Can money still be made in shipping by flipping ships?

Unlike other capital assets whose value depreciates over the economic life of the asset, ships are known to appreciate in value if markets are strong. When freight markets are exuberant, the value (price) of ships can appreciate as investors expect stronger cash slow streams and higher earnings. It’s not unheard of ships having doubled or trebled in value in a matter of years, generating exceptional windfalls for their owners.

It is said that much more money in shipping has been made by timing the purchase and sale of ships by an owner and benefiting from the asset appreciation rather than by generating operating profits. And, conceptually, this is true: over the long term of a business cycle, as markets are efficient, the operating profit cannot be much higher than the risk undertaken from investing in a ship. On the other hand, as shipping is subject to a myriad variables – a few of them beyond the realm of logical projection such as geo-political events or natural disasters – volatility in the shipping spot freight markets is notoriously gigantic (both VLCCs and capesize vessels in the last decade experienced spot rates ranging from $1,000 pd to $200,000 pd), ships prices can vary accordingly. There have been cases of ships that have doubled or trebled in value in a matter of a few short months, even – and, inversely there have been cases where ships have collapsed in value in a matter of weeks (actually, there has been a well-published Harvard Business School case study – to which we have contributed, whereby two sistership capesize vessels were sold a few months apart in 2008 at a price differential of more than $90 million. By timing the market decently, many a shipowner have made a fortune in the last decades by just buying and selling vessels at the right time.

The 2008 market correction saw a precipitous drop in asset prices. Many buyers hoped for vessel acquisitions at distressed prices – mostly from fire sales from shipping banks, but really only a small portion of vessels mortgaged with bad loans ever got to be sold cheaply. There was no doubt in the minds of many people that 2010 asset price levels were strong buying opportunities.

Once the markets normalized, 2012-2015 saw a tremendous interest in newbuilding vessels, which, by boom-year standards, were at competitive prices; and, of course, shipbuilders did their best to encourage more newbuilding activity by actually sharing the subsidy windfalls from their governments with international buyers of newbuilding ships.

Let’s say that a market recovery did not play out as expected and 2016, for the dry bulk market, saw one of the worst times on record; freight rates and asset prices just collapsed. As a matter of proportion, ten-year-old drybulk vessels were selling in early 2016 at twice their scrap value, while historically ships of that age would be expected to sell at approximately 5x their scrap value. Once again, 2016 was a screaming buying opportunity in the mind of many people, of buying “cheap ships”.

Fast forward two years later, drybulk asset prices are higher than the lows of 2010 and 2016; but, really, not exuberantly higher; and, definitely, no higher than the highs of 2013-2014. Yes, there have been cases of ships getting flipped at double their purchase price between the low and the high, but such evidence is limited to one-off deals, older tonnage, or transactions where the seller had to sell at any price.

The tanker market, the other main commodity shipping market that it’s prone to asset flipping, has experienced similar trends, only in a different sync cycle than dry bulk. Tankers actually are at a cycle low at present with the trade of crude oil being dislocated by OPEC’s production cuts and the boost of shale oil in the US. Tanker asset prices are low – so much so that an institutional investor recently sold a vintage VLCC for scrap – which was bought three years ago; sale was at a loss by our calculations, and much pre-maturely than the expectations of the tanker’s economic life. Making money on this cheap but vintage supertanker did not work out.

What has happened to the asset play game in commodity shipping? Is the game over? Freight rates still are fair and drybulk vessels generate positive cash flows; what would take to pull prices up from the depths of the 2016 crisis?

We wish we had a crystal ball on this, but we think that making money by flipping ships these days is not the “game” it was. The market is getting more complicated, more efficient and transparent, and more demanding; higher demands by all: bankers, charterers, operators, regulators, etc And, ships have been evolving, and they have to catch up with new regulations; it was ballast water treatment management last year, it’s emissions this year, likely it will be IoT and bunkering fuel in the next few years. And, likely many more factors to worry about.

And, cheap and plentiful financing leverage to lubricate the market to make purchasing of ships easier is only getting costlier and more complicated. And, lack of cheap leverage, among other things, has kept a lid on asset prices.

Not saying that asset play is dead; ships seem reasonably priced in today’s markets. But, asset players have to have access to capital and buy opportunistically fleets (not just a ship) when the timing is right (i.e. Angelicoussis and Ofer Groups in the past), and also have the flexibility for financial structuring (while Star Bulk sold have their capesize fleet (at a major loss) in 2016, now they are consolidating the market by paying in paper (shares) to acquire the Songa drybulk fleet and the Augustea Atlantica / York Capital tanker fleet). By buying and operating fleets, they give themselves the benefit of finding employment with established charterers, accessing the banks and capital, having an operating platform – if the asset play does not work out, they will have the capacity to sustain the cycle and go for operating profits.

Borrowing from a credit fund at 10% interest to play the asset game for one or two ships is like playing with the fire. Even worse if the asset player has to put 100% of the purchase money themselves.

