Tuesday, September 6, 2016

Hanjin collapses into bankruptcy and receivership: Sursum Corda!

I have been predicting this sort  of high profile bankruptcy of a major liner company as inevitable for years now.  There are just too many loss making liner companies and sooner or later state support would reach its limits.  The whole matter of counterparty risk for the vessel provider companies has been misconstrued for years now on the false assumption that the liner companies were just too big to fail. 

Seaspan's Gerry Wang calls the Hanjin bankruptcy a nuclear bomb and mixing his metaphors a 'Lehman moment', but did not Wang see this coming?  For years, he was ordering aggressively and chartering out to loss makers like Hanjin.  His policies contributed to this!

This industry suffers from chronic overcapacity and low margins.  Further their business model based on China and head haul routes is in risk of becoming outdated with the slowing of Chinese growth and trade rebalancing as well as technologically obsolescent with the robotics, 3-D printing, etc.  I have always been in agreement with my friend Christopher Rex of Danish Ship Fund on this industry and its prospects. 

I have argued this time and again with my Wall Street investment bank friends. Hopefully, with this Hanjin case, they will start to wake up and understand better the container industry dynamics.  See some of my  blog articles on this subject over the years.  For example, I was very early to point out the large exposure of Danaos (NYSE: DAC) to financially weak liner companies. 

Danaos was somewhat fortunate with the HMM charters receiving shares in restructured HMM in return for reduced charter rates.  In the case of Hanjin, DAC has estimated exposure of US$ 560 million on Hanjin.  First estimates are creditor returns of 35% for secured claims. But only 5% for unsecured claims and zero on liquidation.  That is quite a mark down!

Over the years, Wall Street has made some bad shipping calls like the earlier reckless, irresponsible dry bulk speculative asset plays.  Investors in shipping stocks have frequently lost their shirts. 

Of course, the great thing about shipping markets as opposed to politics in the US and EU - where the usual reaction is to double up on failed policies, buy time and hide the truth from the public - is that you cannot hide financial losses, financial resources are limited and there are natural market corrections, asset write downs and consolidation.  Raw Schumpeter capitalism always prevails keeping the industry lean and mean over the long run, but not without significant volatility and market swings. 

It is not a good idea to get lost in the noise and ignore supply chain logistics that generates the underlying cargo demand for marine transport.

Monday, August 29, 2016

Hanjin Shipping wins Seaspan concessions: the inevitable for the vessel provider companies!

The current plight of Hanjin is representative for the Liner industry: substantial operating losses, need for recapitalization and over indebted balance sheet.  The container industry panacea of ever larger units to reduce unit costs and defend eroding earnings margins is not working out as hoped.  This has created more overcapacity with cascading.  Now there is talk of the Panamax sizes going for scrap. 

World trade growth is slowing. It is not clear that the old model of large ships for headhaul lines is going to meet the requirements of the future with trade rebalancing in China, robotics and the sharing economy of the future.

The cold truth is that there are already more liner companies than the market can support.  A large number of liner companies are making losses.  Some like NOL have been put on the block for sale and are being consolidated into other companies like CMA-CGM, others like HMM and Hanjin are staving off bankruptcy with financial restructuring.

Vessel provider companies like Seaspan and Danaos have built their fleets by every larger vessels that they let on term time charter to financially weak liner companies that want the larger units to defend themselves from the ordering and competition of the stronger liner companies but unable to carry the vessels themselves on their balance sheets.

I have repeatedly signaled out this risky business policy of the vessel provider companies on my blog.  I have stressed that it was not a sound and sustainable business strategy.  The vessel provider companies would face inevitable challenges in the future as the financial situation of the liner companies deteriorates, leading to bankruptcy and restructuring that would inevitably entail charter renegotiation.  I pointed out the heavy exposure of Danaos to HMM and Hanjin as major charterers.  I stressed the aggressiveness of Seaspan to service financially weak Asian liner companies with ever larger units.  Cosco for example recently announces losses of over US$ 1 billion in their liner business, one of their customers.

I have always felt that Gerry Wang's assertions about having a leasing company business model were overstated and disingenuous to investors.  Seaspan lets its tonnage on time charter with operating risks.  With Hanjin in financial crisis, Wang took the hard line on charter negotiations for investor ears, but Seaspan is in a weak position with its exposure in large containerships.  It cannot easily withdraw and redeploy its vessels because the market for these units is not large.  Inevitably as its liner company customers begin to face financial difficulties, Seaspan has no choice but to accept cuts in charter rates to keep them going with their creditors as long as possible. 

Since the original writing of this piece, Hanjin's restructuring negotiations have not worked out and they are going into receivership.  Seaspan is hoping for a merger between HMM and Hanjin and that perhaps with some sort of state support, they might be able to avoid cuts in charter rates.  We will see over time how Seaspans fares.  This is a test for their exposure to other weak Far East charterers and possible state intervention to keep them afloat.

