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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Tanker Sale & Purchase (S&P) Update

In an effort to be more efficient and focused, from now we will report on this blog only pertinent transactions per market segment and asset class for s&p (sale & purchase market) that have occurred in the last couple of weeks. Transactions and transaction details in shipping are never as transparent and clear-cut as many an analyst or an appraiser may wish to think; having the benefit of time-lapse and fact-checking, we believe that reporting more accurately sales vs reporting them prompter is of greater service to our readership. Also, our reporting will be more structured by market segment and asset class going forward. Transactions will be purely reported herewith; commentary on market conditions and trends, discussion on transactions and developments and their significance will be posted at our sistership blog, Shipping Finance by Karatzas Marine.

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As always, shipbrokerage and shipping finance advisory is provide by our sponsor company, Karatzas Marine Advisors & Co.


Despite the softening of tanker freight rates in the last two weeks, one has to be humbly impressed by the performance of the tanker sector over the last twelve months, and accept that volatility in the shipping industry is hard to accurately model: VLCC spot rates (the group most volatile but with the easiest-models-to-build of the tanker market) have moved from $33,000 pd this time last year to above the $60,000 pd mark on several occasions in January, March and May this year, flirted teasingly with the $90,000 pd mark three weeks ago, and now have come full circle to appr. $34,000 pd. It has been a great market of sorts, definitely in comparative terms to dry bulk and containership markets, but still, some people have been worrying whether the structural recovery of the sector is still intact: the demolition pace has slowed down, newbuilding activity has increased, but still the time lapse of the deliveries (about a two-year-delay) does not seem to provide much comfort or confidence: tanker stock prices have not outperformed the broad market, to put it liberally, and most of the tanker stocks trade barely at or below NAV at the very best (the implied valuation of their tankers-on-the-water), while tanker IPO hopefuls waiting in the wings, and waiting… and tanker vessel prices really have not justified the buy-low-sell-high asset play strategy of many a shipowner.

The sale and purchase market has quieted down in the last two weeks, partially due to peak vacation season and also due to the chilling effect of a deflating tanker freight market. Besides the rather un-inspiring prices achieved, several of the sales have been controlled by financial investors, including private equity funds. The involvement of private equity funds with shipping has drawn much attention and we have written on the topic in the past; however, seeing York Capital, Wayzata Investments and Apollo, among others, selling vessels – and not shares at IPOs as per original game plan, and sales of vessels in a ‘hot’ market and at prices that do not seem to come remotely close to highly advertised double-digit expected returns of the private equity…but again, barely a week passes with funds folding due to poor performance because of commodities, currencies, emerging markets…at least, shipping has not sunk a fund yet, at least formally.

In the VLCC market, Tufton Oceanic has disposed of MT ‘Sasa’ (300,000 dwt, Hitachi Zosen, 2001) at $40.5 mil to Russian buyers, while Windsor Petroleum has sold to US-based Ridgebury Tankers four sistership vessels at a value-oriented price of $150 mil for the package: MT ‘British Purpose’, MT ‘Progress’, MT ‘Pride’ and MT ‘Pioneer’ (all ca. 305,000 dwt, Samsung Heavy Industries, 2000/2000/2000/1999).

