Whilst we know its summer in Surfers’ Paradise, Buenos Aires and Cape Town, the winter of 2003 has been particularly memorable at our headquarters near New York for the weather. Snow and cold and then even more snow in an unrelenting attack.
Equally unrelenting is our little corner of the world in ship finance. Since December 15, 2002, NYSE listed tanker companies have raised $1 .64b in new funds to finance what is largely consolidation in the industry and not for new tonnage. But others, like OMI, are refinancing and sandbagging the balance sheet to get stronger in a market that looks as if it cannot last, instead of getting bigger and more leveraged. Which strategy will win? Well, there are lot of theories out there and all are right in some respects but the best answer is that no one really knows. The world is just too uncertain. Activity has not just been in tankers. Sinotrans, the Chinese version of United Parcel Service and the old Sea-Land combined, hit the market with a $450m IPO with Credit Suisse and BOC International. It’s oversubscribed and up on the issue date. RCCL is out to replace their $1 bn revolver with a ‘best efforts’ of the same size with Citibank, Nordea and Dnb.
Indeed many bankers have indicated to this editor it’s the best in a while in terms of opportunities. Said one, “Last year you (the bank) had to grab onto whatever you could get and hope that you did not lose it, because if you did you would have a bad year. This year the bulls-eye is much easier to discern and the chance for many to have a good year, is not only excellent, its downright likely.”
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carisk | Categories:
Marine Money | June 30th, 2008 |
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Two weeks ago, the Wall Street Journal published an article entitled “LIBOR Hits U.S. Borrowers” by Carrick Mollenkamp and Mark Whitehouse. In the article the authors identified the problem that “…payments on trillions of dollars in U.S. corporate and mortgage loans are set according to dollar LIBOR, but only 3 of the 16 banks that contribute their borrowing costs to calculate the rate are based in the U.S. That means the financial difficulties of European banks are having an outsized effect on U.S. borrowing costs, and could complicate the Federal Reserve’s efforts to bring those borrowing costs down.”
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Last week it was dry bulk. This week, all the fuss seems to be revolving around the tanker market. A Wall Street Journal “Money & Investing” section cover story on the popularity of shorting tanker stocks drew some attention. As did a bearish report from R.S. Platou, a much-talked-about, products-focused IPO from Aries Maritime, positive reports form Jefferies and Banc of America and tanker stock coverage initiations from First Albany. So what, exactly, are the arguments going around, and of what should tanker market players and their financiers be aware? It’s still impossible to predict the future, but we can tell you what some of the competing arguments are.
R.S. Platou analyst Erik Andersen drew a lot of attention with his bearish report on shipping, particularly tankers. According to Mr. Andersen, the seasonality justification for low spot rates – which brokers say have dropped into the upper teens for VLCCs on some routes – is badly overblown. He notes that from 1997-2004, the average second quarter rate was about 37.5% lower than the average fourth quarter rate, completely out of order with the drop in rates from $147,000 in the fourth quarter of 2004 to $41,000 so far in the second quarter of 2005. However, this is still above the 8-year average second quarter rate of $35,000 – albeit with higher bunker prices – suggesting that perhaps the $147,000 was more of an anomaly than the $41,000 is a sign of a crash. Still, tanker fleet annualized growth figures of 6-7% compared to a comparable rate of 1% annually over the decade from 1993-2003 are somewhat ominous. Citigroup Smith Barney analyst Charles de Trenck noted how the current weak rates are making the tanker market the first among the shipping sectors to experience the pricing pressures derived from growing capacity. But on the bright side, Mr. Andersen did write that he does not believe tanker markets will weaken so much as to create a weak year for owners.
Analysts Magnus Fyhr and Douglas Mavrinac at Jefferies & Company have a much different take on the current market situation. They said in a report issued to reiterate their buy rating on Ship Finance International that they expect tanker demand to be firm on increasing OPEC production. Importantly, the analysts believe that incremental fleet growth of 21 MMdwt scheduled through the end of the year is likely to be absorbed by increased tanker demand.
Evincing similarly positive sentiments, analysts Daniel Barcelo, Philippe Lanier and Pierre Sargeant of Banc of America Securities issued a report on oil tankers optimistically titled “Hold On for the Summer Heat.” They note that a 5% tanker stock pullback over the past two weeks has been related more to Arabian Gulf VLCC market conditions than to the tanker industry as a whole, much of which has remained fairly strong. Additionally, they point out that the 450 vessel global VLCC fleet has grown by only two vessels so far in 2005, implying that softened rates could not be explained by supply buildup, but rather are a product of a reduction in Arabian Gulf export volume and a temporary buildup of available tonnage in the gulf. Analyst Craig Irwin of First Albany appears to agree, having this week initiated coverage on General Maritime, OMI and Arlington Tankers with a Buy rating. And a group of Asian investors that market sources say recently put their money into a very expensive $140 million VLCC newbuilding have put their money where their mouth is when it comes to predicting a strong VLCC market for years to come.
Much of Wall Street, however, seems to have sided with R.S. Platou on the more bearish side of the debate, as a widely disseminated article titled “Shorts Expect Tankers to Take On More Water” strongly suggests. Teekay, OMI, Knightsbridge and General Maritime are all being subjected to this phenomenon, with Frontline leading the pack. Investors are brazenly betting that tanker stocks will keep falling. Whether or not this will happen is hard to tell, though the practice certainly is not encouraging for those hoping to see their tanker investments appreciate.
