Container Funding – What’s Going On?


I am working on another CI commission – the funding of containers. I am looking through the latest financial results for some of the big container lessors; Textainer, TAL International, CAI International and Seacastle (Seacube). These results are such a contrast to the liner companies most of whom are making losses. Indeed, I would go so far as to say the container lessors are doing very well. Digging a little deeper I can see the capex so far this year among the above four companies is already over $2.0 billion. This is not only new boxes, but containers bought from the liner companies.

There is a good story here. Why are the container lessors buying so many new boxes in a flat market? How are they funding this when bank debt is so tight?

If you work in the container management of a lessor or are involved in the funding of boxes, and have something to say on background or for the article, then drop me a line.

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OOCL – How to make a profit in difficult times.


I am completing a feature on the liner company OOCL. This will appear in a forthcoming edition of Containerisation International. The company is a fascinating subject, being near collapse in the 80’s before it re-emerged under the control of the Tung family in the 90’s. Rapid expansion into non-core businesses and a large orderbook saw debts reach around $2.5bn. It could have gone under, but banks and other backers rallied around to support the company through a long and painful restructuring. Today the company is very conservative in its approach, sticking to a few tradelanes but covering them in depth, and with limited exposure to the over-capacity Asia-Europe trade. It is also innovative, being one of the first to invest heavily in IT, which spawned the client system CargoSmart. The result is a liner company that today is producing profits in a difficult market.

 

If you have anything interesting to say about OOCL, on or off record, then give me a call on INT+44 (0)7974 935477

The Killing III – Shipping in Drama


The Danish drama “The Killing” has been an unexpected hit in the UK, and for a year we have been waiting for the next  series (9.00 pm, BBC4). The skeleton crew onboard the idle ship “MEDEA” are murdered. The “MEDEA” belongs, we are told, to biggest company in Denmark, an energy and shipping giant called “Zeeland”. Of course, shipping people will immediately know that “Zeeland” can only be one particular Danish company.

What struck me was how high the production values are in The Killing III. There is one short “talking-heads” shot on a dockside were the police and special branch meet the “Zeeland” representative. In the background a ship has been repainted in “Zeeland” colours and the “Zeeland” name painted in big letters along the side. This shot could have been done with the cast facing the other way in front of a “Zeeland” sign tacked on a nearby wall, which is how it would have been done in the UK. But no, they went to the trouble of having a ship repainted just for that shot to emphasis the size and scope of the “Zeeland” operation. In another shot the police are searching for body parts in a scrap facility, and in the background we see stacked containers repainted with the Zeeland name. But is is not just the sight of ships that has me hooked, it’s the drama. In the UK we are a couple on months behind the Danish showing, so if you comment, please try not to spoil it for us. By the way, I didn’t mentioned the sweater once.

Measuring the Performance of Social Media


Measuring the Performance of Social Media

Having only started blogging earlier this year, I am a little behind the curve on using social media. I hadn’t even thought about measuring the response. According to a press release from ShipServe, the marine online trading company, I am not alone. Indeed, it seems there are people and companies that are fully engaged in the e-commerce world who are not measuring activity.

ShipServe conducts a survey on e-commerce and social media run each year. The headline finding is that over 40% of the companies surveyed are not measuring the success the results online or offline. This is done, I learn from the press release, through web analytical tools. Indeed, I now realise that WordPress, the website I use to host my blog, has a raft of web analytic tools. There are even more tools on the Google site.

If you want to look at the survey results, these can be found at http://www.shipserv.com/info/wp-content/uploads/online_survey_2012.png. The survey results are presented in a clever graphic, based around a voyage from Shanghai to Rotterdam. I would place my voyage way-point somewhere just outside Shanghai harbour!

Investment Opportunities


Amsterdam Mare Forum 2012 Final Part and Meeting Takeaways

Investment Opportunities – the Final Session of Amsterdam Mare Forum 2012 (see site for presentations).

Invest in Fuel-Saving

Alisdair Pettigrew of the Carbon War Room (Ship Ops) explained how each ship on ShippingEfficiency.org is given an EU style efficiency rating A to G. The A is the highest rating, while G is the lowest. According to Mr Pettigrew, some charterers are now using this rating as part of the decision making process when deciding on which ship to hire. Cargill, apparently will not take ships rated F or G. Such a “threat” to a ship’s charterability was clearly of great interest to shipowners, but Mr Pettigrew had to leave before questions were taken. But there was good news on offer, too. According to a calculation in the presentation, the cost of converting a VLCC to a fuel-saving regime is around $1.8m. The payback period was 13 months, which makes this sort of conversion a realistic proposition.

