Now that 2009 has come to a close, many shipping companies will have to test loan to value clauses of their debt covenants again. During 2009, vessel values fell somewhere along the lines of 40% to 60% on most classes and at the year-end the banks will come calling. For some owners, this will be the second year in a row they are faced with renegotiating their loans.
Gone are the days that shipping companies could borrow at LIBOR plus spreads of below 1%. Last year, many banks were content to increase margins to around 2% or 3% in order to grant a one year waiver. This year everyone is wondering what will happen, and we have a feeling that banks won't agree to waivers with similar terms this year. While the negotiations will be on an owner to owner basis, and depend on many factors, we can see the banks becoming even more aggressive in their tactics this time around. Last year, banks started pushing for owners to use them for more than just lending, insisting that if there was a stronger "Private Banking" relationship, then they could be more lenient on their demands on the “Corporate” side. Also, if there is any ancillary business, it should be done through them (such as interest rate and currency swaps) in order to keep them happier. Some banks even started to demand being a part of any equity deal a publicly-listed shipping company may do, despite having no expertise and doing nothing to earn those extravagant fees. It may get even worse this year, as banks may start asking for additional capital repayments to get loans in-line with expected vessel values and even higher spreads. With rates where they are, this may mean that private owners may have to dig into their own pockets to comply. It may be a bumpy ride, but it is also important to note that repossessions are still very rare and if the banks start arresting vessels it will cause a spiraling effect that would be more devastating for the industry and the banks themselves at the end of the day.
Eventually, there will be a tipping point with the banks that take a heavy handed approach, and while some owners may not be in a position to do anything about it in the near-term, it will come back to haunt their business eventually. Ship Owners, especially Greek Ship Owners, have a very long memory about such things and when conditions improve and in five year’s time, we may see a few new names at the top of the lending tables.
Tuesday, January 26, 2010
Friday, January 22, 2010
Has the Golden Boy lost his Lustre?
We hear that Peter Georgopoulos has decided to take time away from his pheasant hunting to hit the road to pitch his latest shipping creation, Baltic Trading, to investors. There has been a lot of talk in the industry about whether this deal will be successful or not and why. The structure of the deal is certainly attractive to the investment world, a company that emulates the strategy of Nordic American Tankers (NAT) in the drybulk sector, and would replace DryShips (DRYS) and Excel Maritime (EXM) as the stock to buy if you want exposure to the Baltic Dry Index (BDI). In truth, DryShips fell out of favor with this group of investors after they started time chartering its drybulk vessels and went out and acquired drillships, and is now the stock to buy if you want exposure in that segment of the shipping space.
However, we hear the deal isn't an easy sell as you would expect as Mr. Georgopoulos' recent track record for investors has taken several hits. First was the timing of General Maritime's (GMR) purchase of Arlington Tankers around the peak of the tanker market, followed by GenCo Shipping and Trading's (GNK) cancellation of six newbuildings when the market collapsed, which in hindsight, may not have been the best move since the market quickly recovered afterwards, and finally culminating with the latest bond offering from General Maritime, which ended up with a yield even higher than the Greek Government's (Ok Greece's yield isn't even that high but it may be in the same range soon enough)!
Peter "Gold" used to be the darling of the investor world, a Greek-American who understood both, Shipping and Wall Street. Over the course of his career he has made a lot of money for his shareholders and partners, however, the collective memory of the investment world is tends to be short and losing investments are remembered much longer than winning ones. This deal is being looks upon as a bellwether in the shipping industry, and if it succeeds expect to see several more shipping IPOs launch in the coming months, both in tankers and in drybulk. However, we view this deal as more of a test of the faith of investors in Mr. Georgopoulos, not the market as a whole and it will be interesting to see what happens.
However, we hear the deal isn't an easy sell as you would expect as Mr. Georgopoulos' recent track record for investors has taken several hits. First was the timing of General Maritime's (GMR) purchase of Arlington Tankers around the peak of the tanker market, followed by GenCo Shipping and Trading's (GNK) cancellation of six newbuildings when the market collapsed, which in hindsight, may not have been the best move since the market quickly recovered afterwards, and finally culminating with the latest bond offering from General Maritime, which ended up with a yield even higher than the Greek Government's (Ok Greece's yield isn't even that high but it may be in the same range soon enough)!
