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Of course, the shipping crisis creates effects on the U.S. capital market, too. However, there is some activity, for example with »follow-ons«

The shipping industry’s and systemic tendencies towards over-capacity are well known. Shipping with its deep slides of long duration[ds_preview], has been a poster child for the highest risk transactions. Regulatory pressures (which require higher returns commensurate with risk) has shifted banks’ attentions away from shipping, some of them now consider the segment as non-strategic.

The U.S. capital markets, centered in New York, are  the largest and most liquid in the world. Recent analysis by NYMAR (which promotes New York as a top venue for shipping related activities), points to US $28.5 billion in listed shipping company market capitalization at April 1, 2016 (exceeding all other markets except Hong Kong). The NYMAR analysis also reveals capital raises through New York of  US $4.0  billion in shipping IPOs and US $7.7 billion for shipping high yield bonds.

Banks provided 90% of shipping debt in 2008. The stories of losses and retreats have been widely reported; recent iterations have seen industry stalwart RBS taking a £264 million impairment charge in Q2, as it winds down its shipping loan portfolio after unsuccessful attempts to market it to other banks. Long-time shipping finance banks still insist that they are loaning money to existing »relationship« customers to fund good deals.

Dealogic, a source of data on financing, shows that bank lending peaked at $92 billion annually in 2007, but in recent years, had hovered around $40 – $50 billion (with aggregate portfolios of between $300 – $400 billion). Mr. Henry Williams, Chief Financial Officer of the listed company Pyxis Tankers, (NASDAQ: PXS) explained to HANSA: »Banks’ higher capital and regulatory requirements, portfolio problems and poor industry conditions have led to fewer lenders and more conservative loan terms for borrowers. However, the orchestrated interventions by central banks have led to low historical effective interest rates, a silver-lining for our debt reliant industry.«

As banks have exited shipping lending, »Alternative capital« has stepped into the debt vacuum, buying up existing toxic loans, and also carving out fresh mezzanine positions (various shades of debt, but with an equity »kicker«). Examples of the shifting landscape are numerous. Most recently, NordLB has offloaded approximately $1.5 billion of shipping loans in late summer to a consortium of longterm investors including the wellknown KKR group. KKR is not a stranger to shipping, having teamed up with shipowner Christoph Toepfer in 2015 to acquire 18 vessels from Commerzbank, supplementing a partnership in place since 2013.

A different vantage point on ship finance comes from the viewpoint of equity investors, both institutional and retail, who had dozens of issues to choose from during the heady days of 2004 – 2008. Fast forward, analysts are suggesting that there will be no new public offerings in 2016, though existing companies have been able to raise equity through »follow-ons«.

In late September, 2016, Star Bulk Carriers (NYSE: SBLK) raised $50 million in such a deal; characteristically, the main investors were existing holders (including PE investor Oaktree Capital- now owning nearly 52% of the company). The deal is also representative of another fact of shipping life; the sale of equity was required by Star Bulk’s bank lenders as part of an arrangement for the company to arrange a multi-year extension on $224 million of existing bank debt. Mr. Williams, the Pyxis CFO, noted: »Over the last two years, many equity offerings were rescue financings where the proceeds were used to repair over-levered balance sheets or plug funding gaps.«

During the year, Scorpio Bulk ( NYSE: SALT), Seanergy (NASDAQ: SHIP), and Teekay Corp (NYSE: TK) have also seen successful »secondaries«, as these follow-ons are called. Improbably, a »blanque check company« which has a set time period (here, 18 months) to complete an acquisition of an existing business – Stellar Acquisition III, raised $65 million for a New York listing. In summing up the place of equity in ship finance markets, Mr. Williams said: »The eventual return of positive investor sentiment towards the industry should hopeful revive the new issue market of traditional growth equity. Simple, investors have to make money. Meaningful stock price appreciation leads to more follow-ons which ultimately leads to a viable IPO market for shipping companies.«

Yield oriented shipping MLPs (which borrowed a model from the oil transportation business) were the rage in times of stronger shipping markets when long term charters enabled these vehicles to throw off substantial yields, distributing surplus cash to unit holders (actually »limited partners«). With two years of weaker oil prices, the shipping MLPs have been dragged down; investors, incorrectly, have grouped shipping MLPs with oil patch partnerships that do indeed take energy price risk.

Two MLPs within the Teekay group, Teekay LNG (NYSE: TGP) and Teekay Offshore (NYSE: TOO), along with the parent- Teekay Corp (NYSE: TK), saw their stock prices nosedive as liquidity squeezes forced the entities to cut distributions to holders in late 2015. On a brighter note, Hoegh LNG Partners LP (NYSE: HMLP) has announced an intention to raise up to $600 million of unspecified securities (carved out in a »shelf registration«); securities will likely be issued if the parent company, Hoegh LNG (Oslo: HLNG) choses to »drop down«, selling a vessel(s) to HMLP.

Finance is intertwined with company dynamics, when the discussion turns to »consolidation«, the idea of smaller companies combining to form larger entities, with advantages. Pyxis’s Mr. Williams offers that: »The only major shipping segment which has experienced consolidation is containerships due to long term financial and fundamental operating challenges«.

Mr. Williams, looking at his own sector of the market, says: »As to tankers, fragmentation will continue but there are some limited benefits of consolidation – primarily, broader access to and slightly cheaper cost of capital and spot chartering efficiencies.« On the drybulk space (which is the province of Star Bulk, Scorpio Bulk and Seanergy), he said that the nature of trades, and tendency towards family ownership, would auger against any meaningful consolidation.

Strategic considerations, the desire to unlock company value – where individual components are worth more when unbundled – have actually fueled a countervailing trend. Most recently, Overseas Shipholding Group (NYSE: OSG), after emerging from its recent restructuring, is looking to split its U.S. flag (»Jones Act«) business out from its international fleet of tankers. M


Barry Parker