Invest in Offshore

Wilhelm Magelssen of Pareto Project Finance started his presentation on direct investment with an anecdote from the 1970s. Apparently the Norwegian government wished to have a stake in the Swedish car manufacturers Volvo and SAAB, which at the time were very successful. In exchange Norway would give a stake in the North Sea oil. Sweden turned down the offer, and as we know, Volvo nearly went bust and was sold to Ford, and SAAB cars are no longer built. I googled this story, and the version I found is that Volvo proposed a merger with SAAB-Scania, which was not interested. Volvo then approached the Norwegian oil industries, but the Volvo board rejected the deal. But whatever the version, it illustrates Magelssen’s point that direct investment is a useful tool for investors.

The direct investment on the table is offshore assets. Exploration and Production budgets will total $500 bn this year and will double in the next five years. The day rates and asset values are increasing in the offshore sector (see slide 6), and in Pareto’s opinion, now is the time to invest.

Invest in Green – RINA can help.

According to Michele Nicora, RINA has produced the first green ship mortgage in conjunction with Medio Credito Italiano. Under this agreement, the ship under the loan is analysed for its environmental qualities.

Invest in LNG Bunkers

Apostolos Poulovasilis of Lloyd’s Register detailed a model Lloyd’s Register has developed to analyse demand for LNG bunkering going forward. The model covers the main ship types, and takes into account the regions the ships operate. The inputs are bunker fuel prices, newbuild demand, and the regulatory timetable. The model runs over three scenarios, low, base and high through to 2025. The findings are published in a report “LNG-Fuelled Deep Sea Shipping – the outlook for LNG bunker and LNG-fuelled newbuild demand up to 2025”.

Invest in Brazil-China Trade.

Charles Tang is the chairman of the Brasil-China Chamber of Commerce and Industry. His presentation laid out the massive growth expected in trade between China and Brazil. China, of course, is sucking up Brazil’s iron ore and crude oil, and Brazil is using the funds to build up infrastructure (Football World Cup and the 2016 Olympics) and industries. In 1999 Chinese investment in Brazil was $1.5bn, in 2012 it will reach $100bn.

This was all good news, but there some uncomfortable questions in the debate that immediately followed.

Debate

Almost immediately after Charles Tang finished his presentation an owner stated he could not do business in Brazil. The level of corruption in Brazil, he said, was unmanageable. Charles Tang countered he had never encountered corruption in Brazil. (There will be a Mare Forum in Brazil in September 2013, so maybe corruption could be a topic – or maybe not.)

The debate moved onto to more positive topics. There were several queries about LNG as bunkers and Jan Valkier volunteered that Anthony Veder has ordered two Ethylene carriers for the North Sea trades. In agreement with the charterer the ships will run on LNG, stored in two tanks on the deck.

Chairman Gourdomichalis introduced Leonidas Polemis of Remi Maritime with a question of the SPAC (Aquasition Corp) he and his partners had started in New York. “It is a tough market. Stock market is still speculative, but we did the SPAC at the right time.” he said.

On the question of fuel efficiency and the EEDI, Michel Fransen of Spliethof pointed out the EEDI formula uses total power “..which is a mistake” (the use of total power in the formula means that potentially ships will be under-powered in order to gain a better EEDI rating). But it appears that Spliethof has fitted scrubbers to some of its ships.

Amsterdam 2012 Mare Forum “Takeaways”.

  • Think long-term about the bigger picture. Are you prepared to weather Moisi’s storms?
  • Have you a plan for your bank / company to cover the worst case scenario; a hard landing in China and the US falling off the fiscal cliff?
  • Is your bank / company able to cope with two more years of a low freight rate / over-supply environment before the predicted upturn in 2014?
  • Talk to your bank now and on a regular basis. After four years of crisis there is no excuse for surprises.
  • Banks prefer committed and prudent owner/operator with access to cargo. What can you do to be one of those?
  • Banks are restrained by capital requirements and can’t do as much as business. Look into the alternatives presented during Mare Forum.
  • Banks are willing to talk about Eco-Ships and / or financing fuel-saving devices, but it would appear from the debate, they have no firm opinion on the subject. More data needed!
  • Mare Forum is also about about making new contacts and networking. Don’t let those business cards go stale. Get them into your contacts and update your LinkedIn connections.

