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Shipping Finance by Karatzas Marine | Equity, Debt, Leasing, Advisory & Restructuring
Shipping Finance by Karatzas Marine Equity, Debt, Leasing, Advisory & Restructuring
China subsidizes locally; can international shipping get a cold? Posted on December 18, 2013 In the last week, the Chinese government announced a series of subsidies for the local shipping market. In general the program has as follows: Chinese shipowners who scrap their Chineseflagged vessels at Chinese demolition shipyards within Chinese fiscal years 2013, 2014 and 2015 will obtain a subsidy of about 750 RMB (about US$ 125) per gross registered ton (GRT). Vessels have to be eighteen years or newer for containerships, and twenty years old or newer for dry bulk vessels. Also, Chinese shipowners who place orders to Chinese shipyards for vessels that will fly the Chinese flag will be entitled to a subsidy of 750 RMB (about US$ 125) per GRT. Since these two subsidies are ‘combinable’, for an owner who replaces an existing vessel with a new contract, the total subsidy will be the sum of the two parts for a total of US$ 250 / GRT. As a reminder, Gross Registered Tonnage (GRT) is a common measurement of the internal volume of a ship with certain spaces excluded. One ton equals 100 cubic feet. GRT depends on asset class, design, etc, so it’s a unique number for each vessel, but as a rule of thumb, it’s about 5/8 of the vessel’s deadweight (again, a gross simplification for our purposes here.) A 50,000-dwt supramax vessel would be about 35,000 GRT, and would generate about US$ 4.2 million in demolition subsidies and another US$ 4.2 million in shipbuilding subsidies. And average newbuilding contract for such a vessel would be around US$ 26 million today, and the scrap price, in general, of such a vessel in China would be about US$ 2 million. Effectively, between the subsidies and the scrap value of a supramax vessel, a Chinese owner will need about $16 million to get their hands on a brand-new supramax vessel. This presumes that the shipowner will not obtain any further subsidies (like cheap construction financing, cheap post delivery financing, COAs from a local steel mill, etc) Again, this subsidy pertains only to Chinese shipowners who will undertake demolition and shipbuilding activities in China and keep their vessels under the Chinese registry. And, it pertains to vessels that are scrapped much earlier than their design life (usually aboutFollow 25 years) as vessels shippingfinance.wordpress.com
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Shipping Finance by Karatzas Marine | Equity, Debt, Leasing, Advisory & Restructuring
subsidized cannot be over twenty years of age when scrapped.
Follow “Shipping On the surface of it, based on the information Finance provided during announcement, there will be bythe Karatzas no direct impact to international shipping from this program, presuming that it progresses as Marine”
announced without glitches (you never know if a website doesn’t work these days!) and without
Get every new post too many loopholes busted (i.e. who is a ‘Chinese owner’? Could be delivered someone acting as a to your Inbox.
