Tag Archives: sale & purchase

The Unbearable Boredom of Marine Asset Prices

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The COVID-19 pandemic has been the low-probability-high-impact novel risk that few people had seen coming and warned about it (mostly statisticians and epidemiologists) but the greater business community had ignored it till now.  Coping with COVID-19 is still an evolving process, and the shipping industry has been learning to react  and adjust to the forces the pandemic has unleashed on supply chains and logistics, some with a positive impact, but mostly with adverse or very adverse implications.

We have argued elsewhere on some of those implications, and we will follow up soon with a few more thoughts. However, for now, the subject of marine asset pricing and vessel values, more than six months since the pandemic has started in the West, seems to be too intriguing to pass up.

Once the magnitude of the pandemic started taking shape by March 2020, and the extent of lockdowns and closing of borders and travel restrictions were evident, the first expectations were that this is going to be very bad for the shipping industry and for shipping values. After all, once the industrial base of China and the United States and the European Union coming to a screeching halt, and trade volumes collapsed, one had to expect the worst. And, indeed, the first couple of weeks of the pandemic were brutal in anticipation, from the world stock markets to the long lines snaking outside supermarkets.

The Baltic Exchange [Disclaimer: Karatzas Marine Advisors is a Baltic Exchange member company] freight indices (both for dry bulk and tankers) were edging marginally higher at the beginning of the year on renewed hopes of market recovery. When COVID-19 smote the market, dry bulk freight rates quickly collapsed; it was not that demand for raw materials collapsed simultaneously with the rising of the pandemic, but port operations pushed forward any cargo requirements, thus pulling the freight market down fast in the short term. However, the very same disrupted port operations that pulled the freight market down had a completely different effect for tankers: combined with a glut of crude oil and petroleum products that brought the energy markets into a contango, and quickly tanker rates skyrocketed, at least temporarily.  But, once oil companies and refineries managed to handle their excess inventory, as one would had predicted back in April, the tanker market deflated as well.

From the following graph of the Baltic Exchange Indices, freight rates presently are lower than at the same time last year (2019) and the year before (2018). There is a current, rather seasonal, rally in the dry bulk market (the US Dollar has lost appr. 10% of its value in 2020, and commodities priced in USD being cheaper in local currencies have spurred regional trades), but still below break-even cash levels.  VLCCs are earning appr. $15,000 pd spot now (vs. $45,000 pd average 2019 earnings) and Capesize bulkers are earning $14,000 pd spot now (vs. $14,500 pd average 2019 earnings). Not great numbers, but again, as solace, in 2016 the market was much worse with Capesize vessels  earning the grand sum of $4,500 pd. And, when considering the GDP of many OECD countries has dropped more than 10% in the first half of 2020, and the OECD formally expects global economic activity to drop by 6% to 7.6% annualized in 2020 (based on average scenarios), the current freight market is not bad at all.

Baltic Exchange Tanker & Dry Bulk Freight Indices since 2015

And, accordingly, since freight rates are highly correlated to marine asset prices, one’s attention turns to the secondary value of ships: at least the shipowners, and the shipping lenders and the investors as the use shipping asset prices as their main benchmark for equity (and wealth) creation, as collateral to shipping loans (Loan-to-Value or LTV) and the Net Asset Value (NAV) of the company. In the two graphs herebelow, we are using values of five-year old both dry bulk and tanker vessels, the major asset classes per market sector as a proxy, although prices for older and newer vessels show similar characteristics.  The data were provided by the Baltic Exchange and Karatzas Marine Advisors.

For Capesize, Panamax and Ultramax dry bulk vessels, asset prices have declined since last year; in a sense, this is to be expected given the state of the market, but nominally, one would expect that dry bulk vessel prices to be lower at present than where they really stand. Not only freight rates are low, but also several complimentary factors (i.e. momentum, financing, etc) are worse than the freight market may imply. What is noteworthy is that although the overall marine asset pricing curve is negative, in the last several months, it’s effectively flatlined, showing signs of minimal variance and volatility. If the shipping industry is known for one thing is that it’s that flat lines rarely exist in shipping.

 

Tanker Vessel Assets Prices (5yr-old Vessels)

 

Likewise for tanker asset pricing, for five-year old VLCC, Suezmax, Aframax, Panamax LR1 and Medium Range MR2 and MR1 tankers, the overall trend is negative, but again, the several last months show a flat line as well. Minimal movement in tanker asset pricing, in a market that is known to move around widely.