Ship Finance Under Siege


Ship Finance Under Siege

Part Three of the Mare Forum Amsterdam Ship Finance.

Ship Finance Under Siege was chaired by George D. Gourdomichalis and it was the turn of bankers to explain what they were doing at this stage of the Crisis. Paul Aerts of Rabobank wanted to get a message to owners. Don’t wait and see what happens, come and talk to your banker early and frequently. Bankers are aware of the problems, and are concerned with the direction of operating costs (Richard Greiner of the shipping accountants Moore Stephens, the publisher of Opcosts was also present at Mare Forum), and falling levels of maintenance. Rabobank is aware of these problems and is focusing on quality owners (aka Snaterse’s Prudent Owner) with vessels from top yards. These include the big Japanese and South Korean yards, and the state-owned Chinese yards.

Remco Steger, Director of Shipping at ING laid out the factors that the bank examined;

  1. Quality of management
  2. Modern assets
  3. Market share
  4. Access to cargo

Funding ship finance is now expensive compared to other activities in the bank and pricing and commitment fees will continue to rise. There is now a two-tier market, and those owners who are “out-of-bank” will find funding very difficult.

(There was also a discussion about the Dutch shipping finance cluster and the Dutch CV scheme, but I think I will cover this in a separate blog).

George Xiradakis is a favourite on the conference circuit. As a former seafarer turned banker he has the authority and licence to say what some are only thinking. Xiradakis is working with Chinese banks and showed that while equity and bond finance has been falling in the US and Europe, it is on the rise in Asia. However, it is not large enough to take over all the funding required. He had an interesting slide showing the five-year CDS spreads for the currently active Norwegian and Asia Pacific banks, and the 50 bps spread with the barely active in shipping North European banks. Is shipping under siege? In a series of slides he showed the pre-2008 active banks has shrunk from 38, to 28 to around 20 at the moment. In summary, in his opinion, the growth in shipping finance will come from Pacific Asia while European banks will concentrate on restructuring and supporting a few key clients. The banks make fees on the restructuring but after four years the traditional shipping banks are fatigue, and it is time to ask the question. Can shipping finance be excluded from the forthcoming Basel III process? Shipping is a necessary function, but the extra burden of Basel III will push more banks out of the market.

John Hartigan is a Senior Investment Manager with Northern Fund Management. He was at Mare Form to represent the alternative investment category. The rationale for investing in shipping assets was based on timing the purchase. Using the Clarksea Index as an indicator Northern Fund Management showed that even with a 50% miss rate it was possible to generate the high level of returns required (25-30% IRR). The system employed looked similar to Price / Equity paper by Nikos Nomikos et al I reported on in an earlier blog.

Debate.

In the debate that followed some of the bankers were remarkably frank. Marco Albers of Dekabank stated that 45% of the portfolio was with KG businesses. Rory Hussey of ING Shipping in London said that their capital allocation was surprisingly good (cue rush by owners to get Rory Hussey’s business card), and that the more assets they took on the higher the level of income. Others pointed out that new business had to be ECA (export credit agency) backed, so in a way it is the taxpayer of the bank’s home country that is supporting the bank. Gust Biesbroeck of ABN AMRO was more sanguine. “You cannot stop people ordering ships. A large number of ships in the water may be wrong sort of ship. But you cannot tell people what to do.” This attitude can explained on several levels. First, a banker cannot be seen to be a “shadow” director, orchestrating a company. This would raise liability issues for the bank. Second, owners tend (or did pre-Crisis) to order the ships first, then look around for the financing.

Our leonine chairman, Gourdomichalis, had the last word. He reminded us we were all wrong. Once the market turns and the boom days are here again, we will have forgotten all the discussions that have taken place and we will return to our old ways. In shipping, it is ever thus, and so the cycle continues.

Have We Reached the Bottom?