front/JV-partner of a US-based private equity fund?) And, on paper, most likely this subsidy program seems to have a neutral impact on the merchant fleet, as one would JoinChinese-flag 149 other followers expect that shipowners, in order to maximize the subsidies obtained, would order as many
Entervessel your email address vessels as they scrap. However, a Chinese-flagged does not mean that the vessel is intended for coastal trade and cannot be used for international trade. Sign me up The subsidy obviously will benefit Chinese shipping-related activities as it will motivate more by WordPress.com demolition sales and thus create jobs for demolitionPowered yards and produce more scrap steel plate;
also, given the subsidy, it will make no sense whatsoever for a qualified vessel to ever get scrapped in the sub-continent; the subsidy makes up much more than ballasting costs and any market premium obtained from the scrap yards in the sub-continent. Thus, all being equal, more demolition activity in China in general is to be expected, and the few vessels that could in the past ‘leak’ to the Indian / Pakistani / Bangladeshi demolition yards will now be retained in China, therefore, a small negative impact in terms of volume to sub-continent, and likely a bit better news for international shipowners selling to scrap yards in the sub-continent and getting more competition for their vessels from the scrap yards (again, presuming a perfect ‘model’ with no inefficiencies around it.) The subsidy obviously will also benefit the Chinese shipbuilders through increased volume of business and more newbuilding orders. Shipbuilding jobs are good since create payroll and payroll taxes and trickle down effect in the economy; and, shipbuilding jobs are also good as they keep workers and shipbuilders sharp with their skills and internationally competitive, or at least it provides for a chance to climb faster the shipbuilding learning curve (a well-known Chinese goal.) Assuming that Chinese shipbuilding capacity is inelastic, these subsidies likely will be bad news for international shipowners, as it will absorb shipbuilding capacity by local players who could afford to bid prices higher given the subsidies, and thus, international shipowners will have to pay higher prices for their contracts. Again, this outcome will take place if the assumption of Chinese inelastic shipbuilding capacity holds, and, we all know with the greenfield yards of 2005-2008, that that’s a tall assumption one to hang their hats from. In our humble opinion, these subsidies could have a very negative effect on the international shipping industry for a couple of other, major reasons:
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Searching for guidance (Image source: Basil Karatzas)
First, based on the supramax example above, it provides for about 30% markdown on sticker, newbuilding prices for Chinese shipowners to replace their fleets; if we talk about 10 years old vessels that have made operating profits during their life so far, and their market value is a fraction of their replacement cost, the subsidies offered are extremely substantial. As it does not seem to be any vessel limit per owner or subsidy amount claimed per owner or vessel size or anything else to that effect (as least as this has been reported in the western press), then major Chinese shipowners like COSCO effectively can replace their fleets very cheaply and become much much more competitive on the international markets and give the Maersks of the world a run for their money. It seems that the only ‘bottleneck’ in this subsidy program is the capacity to scrap and build, as the program is valid until the end of Chinese fiscal year 2015 (same as calendar year.) Therefore, Chinese shipowners are given the government’s blessing to get aggressive and very competitive on the world trade stage. Secondly, this program will be negative for the overall shipping market for many years to come, and will delay further in the future any market recovery. Nominally, there are more than five hundred shipbuilders in China, a sizeable number of them established in the last decade and still a sizeable portion of them being ‘greenfield’ yards, meaning that they barely have had any legitimate claim to building continuously competitive vessels, or even seaworthy vessels. Most of these greenfield yards had primarily been active in the construction of small vessels, mostly in the dry bulk market, and a lot of the vessels delivered from these yards over the last five years are not commercially competitive and with little chance that they would ever traded until their design life. A lot of these vessels ended up in the hands of Chinese ‘farmers’ since the yard collected the forfeited down-payment of the original (international) buyer and then sold or ‘warehoused’ shippingfinance.wordpress.com
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Shipping Finance by Karatzas Marine | Equity, Debt, Leasing, Advisory & Restructuring
