Private Equity Spending Fuels Shipping Sector Risk

Joseph Keefe
Friday, May 09, 2014

Private equity has pumped $32 bln into shipping in past 2 years. Ships totaling 299 mln dwt to enter global fleet from May. Some private equity-backed shipping IPOs have been put off on weak sentiment.

The shipping industry faces a looming capacity glut as billions of dollars pumped into it by private equity have stoked a vessel-buying spree, threatening its prospects just as the sector is emerging from its worst downturn in three decades.

Backed by private equity and hedge fund financing, shipping companies have placed orders for thousands of new ships over the past two years, reminiscent of the ship-ordering binge of the mid-2000s that eventually led to overcapacity after the global financial crisis severely hit cargo demand.

The demand-supply equilibrium could tilt into overcapacity again from 2016, straining shipping companies' finances. It may also make private equity's exit from shipping less profitable, shipping experts said.

"Shipping is not a get-rich-quick business. By virtue of the capital that the private equity funds are pumping into shipping, they are in effect destroying the very prospects that they are chasing," said Jan Engelhardtsen, chief financial officer at Olso-listed tanker and terminals company Stolt Nielsen.

"Because the investment horizon for private equity is short-term and shipping is fundamentally long-term in nature, private equity's entry into shipping in most cases is never going to end well," Engelhardtsen told Reuters.

Private equity companies such as Oaktree Capital, Apollo Global Management and Blackstone Group have invested in tankers, container ships and bulk carriers, set up or acquired shipping companies and bought ships and shipping loan books from banks such as Germany's Commerzbank and British state-backed bank Royal Bank of Scotland.

Estimates vary, but maritime fund management company Tufton Oceanic says private equity has invested about $32 billion in shipping in the last two years.

Among major private equity shipping deals are Global Maritime Investments' move to invest in around 20 dry cargo ships. And Oaktree Capital Management bought into Star Bulk Carriers Corp last year, but later trimmed its holding. Star Bulk has 28 dry bulk ships, including 11 that are on order.

The current global ship order book is worth $297.6 billion although $110 billion remains unfunded, according to figures from Britain's Clarkson Research Services and Tufton Oceanic.

TONNAGE GLUT


The investment will help create a surge in ship deliveries with ships totaling 299 million deadweight tonne (dwt) due to enter the global fleet from May compared with a current global fleet of 1.7 billion dwt, according to Clarkson data.

Global seaborne trade, including commodity shipments, is expected to grow 4 percent in 2014, Clarkson has forecast. If trade growth remains at similar levels in the next two years, it will potentially create a supply glut of tonnage from 2016.

Ng Siu-fai, chairman of Oslo-listed dry cargo ship owner Jinhui Shipping and Transportation, in a reference to private equity, said the company had seen new participants placing new orders "with a primary, if not only, objective of speculative gain in asset price appreciation rather than working these.....assets for long-term positive cashflow".

But Albert Stein of debt and restructuring specialist AlixPartners in London, which advises private equity among others, said shipowners must share the blame for the coming glut.

"You can't blame private equity alone. (look at) who sold them the idea that the market's going to expand," said Stein.

IPOs HIT

Private equity firms typically have a three- to five-year investment horizon and exit through asset sales or initial public offerings.

"PE firms come in all shapes and sizes and have varying investment horizons. However, they're all trying to generate returns of 15 percent plus per annum, which restricts them to relatively short investment periods," said one Hong Kong-based ship financier.

New ship prices have been volatile over the past six years. For example, the price of a new 320,000 dwt supertanker was $105 million in 2010, but dropped to $93 million in 2012, while the current price is $101 million, according to Clarkson figures. Second-hand ship prices now are generally lower than in 2010.

"The majority of the PE who purchased tonnage in 2009-2011 will see healthy returns in the high teens to mid twenties if they can monetise their positions within the next 24 months," said Randee Day, president and chief executive of Day and Partners, a U.S. maritime consulting and advisory firm.

"Sophisticated private equity will not remain in exposed positions over the next 18-24 months," she said.

Weak public investor sentiment has led to the postponement of several shipping IPOs although several more IPOs, backed by long-term shipowner interests, are planned. Wilbur Ross' Diamond S Shipping Group cancelled its tanker IPO in March and Greece's Stalwart Tankers scrapped its IPO last month.