Have We Reached the Bottom?*

Continuation of the report on Mare Forum Amsterdam 2012 (Part Two)

World Oil Trade Outlook

The ever charming Roberto Giorgi, CEO of V. Ships chaired the pre-lunch session at Mare Forum Amsterdam 2012 on the outlook for the markets. Foteini Kanellopoulou, Senior Analyst with Clarksons commenced with an explanation of the current fundamentals of oil demand and supply growth. The presentation is on the Mare Forum website, and in typical Clarksons fashion tells the story without words. One statistic stood out on graph three; $1 trillion world GDP = 58m tonnes of crude oil trade.

Dry Bulk Outlook

Another Clarksons analyst, Burak Cetinok, presented the dry bulk outlook. His presentation is also on the Mare Forum website. The dry bulk story is well known and again the Clarksons technique of telling the tale through the graphs means you can understand the presentation without actually being there. The main takeaways are that Clarksons believe world seaborne trade will grow by a CAGR of 4.7% between 2012 and 2014. That demolition will be firm but the fleet will continue to grow in most sectors well into 2013. The Handysize sector is showing the fastest de-acceleration of growth, both in terms of the orderbook and ships to be delivered. Under current conditions the overall fleet growth in the dry bulk sector will equal the required demand deadweight sometime in the first half of 2014. When pressed further Mr Cetinok agreed that positive meaningful growth in the second half of 2014 is likely.

Container Outlook

After ending on a happy note the mood changed for bloodbath that is the container market. This was given by Dirk Visser, Senior Shipping Consultant with Dynamar, and Managing Editor of “DynaLiners”. Mr Visser started with the now familiar graph of container TEU steadily before pointing out the fantastic swings in company earnings experiences by the liner services. In 2010 he estimates the top 20 public liner companies made $142/TEU before crashing to a loss of -$83/TEU in 2011. Compare this to the economies of scale for the Maersk ULCS (200,000 dwt, 18300-TEU). These vessels have $150/TEU advantage over a 8500-TEU. The problem is the uneven distribution of ULCSs among the services. According to Dynamar, by 2016 there will be 274 ULCS, with 202 in the North Europe to Far East trades. These will be serving with 17 carriers operating in four main groups and completely fill this trade. This is too high a concentration to differentiate product, and rather than offering economies of scale will simply commoditise the trade. His suggestion is for the industry to consolidate and collaborate to squeeze costs, through reducing sales forces. Supply will need managing and carriers will have to agree to scrap the ships the ULCSs displace, rather than the traditional role of cascading displaced vessels into other routes. This is a radical solution.

Shipbuilding Outlook

Sjef van Dooremalen gave the outlook from the Dutch shipbuilders’ perspective. The view is to keep pushing forward in the specialist sector, to be the leaders in design and innovation, and to cooperate with like minded maritime clusters. This includes St. Petersburg, Singapore, Shanghai and Rio de Janeiro.

The Shipowners Outlook.

Michael Bodouroglou, the CEO of Paragon Shipping says what he sees. He sees shipping is bouncing along the bottom of the trough phase of the shipping cycle. Demand is waning, but owners can’t do anything about that, so let’s work on what owners can do, seems to be his philosophy. Supply is the main problem. The orderbook grew too quick, but is now reducing. Trade growth is positive, but over-powered by supply. Low freight rates are driving down asset values. In a sample of 31 US-listed companies he found the net debt to asset value cover is below 90% for all ships types. In most cases charter cover is below 40% for the fleet. As a result, most listed shipping companies have no equity left, not enough charter cover, in breach of bank covenants, and are concentrating on survival, not growth. From the shipowners point of view “cash is king”.

Debate

In the discussion that followed the other shipowners present for the most agreed with Mr Bodouroglou. The consensus was the wet and dry bulk markets are too transparent, and there it is difficult to make a high enough return. The key was specialisation and opaque market knowledge. Coco Vroon went one further, stating he thought the container liner market needed a big shake up. The current container business model did not, in his opinion, make any sense.

*Before going to Amsterdam I looked for a contemporary novel set in Amsterdam to read on the train (Eurostar and Thalys from London to Amsterdam). I came across” Rock Bottom” by Michael Schilling, which is a novel about the “Blood Orphans”, a fictitious American rock band. The action takes takes place over 24 hours in Amsterdam, including within the Krasnapolsky Hotel. A funny and clever book written through five different viewpoints.

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