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 Today


The Maritime Industry's original and most viewed E-News Service

Maritime Reporter April 2016 Digital Edition
FREE Maritime Reporter Subscription
Latest Maritime News    rss feeds

People & Company News

China COSCO to be First through the Expanded Panama Canal

China COSCO Shipping has won the draw for its container vessel Andronikos to make the ceremonial first transit through the Expanded Panama Canal during the waterway’s inauguration on Sunday, June 26.

Sellick Equipment to Open New Facility

On April, 20, 2016, at the young age of 97 years, Walter Sellick along with sons Howard Sellick - President, David Sellick - Vice President and grandson Colin Sellick - Systems Manager,

Asia Tankers-VLCCs Rates Ease as Tanker Jams Fade

Port congestion eases at Basra and Chinese ports; tanker demand set to expand on lower oil prices. Freight rates for very large crude carriers (VLCCs), hurt by slower-than-usual release of cargo,

Contracts

Asia Tankers-VLCCs Rates Ease as Tanker Jams Fade

Port congestion eases at Basra and Chinese ports; tanker demand set to expand on lower oil prices. Freight rates for very large crude carriers (VLCCs), hurt by slower-than-usual release of cargo,

EU Clears CMA CGM, NOL Merger, with Conditions

The European Commission said on Friday it had cleared French shipping group CMA CGM's $2.4 billion takeover of Neptune Orient Lines on condition that NOL pulls out from a rival shipping alliance.

How France Sank Japan's Sub Dream

Ousting of Japan ally PM Abbott opened door to rivals; Tokyo slow to respond to new competitive process. In 2014, a blossoming friendship between Australian

Shipbuilding

SCHOTTEL Debuts EcoPeller with High-torque Gears

Propulsion and steering systems manufacturer SCHOTTEL has unveiled its new EcoPeller (SRE), which it said offers improved efficiency and robustness. Playing a

Fincantieri Delivers Carnival Vista

Carnival Vista, the new flagship of the fleet of Carnival Cruise Line, brand of the Carnival Group, was delivered today at Fincantieri’s shipyard in Monfalcone.

Samsung Heavy Loses $4.6-bln FLNG Order

South Korea’s shipbuilder Samsung Heavy Industries (SHI), the world’s third-largest shipbuilder,  has received a contract termination for three floating liquefied

Ship Sales

How France Sank Japan's Sub Dream

Ousting of Japan ally PM Abbott opened door to rivals; Tokyo slow to respond to new competitive process. In 2014, a blossoming friendship between Australian

Samsung Heavy Loses $4.6-bln FLNG Order

South Korea’s shipbuilder Samsung Heavy Industries (SHI), the world’s third-largest shipbuilder,  has received a contract termination for three floating liquefied

Japan wants Australian Explaination for Failed Sub Bid

Japan wants Australia to explain why it decided not to pick a Japanese design for a new fleet of submarines choosing instead a proposal from France's DCNS. "The decision was deeply regrettable,

Finance

MARAD: $5 Mln Available for Marine Highway Projects

The Maritime Administration (MARAD) has announced the availability of $5 million in Federal funding to expand marine highway service by creating new or expanding

Baltic Index Down on Lower Capesize, Panamax Rates

The Baltic Exchange's main sea freight index, tracking rates for ships carrying dry bulk commodities, slipped on Friday, as demand for capesize and panamax vessels fell.

Oil Rally is Not Just About Hedge Funds: Kemp

Oil prices are becoming dangerously overheated as speculators anticipate a rebalancing of supply and demand that has barely started, according to many oil analysts.

 
 
Maritime Contracts Maritime Security Naval Architecture Pipelines Pod Propulsion Port Authority Ship Repair Ship Simulators Sonar Winch
rss | archive | history | articles | privacy | 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: 0.1284 sec (8 req/sec)