Wave of private equity money flows into shipping

October 27, 2013 2:23 pm

Wave of private equity money flows into shipping

By Mark Odell and Ajay Makan

The shipping industry has endured its worst crisis in 25 years. But there are some signs it may be navigating its way out of choppy waters – not least a surge in the amount of“smart” money from private equity flowing into the sector. The record influx of funds so far this year is seen by many as a watershed after five years of weathering the storm that caused several ship operators and owners to collapse during the economic downturn.Dagfinn Lunde, head of shipping at DVB, says the German bank has probably been the most active on private equity deals in the sector, providing the senior debt in various deals involving 45 buyout groups since 2010.

He says typically these deals involve a private equity fund providing about 80 per cent of the equity to buy a ship, with the shipowner providing the rest. “That is new in the last three years. This year has been the most active, it is [spreading] like wildfire,” he says.

Until the financial crisis most shipowners could borrow enough from banks to cover $7 out of $10 towards the cost of buying new ships. But banks are now unlikely to lend much more than half – even to shipowners with very strong balance sheets – meaning they need to come up with more money, according to Urs Dur, managing director of Clarkson Capital Markets.

Private equity has been drawn to the sector as asset valuations for both new-build and second-hand ships have hit rock-bottom.

As a highly-fragmented industry with few large players, the need for capital could hardly have been greater. Traditional lenders such as Germany’s Commerzbankand HSH Nordbank and the UK’s Lloyds and Royal Bank of Scotland are either exiting the market or looking to reduce exposure, stung by heavy losses on loans made before the downturn.

Ship owners looking for fresh funds have found private equity groups willing to listen as they struggle to allocate capital in their more traditional markets.

Oaktree Capital Management, for example, last year took a large stake in Floatel, which owns and operates offshore construction support vessels, and injected equity into General Maritime, a crude and petroleum product tanker company.

Other groups are investing directly in ships. This summer Carlyle committed more than $100m to InterLink Maritime, allowing it to order ten bulk carrier ships, while in September Apollo Global Management committed to a joint venture with German freight line Rickmers Group to invest up to $500m initially in second hand ships.

Before that York Capital linked up with New York-listed Costamare, a container ship owner, in another $500m joint venture. “The reason they are here is high expectations about returns as they are entering at the low-part of the cycle,” says Greg Zikos, chief financial officer of Costamare.

These expectations have so far this year attracted more than $2.7bn, a quarter of the total investment in ships led by private equity since 2008, according to data compiled by Marine Money, a US-based consultancy.

Bankers and analysts say the money has targeted specific “hot” sectors of the market, especially product tankers, which carry refined products, and vessels to carry liquefied petroleum gas and liquefied natural gas. There has also been a renewal of orders for dry bulk carriers.

On top of the $11.2bn invested in ships and indirectly in shipowners since the start of 2008, private equity groups have also been investing in terminals, ship charterers and shipping containers. In August, KKR led $580m in funding for a specialist shipping bank.

The rush to invest in a distressed sector has been welcome for those shipowners struggling to stay afloat, but it has also reawakened fears of overcapacity.

Halvor Sveen, who is setting up Maritime & Merchant, a boutique shipping bank in Norway, says a move of less than one percentage point in global economic output “would make a huge difference to the industry . . . I am highly optimistic that global production is on the increase but the structural overcapacity in the sector going back decades is a source of concern.”

I am highly optimistic that global production is on the increase but the structural overcapacity in the sector going back decades is a source of concern

– Halvor Sveen

Although the sums invested in private equity are large, they continue to be dwarfed by conventional funding. Marine Money estimates that banks continue to provide up to $250bn a year in debt finance to shipowners, limiting the potential for private equity alone to stoke a bubble.

Mr Lunde at DVB estimates that with just under $300bn in new build orders alone on the books, there is an equity funding requirement of $120bn. “Private equity might come in with $3bn to $4bn [annually] so that is still very little.”

But the presence of the “new” money has been noted. At a shipping industry conference in New York this summer a Greek shipowner, whose family had been in the industry for generations, took one look at the audience dotted with private equity executives, before asking the organiser: “Where are all the shipowners?”

His question was only part in jest, says Jim Lawrence, chairman of Marine Money, who organised the conference. Private equity executives not only look different – the Greek shipowner was shocked by the number of dark suits facing him – they act differently.