Uncertainty over the success of IPOs and a rise in asset prices has led some private equity to lengthen their investment time horizons.

"I suspect some firms have extended their hold periods on existing investments because it would have been unprofitable to exit at the originally envisaged time - you have to suspect the Diamond S/Wilbur Ross deal is in this category," said the Hong Kong financier.


By Keith Wallis

Maritime Reporter October 2014 Digital Edition
FREE Maritime Reporter Subscription
Latest Maritime News    rss feeds

People & Company News

NAVCENT Commander Recognizes Journey of Hope Sailors

Commander, U.S. Naval Forces Central Command, U.S. 5th Fleet, Combined Maritime Forces, Vice Adm. John. W. Miller, recognized the accomplishments of three special-needs sailors from the Kuwaiti ship,

NYK Holds 8th Environmental Management Conference

NYK welcomed about 60 environmental supervisors from 47 NYK Group companies to the group’s annual Environmental Management Conference in Tokyo. NYK holds this

W&O, LESER Partner to Deliver Safety Relief Valves

W&O, a global supplier to the marine and upstream oil and gas markets for pipe, valves and fittings, valve automation and engineered solutions, has partnered with

Contracts

Diana Extends Containership Time Charters

Diana Containerships Inc. announced direct continuation of time charter agreements for m/v Cap Domingo and m/v Cap Doukato   Diana Containerships Inc., a global

BMT Supports Samalaju Port Development

BMT subsidiaries in the Asia-Pacific region have been awarded a contract to provide design expertise for an advanced bulk-material handling system for the emerging port of Samalaju in East Malaysia.

EU: Ships Will Measure CO2 Emissions

Shippers to begin monitoring from 2018; Environmental groups say law is weak, shippers favorable. The shipping sector will for the first time have to monitor

Shipbuilding

World’s First LNG-Ready Ultra Large Container Ship Named

The race is on in global maritime circles to be the “world’s first” in every aspect of environmental friendliness, particularly in regards to the incorporation of LNG as fuel onboard commercial ships.

Wärtsilä Integrated Solutions for Maersk's AHTS Vessels

A new series of six Anchor Handling Tug Supply vessels to be built at the Kleven Verft AS in Norway for the Danish based Maersk Supply Service A/S - part of the A.

MacGregor Deck Equipment for Intership's Eco-bulkers

MacGregor, part of Cargotec, has secured a deck equipment contract from New Times Shipyard in China for Intership Navigation Co Ltd.'s three new 36,500 dwt laker-class bulk carriers.

Ship Sales

Norwegian Buys Ship from Princess Cruises

Norwegian Cruise Line Holdings Ltd. announces fleet expansion for Oceania Cruises in 2016; Sirena to join sister ships Insignia, Regatta and Nautica   Norwegian Cruise Line Holdings Ltd.

Ship Broker Clarkson Looks to Acquire Platou

Top ship broker Clarkson is seeking to acquire Norwegian brokerage and investment bank RS Platou for 281.2 million pounds ($441 million) in a deal that would create

BMT-Designed Flex Ferries Delivered in Singapore

A trio of 38-metre Flex Ferries, built by Singapore’s Penguin Shipyard International and designed by Southampton-based BMT Nigel Gee, have been delivered to their new owner,

Finance

New Company Takes Over OW Tanker

OW Tanker, a unit of bankrupt OW Bunker and owner of its marine fuel supply ships, has been taken over by a newly-created company, the fleet manager told Reuters on Wednesday.

WRRDA: Clearing the Channel for P3 Projects

A Creative Combination for Financing Inland Waterways Infrastructure Earlier this year, the U.S. maritime industry in general, and the inland waterways industry in particular,

Choosing the Best Financing Proposal

It isn’t always about the rate. In a robust boatbuilding market – like the one we see now – even the most successful, financially stable operators need to borrow.

 
 
Maritime Careers / Shipboard Positions Maritime Contracts Maritime Security Naval Architecture Offshore Oil Pipelines Salvage Ship Electronics Sonar Winch
rss | archive | history | articles | privacy | terms and conditions | contributors | top maritime news | about us | copyright | maritime magazines
maritime security news | shipbuilding news | maritime industry | shipping news | maritime reporting | workboats news | ship design | maritime business

Time taken: 0.1865 sec (5 req/sec)