Dry Bulk Vessel Assets Prices (5yr-old Vessels)

If any conclusions could be drawn from the current pricing activity (and a weak secondary market activity in the sale & purchase market) is that there is a tug of war between buyers and sellers that  currently stands at equilibrium. Both buyers and sellers trade along the status quo and “last done” pricing as neither group has the upper hand. Despite the weak freight market, sellers still earn  enough to pay their bills (and possibly their lenders, too), and buyers do not really have a reason to pay up to acquire tonnage (but also, they do not find “distressed” opportunities to feast on).

We would think that the market is bound to move, and rather strongly, in either direction in the near future. Both industry idiosyncratic variables (financing, banks, newbuilding activity, etc) or exogenous variables (the upcoming elections in the US are expected to be unusually contentious and impactful worldwide) could move the market and marine asset values, and the current boredom in the vessel value pricing  is deceiving.

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© 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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A Sale & Purchase Market in Shipping that Was … or, It Wasn’t It, in 2017

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2017 was a fairly good year for the drybulk market. As compared to 2016, truth being told, 2017 was an exceptional year. All segments of the drybulk market have moved from severely depressed levels (with a meaningful part of the world fleet idle then) to profitable levels; at some point in early 2016, it seems that all types of drybulk vessels, irrespective of size and segment, were earning $4,000 per diem, if they managed to find employment at all. By comparison, in November 2017, capesize vessels most noticeably were etching earnings close to $30,000 pd.

And, looking forward, the prospects for 2018 seem at least fair for the drybulk market, while tankers and containerships hold hope. Shipping is far from showing a full recovery from the crisis, but at present the market seems optimistic, especially when one considers the abysmal days of the market bottom in March 2016.

Drybulk freight indices in 2017, provided by the Baltic Exchange

2017 has been a fairly decent market for the sale and purchase (S&P) of shipping assets. Vessels were bought and sold, but mainly they were bought, at a livelier pace than in 2015 or 2016; overall, S&P activity has been higher by 34% in 2017 for the drybulk market than the previous two years, a welcome development for S&P brokers. And, most of the vessels were bought in expectations of a recovering market instead of getting sold as in the past in a bloodbath of a market at auctions and other forced sale scenarios.

With increasing volume for S&P in an improving freight market, one would be forgiven to assume that shipping assets prices were on a roll in 2017. It’s true that vessels’ values for dry bulk have improved, driven by an improving freight market and good prospects for the immediate and near future; however, asset pricing was nowhere close to match the freight market’s buoyancy. Freight rates increased by a multifold factor, while asset prices dragged along. As per the attached graph, prices of asset classes tracked by the Baltic Exchange under their Baltic Exchange S&P Assessment Index (BSPA) for five-year old vessels, both tankers and bulkers, have been steady. [Karatzas Marine Advisors is an active member of The Baltic Exchange]. For tankers, prices have shown in 2017 as much liveliness as if trading in a sea of tranquility – exhibiting almost prefect flat lines. For bulkers, there has been a relatively mild improvement in the spring of 2017, but flat lines that resemble tanker prices followed. Still, year-over-year, there is a 25% increase for capesize vessels and milder improvements for other types of dry bulk vessels. Again, these are data for five-year old vessels, and older vessels performed better and newer vessels performed a bit worse than five-year old vessels; and again, these are asset price increases in 2017 alone, not from the bottom of the market in 2016 – where price improvements have been more significant. But again, and without wishing to burst anyone’s bubble, the Standard & Poor’s (S&P 500) index in the USA achieved almost a 20% performance in 2017, and this with all the benefits of a liquid investment.

Shipping asset prices in 2017 and the Baltic Sale & Purchase Assessment Index (BSPA), provided by The Baltic Exchange

Asset prices in 2017 have been un-inspiring for all types of vessels, including drybulk, tankers and containerships. We have written in a different post about the sale & purchase market and asset playing as a business idea that seems that it lost its luster. Hopefully there are much better days in shipping and we are in the early stages of a lengthy and strong recovery; and, likely those who bought ships in 2017 and 2016 will get to enjoy much stronger markets and asset prices.

Our skepticism on the subdued state of the sale & purchase market and its impact on the asset play theme is that they may be early signs that the shipping industry is facing structural changes while we all celebrate the strength of the freight market recovery. It would appear that with the lack of plentiful and cheap debt financing, flipping shipping assets is not as appealing any more. More of one’s money has to be committed to the “bet”, which is makes it costlier to buy ships and play and game. And, more importantly, lack of availability of cheap money for other buyers makes it harder for other people (and potential buyers) of one’s assets to get optimistic and bid up asset prices and pay you a strong price to buy your assets. Or, it may be that shipping is finding its calling that it is actually for transporting goods and being part of the logistics chain and not a speculative instrument for buying and selling ships and stretching one’s fleet like an accordion and being highly opportunistic with the market and business relations.