Peter "Gold" used to be the darling of the investor world, a Greek-American who understood both, Shipping and Wall Street. Over the course of his career he has made a lot of money for his shareholders and partners, however, the collective memory of the investment world is tends to be short and losing investments are remembered much longer than winning ones. This deal is being looks upon as a bellwether in the shipping industry, and if it succeeds expect to see several more shipping IPOs launch in the coming months, both in tankers and in drybulk. However, we view this deal as more of a test of the faith of investors in Mr. Georgopoulos, not the market as a whole and it will be interesting to see what happens.
Thursday, January 21, 2010
Distressed???
Last year, everyone you spoke with was searching for "distressed" deals. First, after the drybulk market collapsed, hedge funds, private equity funds and shipowners alike were chasing banks, shipyards and owners begging to be privy to distressed deals. The drybulk market rebounded and values started to rise with very few distressed assets being sold. Then tanker rates fell off a cliff and everyone is now switching their focus to this industry in search of the distressed deal. It has become the "White Whale" of the industry, vultures are all circulating the distressed banks and owners waiting to jump at the first chance of a distressed deal. These deals, rumor has it, will offer returns far in excess of a typical deal, making the investors rich beyond their wildest dreams.
But will there be enough bloodshed in the industry to create such "once in a lifetime" opportunities? Hell, are these deals really even that great if they do arise? Let’s review the specifics of a said distressed deal, and see if they would really exist or be worth it at the end of the day.
The definition of a distressed asset/liability from the Financial Times is: An asset that is put on sale, usually at a cheap price, because its owner is forced to sell it. There could be various reasons for this, including bankruptcy, excessive debt and regulatory constraints. Debt itself can be sold on to a new owner at below face value (distressed debt).
So in order for an asset to be distressed it must have been purchased at a very high price and now the owner is being forced to sell it at a discount because of problems or lack of cash flow. The truth is that the tanker industry is characterized by strong owners and there have been several years of high earnings so there are a lot of reserves on the sidelines that should help them make it through these tough times. In addition, as long as owners are willing to make their loan payments, banks are not going to go after the assets. Banks are also very slow to take any write downs that may cause increased downward pressure on values, and start a spiraling effect. Even if the the owners refused to pay and the banks were to act, it appears that there are so many vultures waiting for distressed deals that the prices will be bid up to non-distressed levels.
One type of distressed deal we are hearing about is where a bank has seized an asset and transferred the liability to a stronger shipowner. The terms of these deals typically allow the shipowner to purchase the vessel with little or no equity up front as long as they assume the liability on the vessel, but with values where they are today this liability is usually higher than the true value of the vessel in the open market would be. These deals also include a typical profit sharing agreement with the bank, so any earnings the vessel makes would be split by some predetermined formula. Does this sound like a great deal for the owner, lots or risk and little upside?
The only place we can see distressed deals occurring is at the shipyards, since if an owner has walked away from a deal, losing their deposits, the shipyards may be easily able to lower the price of a newbuilding to a lower level using the forfeited deposit as a subsidy. But even these deals are rare and everyone is fighting to be part of these deals, which will again cause the assets to be bit up to possible pre-distressed levels.
Given the above information, we don't expect to see many distressed deals in today’s markets unless the banks turn very aggressive against owners, or that rates stay very depressed for a longer period of time. We think a lot of people will be severely disappointed in their continued search for distressed tanker assets.
But will there be enough bloodshed in the industry to create such "once in a lifetime" opportunities? Hell, are these deals really even that great if they do arise? Let’s review the specifics of a said distressed deal, and see if they would really exist or be worth it at the end of the day.
The definition of a distressed asset/liability from the Financial Times is: An asset that is put on sale, usually at a cheap price, because its owner is forced to sell it. There could be various reasons for this, including bankruptcy, excessive debt and regulatory constraints. Debt itself can be sold on to a new owner at below face value (distressed debt).