these vessels locally. In our shipbrokerage practice, like many other brokers, we have seen vessels where the hull is literally crooked, where handysize vessels burn as much bunkers as panamax-size vessels, equipment list from makers unknown to the world, vessels whose designs and all their paperwork and documentation are only in the Chinese language. One of the few things that were going for shipping was that many of these ‘modern’ vessels from greenfield yards were expected to get scrapped before their second special survey. And, now they will, indeed; but, now, for each and every of these vessels that gets prematurely scrapped, there will be a replacement, and if people have learned any lessons from the shipping crisis of our time, these newbuildings will be of modern design and ‘eco friendly’ and will be market competitive for their whole design life, 25 years from now, and will add up to the already bulging world orderbook. And, by the way, they will be 30% cheaper than anyone else’s vessels. Got to love ‘moats’ created by governments! © 2013 Basil M Karatzas & Karatzas Marine Advisors & Co. All Rights Reserved. IMPORTANT DISCLAIMER: Access to this blog signifies the reader’s irrevocable acceptance of this disclaimer. No part of this blog can be reproduced by any means and under any circumstances, whatsoever, in whole or in part, without proper attribution or the consent of the copyright and trademark holders of this website.Whilst every effort has been made to ensure that information herewithin has been received from sources believed to be reliable and such information is believed to be accurate at the time of publishing, no warranties or assurances whatsoever are made in reference to accuracy or completeness of said information, and no liability whatsoever will be accepted for taking or failing to take any action upon any information contained in any part of this website. Thank you for the consideration. Posted in Maritime Economics | Tagged Basil M Karatzas, Karatzas Marine Advisors & Co. | Leave a reply
‘Things cannot get worse’ in shipping Posted on November 25, 2013 In a week when the twenty-two-year-old Norwegian Magnus Carlsen was crowned the world’s chess champion, when the crypto-currency Bitcoin reached $900 on behalf of Bernanke’s quasi-endorsement for its potential for (legitimate) digital applications and China’s approval, when the S&P closed above 16,000 for the first time, when the world’s ultimate ‘buy and hold’ value investor Warren Buffett announced a new $3.5 billion position in an ‘old economy’ energy company ExxonMobil, it was also a week when it was revealed that the world’s ultimate trader shippingfinance.wordpress.com
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Shipping Finance by Karatzas Marine | Equity, Debt, Leasing, Advisory & Restructuring
investor George Soros took a position in several dry bulk, publicly traded companies in Q3 2013. The collective investment by the Soros Fund Management is only a few million dollars (less than $7 million, in all) and a very minor slice of the fund overall (less than 1%), but the message was amplified in the shipping press that shipping is indeed in a cyclical recovery. The companies that benefited from Soros’ seal of approval were Dryships (ticker: DRYS), Baltic Trading (ticker: BALT), Navios Maritime Holdings (ticker: NM), Navios Maritime Partners (ticker: NMM), Safe Bulkers (ticker: SB), Diana Shipping (ticker: DSX) and the product tanker company Ardmore Shipping (ticker: ASC). The momentum keeps building that shipping is indeed in cyclical recovery. Asset prices for vessels have kept improving on fairly solid activity of vessel trading and acquisitions by mostly financially-oriented or –sponsored buyers (as compared to buyers putting significant own equity in the deals.) There are micro-trends within the market, and market segments are coming to and moving from favor on a regular basis. While capesize vessels were definitely the flavor of the month a couple of months ago (when rates at $40,000 pd but now below $20,000 pd), in the mainstream shipping, the enthusiasm has moved over to the crude tanker market. For one thing, freight rates for VLCCs have approached $50,000 pd recently (vs. $13,000 pd y-t-d average); for another, the line of thinking in the crude tanker space is that ‘things in the tanker market cannot get any worse’, so by default, the market has to move up. On that note, there has been the acquisition of a 2014-VLCC tanker at a price believed to be just shy of $90 million, while the ever active Scorpio Tankers (ticker: STNG) is rumored to have placed an order of four VLCCs at S. Korea’s DSME at about $90 million per vessel; this order is on top of the ten (10) VLCCs announced just this week by Navig8 and DHT Maritime. $90 million for modern VLCCs while the year-to-date freight average of $15,000 pd is considered that ‘things cannot get worse.’ Shale oil in the US was the development that had been the crude tanker market’s undoing, originally in 2009, with the US not having to import as much crude oil as before. Product tankers were the main beneficiaries of the market shift, with excess refined petroleum products getting exported from the US. And, indeed, the product tanker market has benefited handsomely over the last couple of years, so much so as some to believe that the market is now oversupplied.
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Gas is the Name of the Game!