Even more concerning that the lack of shipping finance prospect affecting asset prices is that the freight market recovery may not considered to be real and sustainable by the “smart money”. Even shipowners with access to cash, few reference names have made substantial purchases in 2017, a few individual acquisitions notwithstanding. Shipowners who in previous down-cycles were loading up on cheap tonnage, it seems this time around have gone on a buyer’s strike. It’s interesting seeing who’s doing the buying and who is doing the preaching, and who’s buying with their own money and who is buying with other people’s money. As another of Yogi Berra’s pith quotations has it, “you can observe a lot by just watching”. And who has been doing the buying in the S&P market in 2017 is not strongly convincing.

There have been reports elsewhere that Greeks and Americans have been the highest buyers of ships in 2017, and the geography of these two countries may indicate trends in the market, at least in the short term and at least for 2017. Access to shipping expertise and access to capital have always been two competitive advantages to have in shipping. Hopefully the trend will continue as our firm has intimate access to both of these markets.

We only hope that 2018 will be a better and more active year for S&P that 2017 has been, and we wish that much more money stands to be made in the new year. Having been very active in 2017 ourselves, we only hope that any S&P activity and asset appreciation is based on fundamentals and not on speculation, and any signs of concern mentioned above remain just that!

Happy New Year!

The hope of the new day and the dangerous of the treacherous seas… Bass Harbor Light, in Mount Desert Island, Maine, USA. 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.

Dry Bulk Ships: To Buy or Not To Buy

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The dry bulk market had a great run from the fall of the last year until March this year when the BDI reached 1,338 points on March 29th.  While freight rates still have been hovering at just above break-even levels, the improvement of the market has been impressive in relative terms; freight rates have quadrupled in the last year, admittedly from abysmally low levels.

While still the freight improvement has not been strong enough to justify popping champagne bottles, it has worked miracles in terms of improving the mood and bringing soaring enthusiasm back in a market that was relentlessly bleeding cash for the last few years. The enthusiasm has been so strong that recent sale & purchase activity (s&p) has been the strongest in the last two years, while there are a couple of cases of shipowners doubling their money on ‘asset play’ transactions within the last year.

The market has given up some of its recent earnings as the BDI is now back to approximately 900 points, but the improved mood is still abundantly present. And, given that we are heading into the summer, a seasonally weak season for shipping, there have been some concerns on the direction of the market. And, now that the market seems to be taking a breather and there is some time for introspection, there is some head-scratching on the real reasons for the market bouncing back so strongly in the last year as fundamentals did not seem to justify such a strong (fourfold) freight improvement.  All in all, while the market is still decent and the mood is buoyant, one has to be more cautious at present.

Shipping asset prices have improved since last year when ships, especially when non-modern dry bulk ships were selling at a multiple of their scrap value, irrespective of quality and pedigree. Probably the “easy money” has been behind for those looking for an easy “asset play”, but shipping asset prices are still low by historical standards.  And, there has been serious interest for acquisitions of dry bulk shipping assets whether in the secondary or the newbuilding market.

But again, it’s hard for a buyer or investor to enter aggressively the market. Prices have doubled for a great deal of assets while the freight market barely covers their daily operating expenses. And, there are risks looking forward to justify an aggressive approach. Trade volumes are still anemic to imply a strong market recovery. And, shipbuilders are getting more desperate by the day at building up their orderbook. Lack of competitive shipping finance keeps a dumper on the market, but any export credit incentive or other catalyst would have a tremendous (even catastrophic) impact on the market.

While asset prices look tempting by historical standards, whether for tankers or dry bulk vessels, it’s hard making the argument that the market is in a full recovery swing and buying ships, whether for operating profits or for asset flipping in the future, can b a great strategy. The risks still lurking in the market cannot be ignored. And, in our opinion, the “irrational exuberance” we have seen earlier in the year make us believe that there is still lots of froth in the market.

The article was first published in Seatrade Maritime on June 6th, 2017 under the title “Dry Bulk Ships: To Buy or not to Buy“.

Great looking dry bulk vessel MV ‘Genco Pyrenees’ not making making (sailing in ballast). Recently photographed sailing upstream in Elbe in Hamburg. 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.

