More than 30 years in ship finance have given DVB Bank senior vice president Paal Hauge a keen understanding of what drives ship finance*
Believe it or not, shipping is a very marginal industry when it comes to financing capital. We in the tanker industry consider Frontline a giant: its market capitalisation is about US$1.1 billion. Maersk has a market capitalisation of about US$32 billion. But you gain a clear perspective on the shipping industry’s attractiveness to investors when you compare these figures with those for Exxon Mobil (in excess of US$300 billion) or Apple, which has a market capitalisation of US$600 billion.
Since 2009, earnings have lagged and ship values have come down. Taking the return for investors over the past five years, you will see that our industry’s success stores include Stolt Nielsen, which has given a 7 per cent return. If you had bought an MR tanker five years ago for US$26 million, traded it on a five-year time charter, and sold it today for US$19 million, you would have made about 5 per cent. But these are pretty meagre results when compared with the return on the index seen on the Oslo or Standard & Poor’s exchanges.
What sources are available for shipping to tap to get the necessary finance for investments? Banks lead the pack, but they too are constrained. Ten years ago, 36 banks actively marketed their services to the industry beyond what one might call relationship banking. Today, only a handful actively market.
Apart from bank financing, there are the public debt markets, of course. But to tap that market there is the question of size, and there are other qualifications you need to meet the requirements there. Similarly, the equity markets prefer scale.
Preferred equity is another potential funding source. It provides the investor with a steady dividend, but the investor does not take an equity interest in the company, meaning the investment is akin to debt. Among this range, the product most favoured by shipping investors is the Norwegian bond market. That market has been opening and closing to investors for quite some time. Right now it is pretty good, and it is being tapped by investors.
Investors interested in putting rather big chunks of money toward one single shipping company are doing it through private debt placements.
Convertible debt is also open, its advantage being that you will get access to relatively cheap money. But owners have to accept dilution, of course.
Project financing has been popular among smaller owners, but for all practical purposes the German KG market is not available. Chinese and Japanese leasing arrangements are becoming more prevalent. Whether current lending levels are sustainable in the longer run remains to be seen. There are indications that some Chinese banks are over-leveraged and will have to bring their debt down to sustainable levels.
A number of shipping companies would like to see more consolidation, but everybody wants to be a consolidator. Unfortunately, that cannot happen.
Companies are trying to streamline their operations so that when they are in a position to contribute to consolidation, they will be able to exchange a dollar for a dollar with the consolidating company. Stolt had to pay full value for the Jo Tanker’s platform. Stolt was trading its own share at about 60 or 70 per cent of its net value, so at first glance it was not a particularly good proposition for Stolt to buy Jo Tankers at full value. Yet Stolt had different drivers to do that transaction. The point is, when you are merging similar entities, it is much easier to get better pricing out of it.
* This article is based on remarks Mr Hauge made at the 9th Navigate Chemical and Product Tanker Conference, held in London in March