Several shipowners tried to raise capital since the 2016 crisis based on the investment thesis that buying cheap ships pays off. We are aware of no institutional investor who actually paid much attention to the theme or even funded the project, since 2016, tempting the theme as it may have been. At least, some lessons have been learned on this matter from the past.

Still shipping is an exciting industry and there is money to be made. But for now, the asset play game is not the way to make money in shipping. At least not by playing the same game with the old rules…

Flipping is hard to do! Image credit: Karatzas Images

© 2013 – present 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.

 

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‘Shipshape 10’ News for Week Ending December 11, 2016

‘Shipshape 10 List’, a list of news and articles published in the current week that a senior executive in shipping, shipping finance, commodities, energy, supply chain and infrastructure should had noticed; news and articles that are shaping the agenda and the course of the maritime industry.

Sometimes seemingly tangential, sometimes humorous, occasionally sarcastic, but always insightful and topical.

And, this week’s ‘Shipshape 10’:

With the freight markets fairly decent and with the continuous buoyancy of the equity markets, we think the recent news of shipping companies accessing the capital markets has been the most noteworthy and encouraging of all; still, the amounts are small for most practical purposes, but it’s encouraging to see that capital markets are not completely shut for shipping; this week, Seanergy (ticker: SHIP) successfully raised $15 mil which follows on the $14 million Safe Bulkers (ticker: SB) and $72 mil Costamare (ticker: CMRE), $106 million Höegh LNG (ticker: HMLP) and the $100 million the Saverys’ backed Hunter Maritime Acquisition Corp (ticker: HUNTU) in the form of a SPAC (blank check) raised.

1. Seanergy Maritime Holdings Corp. Prices $15 Million Offering (company press release)

Small disclaimer that Karatzas Marine Advisors & Co. has contributed the Industry Section Report for the F-1 filing with the Securities and Exchange Commission (SEC); the F-1 filing can be found here, Form F-1.

Still on the financial front, HSH Nordbank AG has reported taking more than $1 billion provisions for their non-core shipping loan portfolio; sobering developments…

2. HSH preparing for change of ownership ─ net profit € 163 million after nine months (company press release)

No doubt that shipping finance is a tough market; Oaktree has been making yet another approach to shipping, this time by providing credit (lending) to shipowners. It’s another effort to capitalize on the opportunity created by the shipping banks leaving the industry. The news on Splash 24/7:

3. Oaktree develops financing model for smaller owners seeking secondhand bargains (from Splash24/7)

Without trying to toot our own horn, Karatzas Marine Advisors & Co. had written about the business opportunity in the Cayman Financial Review in October 2015, more than one year ago;

Credit funds in the wake of departing shipping banks

On more commercial issues, Iran (Islamic Republic of Iran Shipping Lines and Iranian Offshore Oil Co.) finally entered into the newbuilding market with a decent order of four new-panamax containerships of 14,000-teu and six product tankers; the news of newbuilding orders is disheartening in this market, but again, Iran does have to rebuild their fleet, having remained away from the markets since 2006; interesting to note that the order for the newbuildings is going to Korean and not to Chinese as speculation held that ships-for-oil trade with the Chinese may had offered more value:

4. Iran Shipping Lines Close to $650 Million Korean Order (from the Wall Street Journal)

The markets are completely moribund, and this week’s auction by Mexico for drilling in the Gulf of Mexico drew strong demand, from the usual suspects (ExxonMobil, Chevron and Total), but also by the national Chinese oil company (China National Offshore Oil Corporation (CNOOC):

5. Oil and Gas Industry Leaders Eagerly Take Stakes in Mexican Offshore Fields (from The New York Times)

While often much more attention is paid to shipping and ships, one has to keep in mind that often complimentary businesses may be as enticing as shipping; Dubai-based global ports operator DP World joined forces with Caisse de dépôt et placement du Québec (CDPQ), one of Canada’s biggest pension funds, to create a $3.7 billion vehicle to invest in ports and terminals; individual ships or shipping companies can come and go, sink or sail, but they always need ports to load an discharge, a seemingly lower risk investment in an otherwise volatile industry:

6. DP World Joins Canadian Pension Fund to Create $3.7 Billion Investment Vehicle (from the Wall Street Journal)

While Ontario’s pension fund (Ontario Municipal Employees Retirement System, OMERS) has divested a majority stake in V.Ships, the vessels’ management company; the economics of the transaction were not made public, but likely at a nice return for OMERS since 2011 when they bought the company for $520 million:

7. V.Group Changes Hands (from the Maritime Executive)

while there has been stipulation for the UK to seek a more hands-on approach with the national flag:

8. UK eyes part-privatisation of Ship Register to compete for flags (from the Financial Times)

The timing of the transactions above is interesting however; could this be a headwinds environment for vessel management companies too if growth is to slow down?

9. Get used to it: Economists see “new normal” of slow growth (from the Associated Press)

while the strength of the US dollar causing undue pressures on trade movements

10. Why a strengthening dollar is bad for the world economy (from The Economist)


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All too familiar picture: pretty ship sitting high in the water. Credit image: Karatzas Images

© 2013 – present 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.