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Vale’s Shipping Strategy – Creating a Competitive Advantage?
By Arlie Sterling, Marsoft Inc.
In mid-2008, Vale announced an order for an innovative new ultra-large Capesize bulker targeting the Brazil/China trades. At 400,000 dwt, the Valemax or Chinamax ships are a third larger than the VLOC series pioneered earlier by Vale in a series of orders and conversions. The new generation of ships is part of a broader range of transshipment and other services that are intended to support innovative and low-cost services to its customers in China and secure an advantage relative to its competitors. Reflecting its deep commitment to the concept, another 16 “Max” vessels were ordered in 2009, bringing the total newbuilding commitment to USD 3.5 billion.
On a somewhat unsettling note to the shipping industry, Vale’s management also announced its intent to keep the price of shipping so low as to ensure that they would never again suffer the competitive challenge that the strong Cape market of early 2008 posed.
Ship Leasing Takes Flight in China
By Rodricks Wong
The ship leasing industry in China is one that is shrouded in much mystery, whose role as a significant capital provider is often overlooked. In this article, we attempt to piece together an update on the latest developments in the vibrant sector.
The Beginning
China’s leasing market sprang to life in 2007. In that year, China Banking Regulatory Commission (“CBRC”) granted the first batch of 12 financial institutions, including Industrial and Commercial Bank of China (“ICBC”), Bank of Construction, Bank of Communications, Minsheng Bank, China Development Bank (“CDB”) and China Merchants Bank (“CMB”) licenses to venture into leasing. And since then, the leasing industry in the country has registered unprecedented growth, but not without challenges.
Greek Shipping Has to Grab the Headlines
Greece has had its fair share of the headlines over the last 12 months. And not for the reasons we would have liked. Notwithstanding this, the debt crisis, though still ongoing and with no clear solution, has almost become secondary news to other things going on in the world. The US was hours away from defaulting on its own debt, and was downgraded for it. The civil wars in Lybia and Syria have claimed the front pages. Over the months, natural disasters in Japan and the US have hit the headlines; others in China and many other places the inside pages. There is a lot going on besides Greece.
So is it just that people are tired about the Greek debt crisis and it doesn’t sell anymore? Or are there, in fact, more important issues going on that put Greece’s problems in context? It has been said that, although Bill Gates is one of the richest men in the world, his fortune could only buy a handful of Manhattan blocks. That leaves a lot of the rest of the world for other people. Is it the case, too, in Greece that the issue has been hugely exaggerated? China could buy out Greece’s entire external debt overnight. So could Germany, for that matter. That EURO 300bn is a huge amount of money for a single, small, south European country to repay is a fact, maybe an impossibility, but in global terms it is not a significant amount.
Bullish still, just slightly less so
It was the fact that Asia, with all its growth, demand and development, are coupled for better or worse with Europe and the US that cast some pall over the enormous proceedings at the St Regis. With opening speaker, Dr. Marc Faber of the hugely respected Boom, Doom and Gloom report mockingly calling Fed bankers “geniuses” for wishing they could push interest rates negative, worrying over commodity wars spreading from conflict in the Middle East, while advocating for every personal portfolio to hold a little gold as paper money value is controlled by evil governments the start was dark.
One didn’t know really whether to laugh, cry or rail against incompetent and self-promoting Western politicians. Dr. Faber’s style is so thoughtful and entertaining one would probably smile as he executed you.
Bankers spoke the new conservatism we are all familiar with. Available Asia funding will clearly flow to Asia first.
But it got brighter with offshore, LNG and even a panel of hugely well capitalized drybulk owners nearly giddy with potential ahead. And the hallways and deal rooms were always full with animated clusters of deal makers.
It was abundantly clear that capital markets are temporarily closed though speakers urged advance preparation for the moment they may open again.
Private equity, discussed by a panel led by ICON’s Tobias Backer, featured a spirited debate between Tiger’s Julian Proctor and gave some prospect for investment.
But Damian Adams, Partner at Watson, Farley & Williams here in Singapore, quantified the funding needs which for some will clearly be a problem and for others an opportunity, when he told the audience, “as far as shipping is concerned, estimates of the extent of the capital shortfall in the shipping sector are $30 billion over the next 3 years and of the overall financing requirements of the industry, a staggering $200 billion.
Whichever figure you happen to believe it’s a lot.
As for the ability for private equity to close this gap, consider that in 2009 the 25 biggest lenders to the shipping sector had a total of $333 billion worth of outstanding loans.
