure is a limited partnership which has both paid-in and uncalled capital. No longer tax-driven, this product is extremely flexible and can be designed in any form that makes economic sense to the participants. It is an ideal alternative when public equity is difficult or expensive or when the asset is trading below NAV. Investors like it because:
•    There is no management risk
•    You can pick the asset you want
•    The structure is transparent
•    A trigger clause allows the holders of 15-25% to cause a sale
•    There is a liquid secondary market
•    The price to put the project in the market is relatively cheap at 3-4% of the cost of capital
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Ship Management’s Effect on Profitability

By Peter Wallace

The technical ship management function is critical aspect to maintaining a profitable and well respected shipping venture. Ship managers control or influence a large part of shipping expenses, but ship managers have the most dominant influence on overall expenses. This team also affects the quality of charters, the quality of crew, the quality of suppliers and the owner’s reputation. The owner’s reputation affects the cost of capital.

Ship Management Business Proposition

In order to understand the ship manager’s invoice, it is important to understand what the technical ship manager’s business proposition is and how the ship manager is compensated. This brings to light what the ship manager can legitimately charge and the areas that an owner must be vigilant to avoid overcharging or fraud.

A typical ship manager can basically only sell their time and services and subsequently charge an annual fee plus extraordinary costs on a standard contract such as the BIMCO Ship Management form. They have essentially no risk when it comes to liability: The ship manager has limited liability–even in cases of gross negligence. Ship managers that have an equity position has a different perspective on the business proposition and have much greater liabilities than “pure” ship managers. Vessel operating costs and costs associated with managing the vessel above the ship manager’s standard services are usually charged to the vessel/vessel owner. Thus, ship managers that have no equity position or not otherwise tied to the performance of the vessel are competing against other ship managers for quality of service. The true operating costs of the vessel are of little consequence because they are passed through and paid with the owner’s funds (it is virtually unheard of for a manager to front an owner funds for any operating costs).

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