MT PRINCIMAR AMERICAS 10

House-flag in the news… Karatzas Photographie Maritime

The Suezmax market has been more active in the last month, reflecting a more fragmented market but also a stronger freight market. The transaction that stood out was the sale of the Veritable fleet by Principal Maritime, which had been sponsored and funded by Apollo; one set of six sisterships built at Samsung Heavy Industries MT ‘Princimar Courage’, MT ‘Princimar Pride’, MT ‘Princimar Integrity’, MT ‘Princimar Grace’, MT ‘Princimar Hope’ and MT ‘Princimar Promise’ (158,000 dwt, Samsung H.I., 2013 / 2012 / 2012 / 2011 / 2011 / 2011, respectively), one set of two-chinese sisterships built in 2010, MT ‘Princimar Joy’ and MT ‘Princimar Strength’ (156,000, Rongsheng, 2010), one set of Japanese built sisterships MT ‘Princimar Confidence’ and MT ‘Princimar Loyalty’ (150,000 dwt, Universal, 2006) and two one-off Korean vessels, MT ‘Princimar Truth’ (160,000 dwt, Hyundai Samho, 2007) and MT ‘Princimar Faith’ (160,000, Daewoo (DSME), 2005) at $662 mil, with payment mostly in cash but also $50 mil in stock. There are several angles to see this transaction since it is estimated that the sellers realized more than $100 mil loss from the sale (estimated cost basis of ca. $770 mil), and also that the sale price was NOT the highest in this auction-like sale transaction. The company has attempted for an IPO late last year but there was not sufficient demand / pricing to proceed then, but it’s to be debated whether demand would had been enough for an IPO now in an allegedly much stronger market, at least as much as freight is concerned. Russian tanker company Sovcomflot has sold their 2003-built Suezmax tanker MT ‘SCF Valdai’ (159,000 dwt, Hyundai Heavy, 2003) to Greek buyers at $35.5 mil. Vintage Suezmax tanker MT ‘Front Glory’ (149,500 dwt, Mitsui Shipbuilding, 1995) was sold by the Fredrisken Group to Far East buyers at $16 mil, almost twice her present scrap value (21,733 ldt). Similarly aged Suezmax tankers (with shuttle-tanker conversion) MT ‘Mattea’ (127,000 dwt, Samsung Heavy, 1997) was sold at $11 mil to undisclosed buyers, rumored Greeks, and MT ‘Kometik’ (126,500 dwt, Samsung Heavy, 1997) was sold at $8 mil to Andromeda Shipping in Monaco. Sisterships MT ‘Cape Bata’ and MT ‘Cape Bowen’ (160,000 dwt, Samsung Heavy, 2003) were sold by KG-funds in Germany to Tufton Oceanic in the UK at appr. $33 mil, each.

MT CAPE BRASILIA 4

A calm tanker market… Karatzas Photographie Maritime.

The aframax tanker market has been rather subdued with the exception of a financial transaction for eight coated LR2 tankers by Navig8 to Chinese buyers at $300 mil; given that there is bareboat back for ten years to sellers / Navig8 little can be said for the below-market ‘sale price’ which can be attributed to the Chinese pedigree of the vessels or Navig8’s persisting rumors abut being able to fund their capex gap for their newbuilding program; vessels were: N/B CSSC Offshore Marine Guangzhou H-057 to H-061 and Hulls H-067 and H-068 (112,000 dwt, CSSC Offshore Marine Guangzhou, 2016/2017); vessels names are MT ‘Navig Gallantry’, MT ‘Navig8 Gauntlet’, MT ’Navig8 Goal’, MT ‘Navig8 Grace’, MT ‘Navig8 Gratitude’, MT ‘Navig8 Guard’, MT ‘Navig8 Guide’ and MT ‘Navig8 Gladiator’. Buyers / lessors are affiliated with the shipbuilding group.

In the MR2 tanker market, a couple of interesting transaction with sellers based in the landlocked Upper Midwest in the USA: Wayzata Investment Partners have sold two product tankers MT ‘Halstead Bay’ (51,000 dwt, SLS Shipbuilding, 2007) at $23 million and MT ‘Maxwell Bay’ (51,000, Guangzhou SY Intl, 2013) at $30 mil, to Torm in Denmark. CarVal Investors have sold sisterships MT ‘Harbour Star’ and MT ‘Super Star’ (51,000 dwt, STX SB (Jinhae), 2008) to Target Marine in Greece at $24.5 mil, each. Tankerska Next Generation has sold two 2015 resales at SPP at $38.5 mil, each to Cardiff Marine in Greece (SPP Hull 079/080, SPP, 2015). York Capital in the US has sold their interest in Hyundai Mipo Hull 2473 (51,000 dwt, HMD, 2015) at $37.5 mil to Scorpio Tankers. Finally, Eletson Corporation of Greece has sold vintage tankers MT ‘Kandilousa’ and MT ‘Serifos’ (46,700 dwt, HHI, 1995) at $8.5 mil.

Overall, the market has not been as busy as it seems with most of the transactions being of ‘corporate’ matters instead of the traditional s&p (sale & purchase). Whether there is no strong conviction from operating buyers to step up on buying or lack of capital constrain their buying appetite, financial players seem to be getting ever more obvious; not as much as with buying, but selling is welcome news as well.


 

© 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.