So in order for an asset to be distressed it must have been purchased at a very high price and now the owner is being forced to sell it at a discount because of problems or lack of cash flow. The truth is that the tanker industry is characterized by strong owners and there have been several years of high earnings so there are a lot of reserves on the sidelines that should help them make it through these tough times. In addition, as long as owners are willing to make their loan payments, banks are not going to go after the assets. Banks are also very slow to take any write downs that may cause increased downward pressure on values, and start a spiraling effect. Even if the the owners refused to pay and the banks were to act, it appears that there are so many vultures waiting for distressed deals that the prices will be bid up to non-distressed levels.
One type of distressed deal we are hearing about is where a bank has seized an asset and transferred the liability to a stronger shipowner. The terms of these deals typically allow the shipowner to purchase the vessel with little or no equity up front as long as they assume the liability on the vessel, but with values where they are today this liability is usually higher than the true value of the vessel in the open market would be. These deals also include a typical profit sharing agreement with the bank, so any earnings the vessel makes would be split by some predetermined formula. Does this sound like a great deal for the owner, lots or risk and little upside?
The only place we can see distressed deals occurring is at the shipyards, since if an owner has walked away from a deal, losing their deposits, the shipyards may be easily able to lower the price of a newbuilding to a lower level using the forfeited deposit as a subsidy. But even these deals are rare and everyone is fighting to be part of these deals, which will again cause the assets to be bit up to possible pre-distressed levels.
Given the above information, we don't expect to see many distressed deals in today’s markets unless the banks turn very aggressive against owners, or that rates stay very depressed for a longer period of time. We think a lot of people will be severely disappointed in their continued search for distressed tanker assets.
Wednesday, January 20, 2010
What Drives Vessel Values?
One thing I have learned about the tanker industry is that it is very close to a pure supply/demand driven market. The charterers use their leverage on the hundreds of owners to drive rates down when they can, and if there is a scarcity of vessels in a region, owners will drive rates up as much as they can. This is also true of vessel values. With the exception of how much they cost to build as a floor, most vessel values are directly related to what their expected earnings are and what owners are willing to pay.
We have done a lot of research on vessel values and read a bit of George Soros, and we can definitely agree that values are driven by two major factors; expected earnings of the vessel, and the amount and availability of leverage obtainable to finance the vessel.
When looking at expected earnings, it is important to note that spot earnings are not the primary drivers of values, time charter rates are. However, it is important to note that spot earnings are important drivers of time charter rates, along with future expectations so they warrant paying attention to. The problem is that spot earnings are very volatile in the short term, and tend to move in several cycles during the course of a single year, where as time charter rates are more stable and include expectations of future earnings, not just the current market trend. Running a quick regression analysis you can ascertain that there is a very high correlation of vessel values to one year time charter rates, and an even higher correlation to three year time charter rates. More specifically, the typical price of a five year old VLCC is over 90% correlated to the one year time charter rate over the past 10 years. The correlation to the three year time charter rate is even higher.
The other driver of vessel values is the availability of lending. Recently, this has become a very important aspect of driving the values of assets. Long ago before the Lehman Collapse, most major shipping banks were throwing money at owners, loaning anywhere between 70% up to even 85% of vessel values (which were at historical high levels) at LIBOR plus a margin of less than 1%. This madness helped increase values even further as owners would only have to dish out $20 million to purchase a vessel worth $100 million and would be paying very low interest rates on that loan to boot! After the Lehman Collapse, most shipping banks stopped lending completely, which caused the Sale and Purchase market to dry up entirely. This was more pronounced in the drybulk market, mainly because when the banks stopped lending they also stopped issuing Letters of Credit, which virtually drove trade to a standstill. On the tanker side, this wasn't as much of an issue as the counterparties tended to be Oil Majors, with higher credit ratings than most banks. However, the global financial crisis caused banks to review their lending portfolios, and to their surprise the shipping portion was less profitable (and more risky) than loans in other areas. This caused values in the tanker industry to fall towards the end of 2008, despite the continued strength in earnings. In 2009 as earnings collapsed, banks pulled back lending to the industry even further, which coupled with the declining earnings caused vessel values to fall more than 50% in some cases.
What does this mean for values? Well, looking at the sale and purchase market in the tanker industry, you can see that things are finally starting to normalize. The combination of lower asset values and stabilizing earnings have started to make vessel acquisitions appear attractive. Banks are again starting lend money to would-be purchasers (although at maybe 50% to 60% of asset values at LIBOR plus a margin closer to 3%-4%), and this has thawed the sale and purchase market at the moment. We see room for values to increase another 10% to 20% from here if time charter rates remain at current levels. If earnings increase, we could see values increase further than that!
