Although the times are challenging, the U.S. capital market is still attractive for the maritime industry. Trade policy tensions naturally play a role here. By Barry Parker
The U.S. capital marketplace, where investors provide debt and equity to business of all types, and then trade these instruments[ds_preview] in secondary markets, is huge, although maritime companies are a minimal component. After the reorganizations of the past few years, a number of the listed companies are in the hands of Private Equity investors, some of whom had converted debt into ownership stakes.
As 2019 began, equity markets were correcting upward after their brutal end 2018 performance. Shipping shares analyst Jon Chappell, from Evercore ISI, told clients: »Easing fears about trade wars and global recession have been behind the broader lift in U.S. equity markets and especially oil prices year to date.« He noted also that: »The December pain trade across commodities and associated equity classes, like shipping, thankfully ended right around Christmas, with risk-on (and likely short covering) creating a mean reversion trade for most shipping stocks to begin 2019.«
When the talk turns to share-listed maritime companies, investors often look out into the future for a market upturn, which seemed to be happening for drybulk in Q2 2018 – as the Baltic Dry Index reached a multi-year high mark around 1,800. In an important Q2 transaction, Genco Shipping & Trading, owners of more than 60 deepsea vessels from handy up through capesize, entered into a 460mill.$ debt refinancing. Three existing debt facilities were combined in a deal which »took off the handcuffs«, in the words of CEO John Wobensmith, meaning that restrictions were removed on additional debt incurrence and on vessel purchases, with older ships being swapped out for newer vessels. Later in the year, GNK went on to raise an additional 108mill. $ of secured debt (priced at Libor plus 250 basis points), with a five year term, from a group of banks led by Credit Agricole and Skandinaviska Enskilda (SEB) to fund vessel purchases. The loan represented 45% of the appraised value of six modern vessels. In late January, another listed company, Eagle Bulk announced that it was raising 208mill. $ (153mill. $ five year term facility and 50milll. $ revolver) from European banks. Similarly to the GNK deal, pricing was pegged at Libor plus 250 basis points.
The drybulk optimism withered around late June. Weeks after GNK’s meg-refinancing, Goodbulk, already listed in Oslo and seeking to gain a U.S. listing in what would have been the first IPO in several years, withdrew its 140mill. $ deal. In September, another IPO, from Navios Maritime Containers, was also pulled back after a disappointing response from potential investors.
Secondary offerings, where already listed companies raise additional funds, continued during 2018. In one notable deal, Scorpio Tankers raised 300mill. $ in October, with related parties (chiefly sister company Scorpio Bulk – »SALT«) taking more than 100mill.$ of the shares. In recent years, »pure plays« – where a listed company’s fleets are not diversified across ship types, have come into favor. Here, that trend was seemingly reversed.
Deutsche Bank equity analyst Amit Mehrotra lauded the deal, noting that: »SALT has traded in cash for product tankers at highly distressed valuations, which we think will pay off handsomely for shareholders.« In spite of strength in the MR sector, STNG’s stock price had not gained traction, in January, 2019, the tanker company announced a 10-1 »reverse split«, which would have the effect of raising the per share price – while overall capitalization remains unchanged.
Consolidation, where listed companies combine with justifications of increased pricing power, operational leverage, and greater ability to raise more capital also featured in 2018. One notable deal saw Euronav expand its breadth with its circa 550mill. $ acquisition of Gener8. One much watched deal that did not happen saw U.S. listed Dorian LPG rebuffing efforts from BW LPG.
Different sort of opportunity
Late in 2018, nervousness about economic growth brought about volatility and selling in the equity markets, creating a different sort of »opportunity« for listed companies – many of which saw their shares pummelled to levels well below the »Net Asset Value« (NAV). With a cautious outlook for underlying markets, they saw their own shares as an attractive investment, with a half dozen authorizations of share buybacks. Mehrotra explained: »While we have questioned the wisdom of share repurchases given the volatile nature of shipping markets, the moves are undoubtedly accretive to equity value in the near/mid-term (given prices well below net asset values), and signal management confidence for the first time in years.«
Firms authorizing buybacks (with some opportunistically purchasing shares) include Star Bulk, Scorpio Bulk, Navios, Diana Shipping. On the gas side, featuring increasing hires up through the end of 2018, Gaslog, which had paid a special dividend. also authorized a share buyback. Its affiliated Limited Partnership, was among the listed issuers raising 96mill. $ of secondary equity, in the form of Perpetual Preference Units that pay a fixed dividend.
Much of the finance activity revolves around »brown-water« companies- often in private hands, with their activities not readily scrutinized. Lenders such as KeyBank, Signature, PNC, and Fifth Third continue to fund thriving companies that remain well under the broader ship finance radar. Names like Paducah, Kentucky based Marquette Towing (the Eckstein family, backed by PE investor BDT Capital) and Magnolia Marine (owned by privately held Ergon Inc. controlled by the reclusive Lampton family in Mississippi) are well known around the waterfronts on the Mississippi and Ohio Rivers.
Barry Parker