Compare this to the combined investment of US private equity firms in the shipping sector in 2009 and 2010, which amounted to $3 billion, less than 1 percent of the amount of debt.
Even though that gap has closed slightly as the result of the write down of existing loan portfolios, tightening of lending criteria and increase in private equity investment, it doesn’t take a rocket scientist or a high school math student for that matter to work out that private equity alone is not going to get us there.”
We will be providing more coverage on the event in next week’s Marine Money Asia. Stay tuned.
Robin Das Exits
After years of service, Robin Das, Global Head of Shipping at HSH Nordbank will be leaving the bank. Always thoughtful, this superb banker successfully stepped in for Harald Kuznik and continued to manage the difficult re-positioning of the bank during the recent financial and shipping crises. Moreover, for us he was always a great source of insights into the banking world. He will be missed but we take comfort in the certainty that he will be successful in his future undertakings. Christian Nieswandt will assume the position of Acting Head of the Shipping Business Unit. Good luck Robin and Christian!
Markit –
With its beginnings in the valuation of credit default swaps (“CDS”) and a snazzy heterograph-like name, Markit describes itself as “a leading, global financial information services company with over 2,300 employees. The company provides independent data, valuations and trade processing across all asset classes in order to enhance transparency, reduce risk and improve operational efficiency. Its client base includes the most significant institutional participants in the financial marketplace.”
We became aware of the company through its informative twice daily email credit market briefings, one from Europe and the other from the U.S. While most business news today focuses understandably on the economy, the role of the credit markets has become central to that discussion. Having only gotten as far as Economics 101 and 102, we called upon an avid student of these markets, Otis Casey, Director of Credit Research for the company, to help us better understand what is going on in the credit markets. Our interest was triggered by the reports outlining the inability of European banks to get dollar funding, a critical issue for shipping given its reliance on European lenders.
Taking the Pulse
Needing to escape the after effects of our move across the hall, we headed into the city looking for answers to questions that we weren’t quite certain how to frame. In terms of transactions, the silence was deafening. This was compounded by questions concerning dollar funding for European banks. Quite simply, the question was simply what is going on?
We began our quest with a meeting and a wide-ranging discussion with Ted Jadick, President and CEO of DnB NOR Markets, Inc. (“Minc.”). Getting right to the point, Ted admitted that the public capital markets are effectively closed for traditional bulk shipping companies for the time being given the negative market fundamentals, although investors continue to be positive towards the fundamentals of the LNG and offshore sectors.
A Numbers Perspective – DryShips’ Partial Spin-off
This week DryShips Inc. announced the details of the previously disclosed partial spin-off of the shares of Ocean Rig UDW Inc., which we previously reported on. The company intends to distribute 2,967,359 shares or 0.007266 shares of Ocean Rig for each share of DryShips. While small, it is a beginning. However, what intrigued us most was some numbers in the report.
Not an Easy Sale – TORM Equity Offering Gets More Challenging
Back in April, TORM announced a rights offering of $100 million. Subsequently, as part of the amendment of its revolving credit facility which extended the maturity from 2013 to 2015, the company agreed to inject the $100 million of cash equity by mid-December 2011 at the latest. If possible, the capital markets have become even more volatile making such an offering challenging at best.
Then it became even more complicated. This week the company announced that through a series of transactions, Ms. Eirini Nomikou gifted her interest in 14,564,704 shares, representing 20.01% of the shares of TORM to Alpha Trust, a trust whose beneficiaries are members of Gabriel Panayotides’ family. With the addition of these shares to the 38,020,804 shares, representing 32.22% of the outstanding capital, which it already controlled, the Trust now has voting power over 52.23% of the total share capital.
Managing Risk – IM Skaugen Re-finances Bond
Without a doubt, the management of risk is going to be a recurring theme going forward and rightfully so with loans amortizing and balloons coming due in challenging market conditions. The banks’ reducing capacity to lend, whether through capital issues or liquidity, compounds this issue mightily. Then, of course, there is the wild card of sticky ship values, which remain disconnected from earnings, very strange for an income producing property.
Just a year ago, I.M. Skaugen SE (“IMSK”) issued an unsecured floating rate note with a borrowing limit of NOK 700 million, of which NOK 300 million was the initial loan amount drawn in this TAP issue. The notes mature in September 2012 and bear interest at NIBOR + 8.00%. Proceeds were used for general corporate purposes.
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