Dry Bulk Sale & Purchase (S&P) Update

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The Baltic Dry Index (BDI) established a 30yr low point in February this year; actually the lowest reading of the index ever. Since then, the market has been bouncing along the bottom with a very anemic improvement to show since then. There are concerns that the industry has entered a long-term phase of malaise with chronic oversupply of tonnage; certain trends point to such direction such as massive orders by cargo interests and end users building up their own fleets (i.e. Cosco, Vale, etc) that will make life for independent dry bulk owners difficult, or at the very least ‘shave the market peaks’. China is done for now with their exponential growth of their market as they try to position their economy towards services and focus on a more equal distribution of wealth that can assure social peace. There also have been structural shifts in the markets associated with shipping, such as replacement of coal with natural gas for electricity and power generation; at present the trend against coal is so bad that it seems coal is becoming a ‘four letter word’ as investors, institutions and sovereign funds are competing for the fastest exit from the industry; for sure, natural gas will need also shipping but not on dry bulk vessels; and the coal trade as almost as big as iron ore at almost 1.2 bln tonnes of coal expected to be transported this year vs. 1.5 bln tonnes of iron ore, based on data by Karatzas Marine Advisors & Co.

2015 06JUN_BDI Graph

Baltic Dry Index: not a day at the beach, regrettably! (Karatzas Marine Advisors & Co.)

Most institutional investors and shipping banks have turned their backs on the dry bulk market, at least for now; thus, there is extremely limited liquidity, which further compounds the downward pressure on dry bulk asset pricing that are inflicted by the weak freight market. The main sources of financing for dry bulk projects today are from the capital markets (selectively available and often at a substantial discount; $SALT’s secondary offering at 30% discount is a clear example of a fallen angel) or with sweat equity and own equity. Independent shipowners and sweat equity have their own capital limitations and likely to opt for older tonnage at rock-bottom pricing, mostly looking for vessels older than 15yrs of age at about scrap pricing; if one has access to cargo or charterers or niche markets, buying a vintage bulker at scrap is not a bad investment proposition: for a few million dollars (small amounts in absolute terms that can be afforded by individual investors) and with minimal capital at risk (premium over scrap), if a buyer can squeeze a few year’s of economic life out of cigarette-butt (think of Benn Graham and Warren Buffett), what can go wrong? And, if the market unexpectedly recovers, these buyers will have hit the jackpot. The access to capital accurately reflects the market dynamics and asset pricing, as big, cash-rich, prime buyers go for beaten-down prices of modern, top quality tonnage, while small, cash-rich owners with access to cargo go for bottom-fishing; thus, there is relative demand from buyers on the opposing ends of the spectrum while demand is sagging for middle-aged vessels; for those involved with volatility analysis and option trading, what’s happening in the dry bulk market reminds of a so-called ‘volatility smile’.

Activity in the dry bulk market is ebbing and flowing, but mostly ebbing as most buyers are taking their sweet time before make any decisions, to buy at all, and if so, at what price. Since asset prices are low and most of the market really is focused on older and cheap tonnage, sale & purchase commissions often are laughable, putting pressure on many smaller brokerage houses.

In the capesize market, Scorpio Bulkers (ticker: SALT) has been continuing their selective divestment of assets in an effort to fill the funding gap for their massive newbuilding program (along with their discounted pricing of secondary offerings as announced earlier this week for 133,000,000 shares of common stock at $1.50 per share; the stock was trading well above $2.20/share at the time of the announcement). In early April, Scorpio has sold three units of capesize bulkers at $44 mil each (2015/2016 deliveries of 180,000 dwt tonnage at Daewoo-Mangalia, MV ‘SBI Churchill’, MV ‘SBI Perfecto’ and MV ‘SBI Presidente’) while this week it has been reported that additional sales took place at $41 mil each, indicating an 8% drop in asset pricing in approximately two months (MV ‘SBI Corona’, MV ‘SBI Estupendo’ and MV ‘SBI Diadema’, 180,000 dwt, 2016, Shanghai Waigaoqiao/China). Approximately one month ago, the still modern cape MV ‘Blue Everest’ (180,000 dwt, 2010, Daehan) was sold at $27 mil, and the older MV ‘Jiang Jun Shan’ (177,000 dwt, 2006, Namura) was sold at $18.2 million. Most market reports have a standardized 5yr-old cape at $30 mil ($29.2 mil as per the Baltic Exchange Sale & Purchase Assessment Index (BSPA)), while just one year ago, such number was pushing the $50 mil mark ($49.08 mil as per BSPA); this is a monumental illustration is value destruction, where $20 mil per vessel has evaporated into thin air, a 40% drop. Few people could have envisioned such a market decline (at least not us, we have to confess), but for professional asset managers, institutional investors, portfolio managers, private equity funds and shipowners on roadshows pounding the table about the market getting this so wrong is a humbling example to watch and wonder.

