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The bitter medicine

PAUL SLATER
shipping must swallow
T
Changing management HE decline in freight rates chests but not their excessive overheads.
from the dizzy heights of five They’ll have to continue to resort to rights
and dismantling years ago means many issues or other secondary offerings of
outdated strategies is shipping companies are equity to get through the next three years.
running at daily losses once The fact that many of these companies
what is required if operating expenses, are managed by the original sponsors is
shipping is to recover overheads and debt service are taken into the main reason why there have been no
account. Worse, the values of ships have significant management changes and the
tumbled and yet still are not accurately shareholders seem reluctant to force any.
reflected in most corporate balance sheets. In other industries facing such a
The solutions: changes at the top, destruction of values, there would have
aggressive moves against corporate been takeovers, mergers and wholesale
overheads and reductions in fleet sizes. management changes. For the reason
The original rush by shipowners to the expressed above and the banks’
public markets came at the start of this reluctance to force change, this has not
century as the industry sailed out of the happened in shipping despite an
doldrums of the 1990s, blown by China’s underlying fear that there is worse to
insatiable appetite for cargoes of all types come.
that caused a shortfall in available space Freight markets will not rebound to the
and a rush to shipyards to order new ships. dizzy heights of five years ago and the
An abundance of demand met an values of most of the new ships that have
expanding supply of risk capital looking been delivered since then will have to be
for a home. It was newly formed sharply written down, which will further
companies, not the more established ones reduce equity values.
that would benefit the most. If the present markets continue
Wall Street rose to the occasion, despite through 2011 auditors will be forced to
having been burned by shipping junk assume permanent impairment of asset
bonds a few years earlier. A rash of initial values, causing equity values to
public offerings arrived. Share prices of completely disappear and widespread
these new companies rose rapidly as the debt defaults as loan to value covenants
freight markets soared on a dearth of are breached.
available tonnage to meet primarily It is these facts, among others, that
China’s appetite for raw materials. help to explain why Lloyds Bank has been
The dry cargo companies reaped this unable to sell off its shipping loan
upswing best, despite historically being In search of a rescue remedy: DryShips, OSG, Seanergy and TBS are just some of the companies portfolio, as reported by Lloyd’s List some
seen as a little dull. Building and that have taken strain in the past few years. Shutterstock two weeks back. In fact, we have not seen
operating a dry bulk ship was easier than a any bank’s shipping loan portfolio sold
tanker and there were plenty of charterers, back of huge orders and reached a point in Most of the public dry and wet bulk off, and the banks are being forced to
both primary and intermediate, ready to 2008 that could only be supported if the companies such as Omega, TOP Ships, provide greater risk analysis and more
take on the new vessels. extraordinary freight rates of the previous Seanergy and NewLead have seen their cash reserves to cover these risks.
The public markets responded with couple of years were sustained throughout values crash and some have reached such The challenge for all shipowners today
secondary offerings and other new the ships’ lives. low levels that they no longer are relevant is how to exit from uneconomic businesses
companies in tankers, containers, gas It was a classic bubble that no one indicators of shipping market values. Even and reduce their exposure to further
ships and even tweendeckers emerged wanted to recognise and like all bubbles it at those levels they are still overvalued and losses, until the markets show permanent
into the public arena. collapsed faster than it inflated. will struggle to survive if markets remain signs of recovery.
Banks encouraged owners to go public China’s slow down, charterers’ reaction as they are. Management and the banks need to be
and supported them with increasing to excessive freight rates and finally the They are unable to attract further reminded that they are dealing with public
amounts of debt and funded large orders global recession and the collapse of the equity capital unless provided by the companies and issues of fiscal
for new ships. Established public global banking system all contributed to original sponsors or management, as in responsibility, asset transfers without
companies rode the euphoria, enlarging the crash of the shipping markets. the case of TBS International, and are shareholder approval and payments to
their fleets and building large corporate Nowhere was this more obvious than in equally unable to raise any more debt even related parties all loom large.
structures. the publicly quoted shipping companies from the junk-bond markets. Shareholder lawsuits are beginning to
Out of the public eye, the large private whose market values disintegrated. The Many of the medium-sized companies emerge — witness the deal late last year
companies also climbed on the private companies faced all the same such as Seanergy, DHT, Global Ship Lease that saw American Commercial Lines
bandwagon by ordering new ships in issues but they were mostly hidden from and OceanFreight are too seriously bought out by Platinum Equity — and the
batches with options, some from yards the eyes of the public. undercapitalised to have any growth auditors will increase their concerns over
that did not yet exist. By the end of 2006, OSG had dreamed of being the first to potential and will struggle to survive as financial statements they are asked to sign
the industry had the largest orderbook in boast of a $100 shipping share in mid-2007 their cash reserves drain away with charter off on.
its history and all to deliver by the end of when its shares peaked at $90, only to be income barely covering expenses and Changing management and
the decade. overtaken by upstart DryShips whose funds being borrowed to pay dividends. dismantling outdated strategies along
The public markets had provided shares hit $123 in late 2007. Since then OSG’s Even the new entries of last year — with drastically reducing overheads are
billions of dollars of new money for the market value has declined by 70% to $2bn Baltic, Crude and Scorpio — have fallen the medicines for recovery. Selling ships
industry and loosened the banks’ purse and DryShips by 66% to $1.8bn. sharply from their issue prices and the that are draining cash flow and focusing
strings to add billions more to both the Tsakos-sponsored Tsakos Energy on maintaining and operating reduced
private and public companies’ spending Navigation is trading below $10 down from numbers of ships is vital for survival.
capabilities. a high of $38. Why does it remain public? This may not appeal to the companies
Private placements of equity also “Selling ships that are The expenses of quarterly filing and that pay large management fees and
emerged with hedge funds and some
private equity funds joining the game and
draining cash flow and meeting Sarbanes-Oxley requirements are
a constant drain of cash and many public
commissions to their private sponsors but
perhaps leaving these funds in the
funding shipping ventures around the focusing on maintaining shipping companies should seriously company would certainly improve the
world without the onus of having to report consider delisting. picture. n
publicly. Some investment banks even
and operating reduced Even the largest public companies, Paul Slater is chairman of marine
bought their own fleets as hedges against numbers of ships is vital such as OSG and Teekay, have had to and logistics financial advisor First
their commodity trading. undergo major financial restructuring, International Corp, headquartered
Ship prices rose dramatically on the for survival” seriously diminishing their so-called war in Florida