But shale still has affected many markets, whether directly or indirectly. Dynagas LNG Partners (ticker: DLNG) has been successful very recently with their listing on NASDAQ raising about $220 million, although the pricing of $18/sh was on the lower end of the pricing range. While crude oil from the US is exported on a ‘ban unless basis’ while natural gas is exported on a ‘export unless basis’, trade of natural gas has been on the ascendant which explains the interest in DLNG. Staying with the gas products of the shale trade, Navigator Gas Holdings (ticker: NVGS) was the beneficiary this week of the public markets with their robustly pricing IPO at $19/sh and raising $230 million. The company has been sponsored by W.L. Ross and has been active in both the handysize and VLGC sectors, with the latter being the major beneficiary of the shale gas trade in the form of propane gas. Still serving the propane gas transport, BW LPG was very successful and very well received in the US and able to price strongly to raise about $500 million this week, again, despite any perceived competition from the NVGS offering. BW LPG is world’s largest VLGC owner with 36 vessels overall, 19 of which are owned VLGCs. The news of these IPOs in just a week for the gas trade bode well for more gas hopefuls in the US markets, Dorian LPG (partially supported by Scorpio Tankers) and Avance Gas Holdings (a Frontline 2012, Stolt-Nielsen and Sungas Holdings joint venture). This week’s earnings call with StealthGas (ticker: GASS) however made it clear that the gas market has already started getting crowded and charterers started preferring modern and bigger tonnage (a more critical point than the tramp dry bulk market when fuel efficiencies and economies of scale do not translate directly to the bottom line.) Fairly active times in shipping… when ‘things cannot get worse’… © 2013 Basil M Karatzas & Karatzas Marine Advisors & Co. All Rights Reserved. IMPORTANT DISCLAIMER: Access to this blog signifies the reader’s irrevocable acceptance shippingfinance.wordpress.com
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of this disclaimer. No part of this blog can be reproduced by any means and under any circumstances, whatsoever, in whole or in part, without proper attribution or the consent of the copyright and trademark holders of this website. Whilst every effort has been made to ensure that information herewithin has been received from sources believed to be reliable and believed to be accurate at the time of publishing, no warranties or assurances whatsoever are made in reference to accuracy or completeness of said information, and no liability whatsoever will be accepted for taking or failing to take any action upon any information contained in any part of this website. Thank you for the consideration. Posted in Maritime Economics | Tagged Basil M Karatzas, Karatzas Marine Advisors & Co. | Leave a reply
Selling Shipping Loans Posted on November 17, 2013 With half-a-decade loose monetary policy, with interest rates kept at historically very low levels by central banks and overall corporate defaults rate at very manageable levels, investors seeking yield have been investing in ever higher risk credit instruments expecting ever lower returns. For instance, Triple C corporate bonds – the lowest credit rating possible, at present yield 7.75%, down from 9.8% from a year ago, and there has been a great demand for them, to the tune of $38.1 billion so far this year (vs $37 billion for the whole calendar 2012.) In shipping, freight rates in the last six months have moved above cash break-even levels in most market segments, and on occasion, the momentum of the increase has been impressive, i.e. capesize rates moved from less than $10,000 pd in July to over $40,000 pd by the end of September, and likewise for VLLC rates, when last week $40,000 pd spot rates were recorded for the first time in more than nine months. For right or wrong, the prevailing consensus at present is that shipping is in a cyclical recovery phase with the worst behind us, and, therefore, taking ‘long positions’ or ‘risk on’ is the right strategy. While a few private equity funds and institutional investors have been setting up JVs with vessel owners and managers to buy actual vessels in order to benefit from the market recovery (the JV between Oaktree and Oceanbulk is the most quoted example), an ‘easier’ approach to benefit opportunistically from a market recover is to invest in corporate transactions in the public markets, whether in equities or debt. For the former, the Oslo OTC market has been very hot this year, and the Scorpio Group (whether in the product tankers with Scorpio Tankers (STNG) or in the dry bulk market with Scorpio Bulk (SALT)) have been the most successful examples of riding the equity raising wave for all its worth. In the debt markets, there has also been activity for some time with the sale of shipping loan portfolios. Lloyd’s Banking Group has gradually been systematically divesting their shipping portfolio since 2010, with their latest sale of a $500 million shippingfinance.wordpress.com
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Shipping Finance by Karatzas Marine | Equity, Debt, Leasing, Advisory & Restructuring
tranche taking place just two weeks ago to likely Bank of America (BofA), who where acting in an intermediary capacity and providing debt financing to the equity providers. The transactions that really caught everyone’s attention however were the sale of DnB’s total shipping loan exposure to Genco Shipping and Trading (GNK) of $520 million (part of a $1.01 billion revolving credit facility), and the sale of Royal Bank of Scotland’s (RBS) entire shipping loan exposure of $720 million on Eagle Bulk (EGLE), part of a $1.1 billion term loan facility (after the restructuring in summer 2012). The exact details of both these transactions are still sketchy, but it has been rumored that the Genco debt was sold for about 91% of its face value, while the debt for Eagle Bulk brought just shy of 90% of its face value; it is believed that in both cases Bank of America is the buyer and arranger of the sales, with Bank of America also providing debt financing to the funds eventually buying these loans. There has been a long list of funds mentioned as the buyers, some known to shipping but some complete newcomers, but the names Oaktree and Centerbridge are most frequently quoted.
