In 2017, US-listed owners raised the third-highest amount of proceeds ever recorded, yet the shipping industry remained out of favour among Wall Street investors.
The reason for shipping’s unpopularity is obvious: shipping shares have underperformed terribly versus the broader stock market during the past half-decade. Why buy shares in Teekay or Seaspan when you can actually make a lot of money buying Amazon or even a Dow Jones exchange-traded fund?
The reason public shipping proceeds have simultaneously jumped in spite of this unpopularity is that many owners are raising cash not because they want to, but because they need to, even if they had to pay dearly to get a deal done.
In late November 2017, Angeliki Frangou-led Navios Holdings took on USD305 million in bond debt at an effective interest rate of almost 12%. The month before, Global Ship Lease took on USD360 million in bond debt at an interest rate of just under 10%. Putting hundreds of millions of dollars of double-digit-priced debt onto the balance sheet is not something any management team would do intentionally.
According to statistics compiled by IHS Markit, US-listed companies raised a total of USD6.78 billion in gross proceeds via 58 offerings in 2017, more than double the proceeds of USD3.11 billion in 2016 and USD3 billion in 2015. The highest-ever level of proceeds was recorded in 2014 (USD8.17 billion).
The most important trend last year – one that will almost certainly persist through 2018 – is a heavy favouritism for debt over equity. Of the total proceeds recorded in 2017, USD3.92 billion or 58% was debt, including Norwegian bonds, US-secured and unsecured bonds, convertible notes, private placements, and Term Loan B offerings. That is by far the highest share for debt offerings during the period covered by IHS Markit data; debt securities represented only 20% of annual proceeds in 2015–16, and 30–40% in 2009–14.
The higher debt proceeds raised by US-listed companies coincided with an increase in private owners’ use of so-called alternative capital providers in New York and Connecticut (often, private equity (PE) firms offering debt at interest rates of 10% or more) as well as the rise in business for Chinese leasing companies. In all of these cases, the root cause is the same: European banks that have traditionally offered low-priced debt to shipowners are being forced to reduce their industry exposure because of new regulatory requirements, causing a funding gap. And that gap will still need to be filled in 2018.
This dynamic was highlighted by Amsterdam Trade Bank chief executive Harris Antoniou at a Marine Money forum in New York in November 2017. “The percentage of bank funding in the whole mix for shipping has been reduced, from around 60% of the capital structure before to below 50%, maybe even down to 40%. With fewer banks involved, the gap has been filled by new sources of funding like leasing, public equity, or the bond markets.”
The challenge ahead is that shipping may not actually be able to afford non-bank financing over the long term. On a through-cycle basis, shipping returns are generally estimated to be in the high single digits. As Antoniou pointed out, “If you look at alternative sources of finance, the cost is fairly high – higher than the return on equity that shipping achieves through the cycle. This begs the question of whether alternative finance is a sustainable source of funding for the industry.”
Another question to watch in 2018 is whether shipping can finally regain the attention of major institutional investors and return to the initial public offering (IPO) market. As of late 2017, there had been no shipping IPOs since the Gener8 Maritime flotation in June 2015 – the longest drought since the turn of the century.
Bankers are confident that shipping IPOs will re-emerge, yet this hinges on the stock performance of already public companies, which, in turn, depends upon freight-market fundamentals. If most stocks in a given sector trade at a discount to net asset value (NAV), and new issuers have to accept an additional pricing discount to get an IPO done, there is little incentive to bring a fleet public – because the fleet could be physically sold for more in the second-hand market than the post-IPO shares would be worth.
When freight rates do recover, shipping stocks should trade at multiples to NAV, allowing issuers to compensate for the IPO discount. As Wells Fargo Securities managing director Eric Schless said at a Capital Link forum in New York in October 2017, “If we get to the point where shipping companies are trading at 1.4-times NAV, we will all be very busy doing IPOs.”
In the meantime, the US public arena is likely to see a continuation of a trend that emerged last year known as ‘IPO via M&A’.
In the 2011–14 period, a large number of private-equity firms invested in shipping, assuming they could buy low at the bottom of the cycle and monetise their vessels assets through a New York IPO. Because they have not been able to do so, they have instead sought to transform their ships into stock by selling those vessels to an already public entity in return for shares.
Last year, fleet deals were consummated for a consideration of shares and cash by Scorpio Tankers, sold by Navig8 Product Tankers; Scorpio Bulkers, sold by Tiber Bulk; Teekay Tankers, sold by Tanker Investments Ltd; DHT, sold by BW Group; and Golden Ocean, sold by Quintana Maritime. Another deal potentially in the works involves a spin-off of Euroseas’ container fleet and its merging with the private fleet of Poseidon Containers, backed by private-equity groups Kelso & Company and Maas Capital.
All of this translates into a mixed outlook for the US capital markets in 2018. As shipowners replace or supplant their bank debt via the sale of debt securities, offering proceeds should stay high. However, while freight rates and asset prices remain under pressure, the interest rate on those debt securities should remain expensive.
If underlying freight markets bounce back and shipping stocks take off, there should be more IPOs. And if not, more private-equity groups will likely throw in the towel and sell their fleets to existing public players.
Access the 2018 outlook page