Over the past few days, we have heard rumblings about several shipping IPOs in the pipeline. BDI has been out there, a Tanker Company, Scorpio Tankers, announced their IPO last night, and we hear a few others may be following. The new model appears to be; small fleet with low debt, strong management team, sell a large portion of the company, and use proceeds to buy cheap assets at "distressed" levels. BDI has been looking for such vessels for a while now, and others are out there searching on both the dry and wet side so that they can try and push through the IPO window over the next six months.
Gone are the high dividend payout model, and we say good riddance! Almost every high-dividend payout tanker model was doomed to fail from the start (Arlington and DHT being the most prominent). Paying out all your cash is a sure way to a slow death since they are dependent on the capital markets to raise money to replenish their fleet. The only company that succeeds at this is NAT since they have NO Debt and a management team that has executed this model for a long time now, but NAT's return on equity remains low compared to others in the industry and if the market was to recover in a big way, its valuation would revert back to below its levered peers.
Growth is always important for shipping companies, and we were always surprised about how popular the "high dividend model" was as it is a great tool for investment bankers to guarentee fees (as companies must continually do follow-on offerings), for shipowners to get high premiums to their Net Asset Values, but not great as for long-term shareholders as these companies couldn't retain enough of its cash to either grow the fleet or pay down debt if/when the markets turned sour as they did in 2009 and ended up having to restructure their dividend policies or sell out. Dividends are important, but a prudent dividend strategy (ala TNP) should be prefered to wild dividend swings although it doesn't seem that way.
We think these new tanker deals will hinge on investor's trust that the management teams will be able to effectively execute their business plans. So it will be important to have names that are respected in the industry behind these deals. However, with the current tanker market backdrop, it will be interesting to see how much appetite there will be for these types of deals.
Thursday, February 18, 2010
Wednesday, February 17, 2010
Tanker Orderbook
Our friends at the Ton Mile Trader did some interesting research on the tanker orderbook and I wanted to comment on that article and give our observations to go along with their findings.
We have been reading a lot about the tanker orderbook, and while it does loom large for this year, we are cautiously optimistic that delays will be larger than 10% as well and probably closer to 20% this year. The banks are now deciding what owners to stand behind and which ones to throw under the bus (aka The Credit Committee), and this will also have an effect on deliveries and delays.
We have had several discussions with yards, banks, and other owners and there have definitely been cancellations, although no official confirmations and the exact number may never be known. The yards are desperately trying to cover them up and re-sell the slots to stronger owners, so they never have to report it as a cancellation. However, almost every yard we have spoken to was offering slots abandoned by other owners for sale at slightly discounted prices so some owners must have walked away.
We do feel that the delays will strengthen the picture for tankers, however, as the orderbook is pretty bare going into 2012, and hopefully owners will be slow to order tonnage as long as the current orderbook remains an issue. Our expectations are based on owners learning their lesson, which isn't a given, so we remain concerned but are cautiously optimistic.
We have been reading a lot about the tanker orderbook, and while it does loom large for this year, we are cautiously optimistic that delays will be larger than 10% as well and probably closer to 20% this year. The banks are now deciding what owners to stand behind and which ones to throw under the bus (aka The Credit Committee), and this will also have an effect on deliveries and delays.
We have had several discussions with yards, banks, and other owners and there have definitely been cancellations, although no official confirmations and the exact number may never be known. The yards are desperately trying to cover them up and re-sell the slots to stronger owners, so they never have to report it as a cancellation. However, almost every yard we have spoken to was offering slots abandoned by other owners for sale at slightly discounted prices so some owners must have walked away.
We do feel that the delays will strengthen the picture for tankers, however, as the orderbook is pretty bare going into 2012, and hopefully owners will be slow to order tonnage as long as the current orderbook remains an issue. Our expectations are based on owners learning their lesson, which isn't a given, so we remain concerned but are cautiously optimistic.
Tuesday, February 2, 2010
Are Chinese Banks the Answer?
The latest talk around the shipping industry has been that the Chinese banks may make up for the decline in lending from the European ship lenders. After TORM, OSG and others agreed to enter into credit facilities with Chinese banks, every shipowner is now aggressively trying to build up relationships with their friendly neighborhood Chinese bankers. We hear that Chinese banks are willing to finance up to 80% of the asset value of a new vessel, if it is from a Chinese shipyard with a Chinese charterer.
Is it worth it? While we commend the Chinese for trying to help buoy their shipping industry, as prudent businessmen, we should be very skeptical of deals that sound too good to be true. The true availability of this lending is questionable and owners should be wary of how much it will really cost. In China, payoffs to open doors and regular renegotiations are common practice as contracts have little value. Their property laws are much different than those of the European Union, and while I am no attorney, I would be worried about having too much exposure to a Chinese organization that would be willing to change the rules whenever they desire. It is also important to note that this financing is expensive, sometimes with spreads ranging in the 4% range, and after including all the added "costs and fees" of doing business in China, it is much more expensive than the typical ship financing.
We applaud shipowners who have the ability to do business in China, and any owner should look to diversify their lending banks as much as possible, however, owners should understand what they are getting into and shouldn't be quick to chase the dragon!
Is it worth it? While we commend the Chinese for trying to help buoy their shipping industry, as prudent businessmen, we should be very skeptical of deals that sound too good to be true. The true availability of this lending is questionable and owners should be wary of how much it will really cost. In China, payoffs to open doors and regular renegotiations are common practice as contracts have little value. Their property laws are much different than those of the European Union, and while I am no attorney, I would be worried about having too much exposure to a Chinese organization that would be willing to change the rules whenever they desire. It is also important to note that this financing is expensive, sometimes with spreads ranging in the 4% range, and after including all the added "costs and fees" of doing business in China, it is much more expensive than the typical ship financing.
We applaud shipowners who have the ability to do business in China, and any owner should look to diversify their lending banks as much as possible, however, owners should understand what they are getting into and shouldn't be quick to chase the dragon!
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