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MV „GENCO CONSTANTINE” – 91% of the nominal value? (Image source: http://www.shipspotting.com)
The quoted pricing of about 90% has been exceptionally strong both in absolute and relative terms, and it presumes that the borrowers will perform in every respect, an assumption that is heavily contingent on a market recovery. As mentioned earlier, with interest rates very low, credit investors have to really search hard for deals, even in ‘obscure’ industries like shipping, and when they find them, they have to be very competitive in their terms and pricing, which has brought about the competitive pricing in these two transactions. However, the fact that both Genco and Eagle Bulk are publicly traded companies in the US (from where a tremendous pool of institutional money is invested) with relatively modern, uniform fleets in the recently buoyant dry bulk market and with significant market exposure if/when the market recovers (a great deal of the original charters have expired or expiring soon) has called for very competitive pricing, which has surprised many market players, and likely the sellers themselves. This is a recurring theme shippingfinance.wordpress.com
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Shipping Finance by Karatzas Marine | Equity, Debt, Leasing, Advisory & Restructuring
with institutional investors who would pay aggressively for ‘paper’ which they can trade from their screen rather than having to deal with potentially logistical and operational matters (buying vessels or arresting vessels); a year ago, Santander Bank, holding a small position in the OSG syndicate, attempted to sell their position, expecting a 60% related pricing; to their surprise, and everyone else’s in the syndicate surprise, the pricing soon got into the 90’s levels, again, reflecting that OSG was a US-based, publicly listed company and easy to trade on a computer screen. The fact the shipping debt, very selectively of course, can fetch pricing in the 90’s is definitely a positive event for many shipping banks, who may find such pricing irresistible and start exploring their own sales. We are not sure whether there will be an upcoming avalanche of shipping loan sales, but there are many constraints: borrowers ideally have to be public companies (much less preference for private companies) with underlying assets in active markets (doubtful that loans on containerships would be as competitively priced and received) with governing jurisdiction English or US law and while there is this (short?) window of low interest rates, market stability with low corporate defaults and debt financing for shipping loan acquisitions is competitively available. But again, seeing that 17% of the world fleet is still on order and many more newbuilding orders are getting placed on a weekly basis, paying aggressively for shipping loans presumes a substantial freight rate recovery (which presupposes tighter control of tonnage supply) and also better asset pricing as loan collateral (which again presupposes tighter control of tonnage supply). It will be interesting seeing whether 90% pricing would make much sense. It also will be interesting seeing how ‘patient’ and tolerant of the corporate managements the institutional buyers of shipping debt will be, being ‘active creditors’ as part of their DNA of managing risk actively vs a traditional banker’s relatively passive and non-confrontational approach. © 2013 Basil M Karatzas & Karatzas Marine Advisors & Co. All Rights Reserved. IMPORTANT DISCLAIMER: Access to this blog signifies the reader’s irrevocable acceptance of this disclaimer. No part of this blog can be reproduced by any means and under any circumstances, whatsoever, in whole or in part, without proper attribution or the consent of the copyright and trademark holders of this website. Whilst every effort has been made to ensure that information herewithin has been received from sources believed to be reliable and such information is believed to be accurate at the time of publishing, no warranties or assurances whatsoever are made in reference to accuracy or completeness of said information, and no liability whatsoever will be accepted for taking or failing to take any action upon any information contained in any part of this website. Thank you for the consideration. Posted in Shipping Loans | Tagged Basil M Karatzas, Karatzas Marine Advisors & Co. | Leave a reply
