Private equity investors and hedge funds once saw shipping as a sure-fire profit generator, but for many that profit failed to materialise. Now, waning interest and a sharpening of exit strategies at these alternative funding sources has turned the focus back to banks.
An overhang of tonnage continues to cast a shadow over the sustained recovery of both the wet and dry shipping markets, but the financing sector should also accept its share of the blame for the extended malaise, according to Svein Engh, group head and managing director, CIT Maritime Finance.
Indeed, Mr Engh believes that many of the challenges facing the industry “remain on the banking side”.
“Many banks are still struggling with their portfolios from the markets that peaked right before the financial crisis,” he says. “During the boom years from 2004 to 2008 many banks were aggressive and ended up lending too much. A lot of companies ordered too many ships, and when the crisis hit and the demand went down, it was too late. The next few years had too many newbuildings coming into the market. Since then, it’s been five tough years for shipping in general.”
While private equity has filled some of the gaps in capital, there has recently been a reduction in private equity investment in shipping. “Many private equity firms were waiting for the freight markets to really come back, the values to go up and then be able to exit their investments at a profit. This hasn’t happened and has led to many private equity firms opting out of investing in new projects. That has an impact in the financing of the industry.”
In addition, says Mr Engh, many hedge funds acquired shipping loans in the secondary market with the same expectations of the market rebounding quickly.
“If they are not willing to hold these positions and they want out now, they could be looking at potential losses,” he points out.
Banks, on the other hand, are becoming more active in chasing deals and this has led to reduced pricing and looser terms. “This is occurring at the very top tier of the market which is a relatively small number of companies compared to the overall market. Pricing has tightened somewhat, but the terms have not changed dramatically,” says Mr Engh.
In terms of its own portfolio, CIT has financed more secondhand vessels than newbuildings, attracted by the immediacy of the secondhand sector. “The secondhand market is always very active. For example, Tanker Solutions, a joint venture between Castlelake, a private equity firm, and a Greek owned operator called Prime Marine, has become a large customer and we recently financed eight secondhand vessels for them.
“In terms of the risk, buying good secondhand vessels at lower prices may make sense in the current market, based on the fact that the price differential between a newbuilding and a five to ten year old vessel is quite substantial, which results in a lower required freight rate for a secondhand vessel to break even,” he adds.
Looking at the markets, Mr Engh believes that the tanker sectors, both product and crude, will be “relatively decent” in 2015. But he is “more sceptical” on the dry side because of the overhang of vessels still under construction. “I believe that market is going to continue to bump along at a relatively challenging level.”
Other factors that continue to impact the struggling dry bulk sector include declining steel production in China, falling Chinese iron ore imports, as well as reduced Brazilian iron ore exports.
Products on pause
The products sector is, it seems, in the same boat. “The product tanker market is seeing a little bit of the same picture. That market actually hasn’t improved as much as most people thought it would a couple of years ago. The main reason for this is the extensive ordering of newbuildings over the last couple of years. Some of those ships are just now hitting the water.”
Meanwhile, the positivity CIT holds for the tanker market is based on an increase in the demand for transportation of crude oil, which “could signify a build-up in oil stocks taking place”. This is being supported by a minimal 0.3% expansion in the crude tanker fleet over the last few months, Mr Engh adds.
“For crude carriers, the supply side is looking a lot better because there have not been many new orders over the last few years due to the very difficult market conditions. Demand is starting to pick up and we think that the market might improve quite a bit from its low levels over the past few years. However, I don’t believe any of these markets will improve to levels anywhere near some of the peak markets we saw six to eight years ago.”