In the panamax market, MV ‘Navios Esperanza’ (75,000 dwt, Universal S.B., 2007) was sold to $14 mil with her intermediate survey due. Interestingly, MV ‘F.D. Jacques Fraubart’ (76,500 dwt, Imabari S.B. Marugame, 2007) was sold less than six months ago at $19 mil, indicating the magnitude of the asset declines in this sector; presuming appr. $1 mil for the cost of the intermediate survey, this sale represents more than 25% decline in less than six months. The sale of the MV ‘Navios Esperanza’ however is in line with present market given than two weeks ago MV ‘Lowlands Queen’ (76,500 dwt, Imabari S.B. Marugame, 2008) was sold at $15 mil. Decade-old tonnage in this segment has just been decimated as recently the Japanese-built MV ‘Million Trader’ (76,500 dwt, Tsuneishi Zosen, 2004) was sold for appr. $9.5 mil; given that the salvage value of the vessel is $4.5 mil in the present market, she’s Japanese-built and her remaining economic life is more than ten years (fifteen actually remaining years as far design life is concerned), it is hard to see how this can be a bad investment, negative cash flows in the immediate future notwithstanding. And, the market is so terrible for pricing panamax bulkers of this vintage that actually the sale of MV ‘Million Trader I’ (76,000 dwt, Tsuneishi Zosen, 2006) at $12 mil in early May was actually considered at ‘overpriced’ territory by one prospect buyer. Similar and tonnage and pricing, MV ‘Medi Sinagpore’ (75,500 dwt, Universal S.B., 2006) was sold for $12.8 mil while the slightly older MV ‘Rose Atlantic’ (75,500 dwt, Sanoyas, 2005) at $11.0 mil. As a matter of comparison, this time last year, the consensus estimate for a 5yr old panamax bulkers was standing at $26 mil ($26.9 mil as per BSPA index), while now the market stands at appr. $17 mil ($16.4 mil as per BSPA), representing an impressive 40% drop in asset prices.

In the ultramax / supramax market, Norden A/S has disposed of two 60,000 dwt Ultramax newbuildings at Oshima Shipbuilding for delivery in Q4-2015 and Q1-2016 for a price in the region of $25m each (N/B RESALE HULL 10781 / 10782, Oshima Shipbuilding, 2015/2016); EastMed of Greece has been reported as buyers. Similarly sized tonnage but older, MV ‘Nord Liberty’ (58,750 dwt, Tsuneishi Cebu, 2008, 4x30T cranes) was sold to Sea World Management for a price region $12.5 mil. The lightly newer MV ‘Hudson Trader II’ less than a month ago (58,00 dwt, Tsuneishi Zhoushan, 2009) had achieved a more respectable $14.2 mil. From Nisshin Shpg.Co.Ltd. Again, as a matter of comparison, BSPA for a modern surpramax was standing at $25.8 mil this time last year and only at $15.46 mil at present; as painful as it has been, supramaxes / ultramaxes / handymaxes have been another great way of value destruction since last year.

MV MONSTEIN 6

Wishing that all waters in shipping were so clear to read! (Image source: Karatzas Photographie Maritime)

While dry bulk asset prices have dropped substantially over the last year, the consensus is that is the ‘glass is half empty’, still. There many reasons to think so, given still the outstanding orderbook to be delivered, excess shipbuilding capacity, low interest rates and excess liquidity for certain markets, mentions of additional credit lines for export credit from China, and lots and lots of dry powder from institutional investors that can move the market at any given point. On the other hand, as we outlined in a recent post, smart money are getting a second look on certain types of vessels in the dry bulk market. Prices are low enough to be tempting, despite negative cash flows in the near term that will have to be ‘added’ to any purchase price; however, delays in deliveries are negotiated each day from buyers, newbuilding orders have stopped – to the delight and surprise of many a shipowner, charterers have gone on a limp to stay away from the period market and delay as much as possible their chartering requirements. There are some smart money that have start thinking that most of the bad news have been priced in the market and, at least in the near future, any surprises likely to have a positive effect on the market. Maybe it’s time to start seeing the dry bulk glass as half-full.

© 2013-2015 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.