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Private Equity and Shipping: Another Take Posted on November 16, 2013 The prolonged trough of the shipping industry has drawn the attention of many newcomers to the industry, from distressed instrument investors to third-party vessel managers and operators. It’s not only that all these newcomers (along with existing players) position themselves for a market recovery; a sea change has taking place in the shipping industry, from shifts in shipping finance to competition from more fuel efficient newbuilding designs to geo-political issues such as China’s support of domestic shipbuilders and their fostering of a local shipping industry that create business and investment opportunities. Among the participants in the shipping world, traditional shipping finance, and namely the shipping banks, like a modern day Aeolus – the Greek god of winds - have the power, whether actively or passively, to shift the market at will. With an outstanding shipping loan portfolio of more than $500 billion at the top of the market, at present, shipping banks have been trying to find their balance while having one eye on the rear view mirror and their ‘legacy issues’ (shipping, but also sub-prime, real estate, sovereign bonds, etc) and the other eye on Basel III and the new capital requirements. Institutional investors have been drawn to shipping partially because of the collapse of the asset prices and partially because the lack of debt had opened the doors for alternative sources of finance such as mezz financing, leasing, yield-driven equity, alpha-seeking private equity, etc Recently, the private equity firm KKR announced the formation of the Maritime Finance Company with the funding of a few hundred million dollars for the purpose of primarily filling the gap left by the lack of capacity from the traditional shipping banks. The concept of institutional investors with private equity minded returns entering the debt financing market in shipping is not exactly unique. Based on our experience and dealing with small banks and seasoned shipping bankers, the concept has been around at least for the last two years and we are aware of institutional investors providing small funding to boutique shipping banks for origination of new loans for double-digit returns (returns on the equity investment, not necessarily double digit interest rates). No doubt that such debt financing cannot be replicated on a massive scale given the cost of financing. On the other hand, it has been calculated, that for banks to fully comply with Basel III capital requirements, their spread on shipping loans will have to be more than 600 basis points. If one were to calculate the total cost of debt financing on a historical average of LIBOR, that numbers would not be much lower than 10%. Probably in the near term of the next two years it will be difficult to deploy large amount of capital as debt financing for new projects while charging interest rates high enough to generate double shippingfinance.wordpress.com
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Shipping Finance by Karatzas Marine | Equity, Debt, Leasing, Advisory & Restructuring
digit returns. After all, current undertakers of new projects in shipping usually have their financing in place and access to different and cost competitive forms of capital from many geographic markets (such as export credit, Norwegian bond markets, highest priority receiving debt financing from shipping banks to the extent possible, etc). On the other hand, there are still plenty of ‘legacy projects’ with banks and shipowners from the better days of the cycle, projects that are not completely doomed but definitely could utilize some restructuring and some capital injection, not exactly equity but neither debt, mostly around the ‘mezz’ section of the capital structure, that could deliver low double-digit returns with low risk while bypassing most of the ‘issues’ an institutional passive investors loves to hate in shipping. © Basil M. Karatzas 2013. All Rights Reserved. No part of this blog may be reproduced, in whole or in part, under any circumstances, without the prior written consent of the copyright holder. Posted in Private Equity | Tagged Basil M Karatzas, Karatzas Marine Advisors & Co. | Leave a reply
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