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The 2008 Global Credit Crisis – Is shipping likely to revert to the 1980’s model?
On November 13th more than one hundred and fifty shipping practitioners, bankers and investors listened to an all-star cast of current and former ship owners, brokers, shippers, maritime arbitrators and maritime attorneys at a CMA luncheon in Stamford, CT.
Moderator Ray Burke of Burke & Parsons, introduced the first speaker, John Bamford, Senior broker at Simpson Spence & Young (USA) who summarized the present situation as: “We are in a state of temporary chaos.” Today’s time charter rates for dry cargo vessels could double and still be 50% of what owners need to make profits again. He suggested that even after the rates start moving it could take 12-18 months longer to bring the supply/demand picture into some semblance of neutrality. On a more hopeful note, he suggested that the fall out from the settlement of October FFA contracts was far less stressful than expected. Still, the physical markets will produce more casualties before things start to improve. On the supply side of the equation, John thought the consensus among brokers was that 30-35% of the fleet on order would be cancelled and some of the new “Greenfield” shipyards would not actually be built.
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A New Perspective
We are very grateful to Imarex’s Mike Reardon for introducing us last week to his colleague from Singapore, Jeffrey Landsberg. Mr. Landsberg suffers from a keen interest in the bulk markets and unlike Mike he focuses more on the physical market. This week we publish for the first time his weekly newsletter, which we will continue to do on a regular basis. We believe that the views of both Messrs Reardon and Landsberg are extremely valuable and a worthy addition to our publication. We hope you find them as useful as we do.
Shipping on the Global Stock Markets
In contrast to the views of our banker friend expressed earlier, private shipping companies clearly saw benefits to going public. Among many reasons for a public listing are to extend capital sources, provide acquisition currency, and allow liquidation of family holdings. At our Dublin conference, Mr. Andrew Meigh, Managing Director of Clarkson Investment Services, provided a superb historical overview of the public markets. For perspective, we have incorporated his graphs, which illustrate the global number of publicly listed shipping companies and the capital raised, the combined market capitalization of publicly listed shipping companies and the number of companies listed on major shipping exchanges. Finally, there is a list of the publicly listed shipping companies together with their market capitalization.
Legal Question
We include below a definition of force majeure for your consideration together with a question of applicability that follows the quote.
“Force Majeure literally means “greater force”. These clauses excuse a party from liability if some unforseen event beyond the control of that party prevents it from performing its obligations under the contract. Typically, force majeure clauses cover natural disasters or other “Acts of God”, war, or the failure of third parties–such as suppliers and subcontractors–to perform their obligations to the contracting party. It is important to remember that force majeure clauses are intended to excuse a party only if the failure to perform could not be avoided by the exercise of due care by that party1.”
Can one make a cogent legal argument that this applies to the credit crisis and more specifically to sale and puchase or newbuilding contracts? Let the lawyers, principals and financiers opine. Responses will be incorporated in an article in our January Survival Guide. Please email your thoughts to gweltman@marinemoney.com.
“Confused, Incomplete, or Inconsistent Owing to Market Instability”
The catchy title is a quote from an article in Monday’s Financial Times by Daniel Thomas and Jennifer Hughes. It refers specifically to a qualifying clause commercial property valuers are currently inserting in their valuations creating increased uncertainty for investors. “In a sharply falling market in which most transactions involve distressed assets, the valuers say they are having difficulty in setting reliable prices. Normally, they rely on recent transactions for comparable benchmarks.”
However, as usual, accountants are getting nervous and expressing concerns about the growing use of caveats and disclaimers on valuations. “Auditors will need to consider carefully the nature of the uncertainty in the valuation, the disclosures made in the financial statements and other circumstances affecting the company.” An alternative view suggests that “auditors should not worry as this is not a qualification of accounts; it is an additional piece of advice.”
The parallels to the shipping universe are unmistakable. However, in our case, brokers have just stopped giving valuations due to legal consequences they have suffered in the past. However for the first time in the shipping space the numbers of public companies, which are potentially exposed has increased exponentially. The cost of going public just went higher or when accountants sneeze their clients may catch cold.
No More Netting
Reading many of the analyst reports, we were always intrigued by the use of net debt in leverage calculations. Perhaps it made comparisons between companies easier. But the underlying assumption that cash would be used on a dollar for dollar basis to pay down debt as implied was always a question mark. Surely this is highlighted by today’s dry bulk earnings, which are currently below cash breakeven rates. With insufficient cash to meet voyage and operating expenses no less debt service, the cash on hand is making up the shortfall. We suppose you can make the case for the use of net debt in good times, however, as we were all rudely reminded recently the shipping cycle never left us. Either it unexpectedly returned, due to a short-lived new paradigm, or we suffered from “Extraordinary Popular Delusions and the Madness of Crowds.” Charles Mackay, the author of that text, has a painful prognosis: “Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one!”
In any event, cash in shipping gets you through the bad times and allows one to exploit opportunities. No matter what bankers may believe it is not there for them.
“Erin Go Bragh”
Despite a reasonable starting time of 10 AM, the delegates to the 2nd Annual Marine Money Dublin Ship Finance Forum filed in early ever ready to meet old friends and make new contacts. If there was one single takeaway from this conference for us it is the fact that the Irish people are happy, warm, smart, blunt and can charm your pants off. This is what makes it a great business center, not all the fancy tax stuff. Notwithstanding my frivolous view, keep up the good work, Jim; it does really make a difference. As we usually do, we have extracted below insights and comments that in our prejudiced or self-serving view we thought were useful or interesting. We are faced with our usual problem of so much to choose from and so little space.
Letters of Credit
There has been much talk these days about the inability of receivers to obtain L/Cs and hence the slow down in cargo movements. We posit the following question to our readers. Could the issue also lie in the unwillingness of New York banks to confirm the L/Cs? Historically, the intervention of the NY banks has been a key credit support to these transactions.
Third Quarter Earnings Season
The third quarter was of course an entire world ago, pre global economic meltdown, when China was still expected to roar back after its great Olympics before orders were cancelled and charterers began handing back ships and FFA settlement days loomed like an executioner. So it may come as no surprise to our readers that company after company has reported earnings and dividends in line with financial analysts predictions. We tip our hat to the stewards of these companies, especially OSG and Eagle where earnings and then subsequent conference calls accomplished what we had hoped for, clear, confident and distinguishing attributes. Companies like Torm and OSG are on their way to their best years ever and Eagle has earnings visibility stretching way forward while DRYS is selling at a .69 P/E in other words for less than its ‘08 earnings.
A Bargain?
The following sales of dry bulk vessels were reported last week in Cleaves Shipbroking’s S&P Market Report:
“ARETHOUSA DWT 171,779, BLT 9/1999 AT HYUNDAI HEAVY ULSAN, SOUTH KOREA, M/E B&W HYUNDAI HEAVY SOLD FOR USD 90 MILL (AFTER BEING RENEGOTIATED FROM USD 133 MILL).
PILION DWT 48,218, BLT 9/1994 AT SHENAVEH, DENMARK, 4 X 25T CRANES, M/E B&W MITSUI TAMANO, B&W SOLD FOR USD 33 MILL (AFTER BEING RENEGOTIATED FROM USD 51.5 MILL).
OCEAN GLOBE DWT 43,246, BLT 8/1995 AT HYUNDAI HEAVY ULSAN, SOUTH KOREA, 4 X 25T CRANES, M/E B&W HYUNDAI HEAVY SOLD FOR USD37 MILL (AFTER BEING RENEGOTIATED FROM USD 53 MILL).”
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