We have done a lot of research on vessel values and read a bit of George Soros, and we can definitely agree that values are driven by two major factors; expected earnings of the vessel, and the amount and availability of leverage obtainable to finance the vessel.
When looking at expected earnings, it is important to note that spot earnings are not the primary drivers of values, time charter rates are. However, it is important to note that spot earnings are important drivers of time charter rates, along with future expectations so they warrant paying attention to. The problem is that spot earnings are very volatile in the short term, and tend to move in several cycles during the course of a single year, where as time charter rates are more stable and include expectations of future earnings, not just the current market trend. Running a quick regression analysis you can ascertain that there is a very high correlation of vessel values to one year time charter rates, and an even higher correlation to three year time charter rates. More specifically, the typical price of a five year old VLCC is over 90% correlated to the one year time charter rate over the past 10 years. The correlation to the three year time charter rate is even higher.
The other driver of vessel values is the availability of lending. Recently, this has become a very important aspect of driving the values of assets. Long ago before the Lehman Collapse, most major shipping banks were throwing money at owners, loaning anywhere between 70% up to even 85% of vessel values (which were at historical high levels) at LIBOR plus a margin of less than 1%. This madness helped increase values even further as owners would only have to dish out $20 million to purchase a vessel worth $100 million and would be paying very low interest rates on that loan to boot! After the Lehman Collapse, most shipping banks stopped lending completely, which caused the Sale and Purchase market to dry up entirely. This was more pronounced in the drybulk market, mainly because when the banks stopped lending they also stopped issuing Letters of Credit, which virtually drove trade to a standstill. On the tanker side, this wasn't as much of an issue as the counterparties tended to be Oil Majors, with higher credit ratings than most banks. However, the global financial crisis caused banks to review their lending portfolios, and to their surprise the shipping portion was less profitable (and more risky) than loans in other areas. This caused values in the tanker industry to fall towards the end of 2008, despite the continued strength in earnings. In 2009 as earnings collapsed, banks pulled back lending to the industry even further, which coupled with the declining earnings caused vessel values to fall more than 50% in some cases.
What does this mean for values? Well, looking at the sale and purchase market in the tanker industry, you can see that things are finally starting to normalize. The combination of lower asset values and stabilizing earnings have started to make vessel acquisitions appear attractive. Banks are again starting lend money to would-be purchasers (although at maybe 50% to 60% of asset values at LIBOR plus a margin closer to 3%-4%), and this has thawed the sale and purchase market at the moment. We see room for values to increase another 10% to 20% from here if time charter rates remain at current levels. If earnings increase, we could see values increase further than that!
Tuesday, January 19, 2010
What will 2010 Bring?
Since I have been following the Tanker Industry, I have paid a lot of attention to predictions from the market savants. In 2007, everyone expected a strong year, and it was average. In 2008, everyone predicted a weakening market and, despite the global turmoil, it was a very strong year. In 2009, everyone agreed it would be a weak year, and it was. Now, predictions for 2010 are coming in all over the map. While there is a debate whether the market will be weaker or stronger in 2010, even the people who are bullish don't expect rates to be anywhere close to their five year averages. So will 2010 prove to be a strong year or a weak year? What, if any, will be the catalysts? What is important to follow?
There are several important developments in the tanker industry that will unfold in 2010. The first, and most important, is the pending orderbook, which stands at around 30.4% of the total fleet (132.3m.Dwt on order over 435.4m.Dwt total fleet size), entering 2010. Of this 30.4%, 14.8% (or 64.5m.Dwt) is expected to be delivered in 2010. This is a large percentage, but if you look at the pending phase out of single hull tankers (55.4m.Dwt of single-hulled vessels are in the market), the net growth of the fleet this year is closer to 3%-5% depending on how many single-hull tankers are phased out during the year. One thing to remember is that the amount of scrapping will be directly proportional to rates. In other words, if rates remain weak, vessels will be phased out faster than if rates were to strengthen. It makes no sense for an oil major to charter a single-hulled VLCC if they can charter a newer vessel at a similar rate.
