Sunday, January 25, 2009

A hedge fund's losses are a gain for a privately held shipping company

The financial crisis is leading to a regrouping in the shipping industry where publicly-held companies are in retreat with massive declines in share price and shrinking capital markets. This is illustrated by the recent move of Robert Bugbee and Cameron Mackey from Ospraie, a major NY-based hedge fund, to a subsidiary of the Monte Carlo-based Scorpio Group.

The Scorpio group has chosen a value-added commercial approach building a tanker pool rather than the asset expansion/ vessel-provider model of most publicly listed shipping companies. Ospraie was a major capital provider for NY publicly-listed companies. They had a sizeable portfolio of shipping shares. They have been obliged to reduce their their holdings in this sector. With listed shipping companies rolling up losses with order cancelations and impaired asset values from acquisitions made at the top of the market, sound privately-held companies stand to make a come back in the industry.

Scorpio Shipmanagement is an old established player in the tanker market. It is closed family-held business of several generations.

Contrary to most publicly listed shipping companies, Scorpio concentrated during boom years in building a tanker pool. They have a very fine group of brokers and a solid commercial base with end-users. They gave priority to investment in human resources to expand their commercial and operational capacity rather than massive scaling up in assets at bloated price levels. They did not concentrate on making quick profits nor double digit investor returns overnight. They had longer term business plans.

Where they did expand their asset base, they used cheaper European finance sources. They did not have the high transaction costs or restrictions to their business plans imposed for raising capital in US financial markets.

Presently as seen in the Bugbee move from Ospraie to a new Scorpio subsidiary in Stamford, Connecticut, hedge funds like Ospraie who have been major equity providers for NY-listed shipping companies, are now in retreat. Their massive portfolio losses due to the drop in commodities prices have forced them to start to liquidate their shipping holdings and restrict their capacity for new business.

Private players like Scorpio have a bright future in this market downturn. They are well positioned with a strong commercial base. They are not saddled with expensive asset acquisitions at top of the market prices.

They will have the opportunity to scale up with new vessels at lower prices that will give them a long term competitive advantage to many publicly listed companies.

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