Whereas traditional shipowners tend to hold vessels for at least 20 years, private equity groups hope to turn a quick profit by listing companies or selling their vessels once charter rates and ship valuations recover.

Some private equity groups are also already looking for the exit as charter rates in some shipping markets show tentative signs of recovery along with the value of ships.

In August, Greenbriar Equity, a private equity group, listed Ardmore, a tanker company, on the New York Stock Exchange, raising $140m. In what might be a cautionary tale, Ardmore’s stock listed below its target range at $14 per share, and has since fallen below that level.

Start-up lender steers toward smaller ship owners

Private equity funds are hardly the only ones to spot an opportunity in the shipping market as traditional lenders pull out and asset values hit historic lows. Only this month, a group of shipping industry executives and financiers announced plans to set up a Norwegian-based shipping bank to target the smaller end of the market, writes Mark Odell. Halvor Sveen, the head of Maritime & Merchant bank who is tasked with having it up and running by the middle of next year, says the focus for the new institution would be small and medium-sized ship owners, many of whom are struggling to raise finance. “We see there is a broad market of customers who are falling between the gaps. It is a very fragmented market and a large part of the maritime community is made up of small companies with between five and 50 vessels. Many are family-controlled and have been in shipping for more than 100 years and want to remain in the market,” says the 52-year-old former head of shipping at Norway’s Pareto bank. He estimates the industry is facing a $100bn credit gap. “We have seen a large downscaling of the credit volumes in the maritime sector in recent years,” adding that even though private equity and the bond market are filling some of the gap there are still plenty of companies struggling to find investors. The founding shareholders and board include Germany’s Henning Oldendorff, one of the world’s biggest shipowners, and Arne Blysted, one of Norway’s richest men who made his fortune in tankers and the offshore industry. The bank is aiming to raise up to $350m in equity via an initial public offering, which should give it capacity to build up a portfolio of some $2.5bn in investments over the next five years, according to Mr Sveen.

 

October 27, 2013 12:33 pm

Buyout groups set course for record investment in shipping

By Ajay Makan and Mark Odell

Private equity-backed investment in shipping is set to hit record levels this year, having already surpassed $2.7bn, as buyout houses bet on a recovery of an industry hit hard by the economic downturn.

The amount committed so far matches the previous record set in 2011. It is part of arecent trend that has seen more than $11bn in private equity-led investments in ships and shipowners since the start of the financial crisis, according to new data from Marine Money, a specialist consultancy.

Groups such as Carlyle, KKR and Oaktree Capital Management have waded in to shipping as the traditional leveraged buyout market has become more crowded. The groups, who are looking for ways to make more money, with interest rates at rock bottom levels, usually take a stake in ship owners or set up special purpose vehicles to order new ships.

Buyout groups have been attracted by low asset valuations and demand for new sources of capital. Many traditional backers have shunned the sector after suffering heavy losses on loans extended to shipowners during the boom years before 2008.

The move into shipping by private equity has been widely welcomed as a signal that the industry is emerging from the crisis. “This is smart money and it’s a sign that confidence is returning to the industry, and that we may finally be at the bottom of the cycle,” said Jim Lawrence, president of Marine Money.

“It is really good that these players are coming into the market,” said Halvor Sveen, who has been involved in shipping finance since the mid-1980s and is in the process of setting up Maritime & Merchant, a boutique shipping bank in Norway, backed by more traditional industry players.

But he said a recent rush of orders was a sign of concern in an industry that is renowned for its structural overcapacity. “I am a little bit worried about the recent order strength.”

Set against the overall size of the market for new orders, the contribution from private equity is still relatively small compared to the current order book, which Clarksons, the shipping specialists, put at $280bn.

Plagued by overcapacity, charter rates across the industry remain volatile, although there have been some signs in recent months of a sustained recovery in some sectors including dry bulk and tankers.

Stephen Gordon, Clarksons’ head of research, said it was hard to judge whether the rebound in orders was coming too soon but pointed out that in recent years the new business won by shipyards was still running at between a third and a half of the levels seen in the boom years in the middle of the last decade. The order book represents only 15 per cent of the active fleet compared with one equivalent to half of the fleet at the peak in 2008

“We have had five years of difficult markets in shipping and there is a sense from some interests that we have reached historic lows,” he said.