The second development to watch is the demand for oil and oil related products worldwide. Everyone knows that demand for oil is growing rapidly in China, and that demand in the rest of Asia is increasing at a brisk pace, however, demand in North America and Europe continue to be the largest drivers for the Tanker market and we expect this to continue in the near term. To put matters in perspective, China’s crude oil imports grew 48% year over year in December to approximately 5.1 million barrels per day from 3.4 million barrels in the year-ago period. In the United States, crude oil imports averaged 8.0 million barrels per day in December, down 20% or 1.9 million barrels per day from 2008 levels. In other words, even though China’s imports grew by 48% year over year, it didn’t make up for the shortfall in demand from the US. If demand in North America and Europe returns to 2007-2008 levels this year, we should see an improvement in tanker rates. It is also important to note that despite the recent correlation of tanker stock prices to the price of oil, the correlation of tanker earnings to the price of oil is insignificant. Theoretically, they should be INVERSELY correlated, as cheaper oil should increase demand.
There is one question mark to this puzzle: When will the tankers in storage re-enter the market?
There are currently approximately 149 vessels used for storage. If the contango trade starts to unwind, these vessels will re-enter the market and weaken rates, if it continues to make sense to roll-over this trade, then the number of vessels used for storage may increase further. Lots of analysts expect this trade to unwind in 2010, but they also expected it to unwind in 2009, so we will have to continue to monitor the situation until it becomes clearer.
So based on what we expect to happen in 2010? In terms of earnings, we expect the year to be slightly better than 2009, although we are more bullish for the second half of the year. In future posts, we will go into more details about values and stock valuations, but this is a bit of a primer on what will drive the markets in the year ahead.
There are several important developments in the tanker industry that will unfold in 2010. The first, and most important, is the pending orderbook, which stands at around 30.4% of the total fleet (132.3m.Dwt on order over 435.4m.Dwt total fleet size), entering 2010. Of this 30.4%, 14.8% (or 64.5m.Dwt) is expected to be delivered in 2010. This is a large percentage, but if you look at the pending phase out of single hull tankers (55.4m.Dwt of single-hulled vessels are in the market), the net growth of the fleet this year is closer to 3%-5% depending on how many single-hull tankers are phased out during the year. One thing to remember is that the amount of scrapping will be directly proportional to rates. In other words, if rates remain weak, vessels will be phased out faster than if rates were to strengthen. It makes no sense for an oil major to charter a single-hulled VLCC if they can charter a newer vessel at a similar rate.
The second development to watch is the demand for oil and oil related products worldwide. Everyone knows that demand for oil is growing rapidly in China, and that demand in the rest of Asia is increasing at a brisk pace, however, demand in North America and Europe continue to be the largest drivers for the Tanker market and we expect this to continue in the near term. To put matters in perspective, China’s crude oil imports grew 48% year over year in December to approximately 5.1 million barrels per day from 3.4 million barrels in the year-ago period. In the United States, crude oil imports averaged 8.0 million barrels per day in December, down 20% or 1.9 million barrels per day from 2008 levels. In other words, even though China’s imports grew by 48% year over year, it didn’t make up for the shortfall in demand from the US. If demand in North America and Europe returns to 2007-2008 levels this year, we should see an improvement in tanker rates. It is also important to note that despite the recent correlation of tanker stock prices to the price of oil, the correlation of tanker earnings to the price of oil is insignificant. Theoretically, they should be INVERSELY correlated, as cheaper oil should increase demand.
There is one question mark to this puzzle: When will the tankers in storage re-enter the market?
There are currently approximately 149 vessels used for storage. If the contango trade starts to unwind, these vessels will re-enter the market and weaken rates, if it continues to make sense to roll-over this trade, then the number of vessels used for storage may increase further. Lots of analysts expect this trade to unwind in 2010, but they also expected it to unwind in 2009, so we will have to continue to monitor the situation until it becomes clearer.
So based on what we expect to happen in 2010? In terms of earnings, we expect the year to be slightly better than 2009, although we are more bullish for the second half of the year. In future posts, we will go into more details about values and stock valuations, but this is a bit of a primer on what will drive the markets in the year ahead.
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