I restate again these points because I have often met dead ears in NY investment banking circles, still enamored with the containership industry.  Over time, the bankers and financial industry are going to have to face the reality:

  • The containership industry is just as challenged as dry cargo with overcapacity. 
  • The growth days from the global megacycle and China boom are over and gone.
  • Liner companies will inevitably be forced to consolidate for survival. It is not clear that very large containerships will be needed to extent anticipated.
  • Vessel provider companies are going to face a long period of thin margins as their liner company employment base shrinks in the consolidation process.
  • Inevitably there is renegotiation risk on their charters that they will not be able to avoid with their liner company customers. 

Sunday, July 31, 2016

Greek Maritime Cluster: Role of the small family shipping business – challenges and opportunities.

What will be the future landscape of the Greek maritime cluster in the coming years ahead? 
The Greek maritime cluster has been facing a period of rising unemployment and shrinkage in the small medium sector,  It has been hit by the bankruptcy of the local banking system, tight money, rising taxation on ships and most significantly the very poor dry cargo markets the last few years, where there is a very heavy exposure. 
Generally these smaller private companies have a lot of bias against their larger listed company compatriots and their use of capital markets and private equity money, which they see as an unsustainable passing fad and a primary reason for the over investment in shipping assets and poor markets. 
These companies generally have older and smaller vessels, primarily handy size bulk carriers, with the larger better capitalized companies operating also Supramax and Panamax bulk carriers. This sector has been the incubator of the maritime cluster, allowing newcomers to enter.  Given the larger number of this type of company, it is a key market for the local Greek service companies such as chartering and ship brokerage firms, crewing, insurance and suppliers.  

As George Economou astutely observed during Posidonia this year, Greeks have been predominate in shipping because they were willing to accept the lower long term returns on shipping assets that others found unattractive. There are a variety of historical reasons for this:  
  • Greece is a small, relatively resource poor country. This drove many Greeks to the sea and created a maritime tradition. 
  • Greece was prior entry to the Eurozone, a soft currency country with constant moderate inflation, where investment in assets was a hedge to currency depreciation and an opportunity for capital gains.
  • Because of the abundance of local seafarers and the family nature of the business, the Greek ship was cheaper and more efficient than most competitors on operating expenses, but this advantage started to erode and has largely been eliminated with the Greek entry into the Eurozone, where Greece lost many other local industries such as ship repairs, textiles, etc.
Still today despite the hikes in ship taxation and EU pressure to eliminate Law 89 offshore law, the cost of maintaining a shipping office in Greece is relatively low compared to lower tax jurisdictions in the Far East like Singapore and Hong Kong. There is an abundant supply of personnel with the increasing unemployment in the sector.

The Greek business model is owner operator. It is based on owning shipping assets and chartering them out for hire with the crew. About 70% of the Greek maritime cluster is invested in dry cargo vessels because of the lower capital requirements and the ease of entering the sector, which is highly fragmented.

The period of growth and success of Greek shipping from the early 1970’s was due to several key factors:    

  • The ability of Greeks to acquire older vessels and keep them running for longer than expected trading life.  
  • The inflation of shipping asset and scrap values along with market fluctuations created significant capital gain opportunities that allowed the company to borrow against higher values to expand and renew their fleets and reduced the nominal value of the bank debt.
  • Abundant bank debt to finance ship acquisitions and roll over the fleet at low cost. Greek shipping was initially fueled by petrodollars and merchant banks, then the German landesbanks and the expansion of the local Greek banks until the 2008 financial crisis and the Greek national bankruptcy within the Eurozone.

The past few years, the climate has changed for Greek shipping. Money has become tight and more expensive, ship values and scrap prices have declined. Earning margins have tightened. The dry cargo chartering market has become more age conscious with a tiered market structure similar to the tanker sector. Ships over 15 years have become less preferred with lower rates with the overabundance of newer tonnage in the market for hire.

Investments in older tonnage at close to scrap levels are no longer a guarantee of safe returns. The earnings margins are very poor, sometimes negative. Often over time, the vessel values erode such that it is not possible over the limited remaining trading life of the vessel to recuperate the asset impairment loss.

This is a highly emotional and very controversial subject in Greek shipping circles. Most of the local Greek shipping industry would vehemently contest this view, but I can safely say that I have seen frequently this phenomenon reflected in balance sheets for older vessels over the last few years.

The present hope today is for a surge in investment in dry cargo shipping assets, even with negative carrying costs as a means of substantial future profits to reflate the sector. This is very understandable with the current depleted balance sheets of the industry and the suffering service industries, particularly the local chartering and sale and purchase firms. A lot of private Greek money has been invested this year in dry bulk shipping assets. More units keep employment for the shipping offices, and create needed income for the local Greek brokerage firms.

For a family business, the top priority is to reinvest in the future of the business that is their prime source of livelihood. Under these conditions, it is quite a different investment decision than an institutional investor or shipping industry outsider. The key differentiating factor is the returns criteria. An outsider is looking for the best possible return for his risk profile in a variety of alternatives. A family business dependent on the shipping industry is willing to live with much lower returns and higher risks initially, even to the point of no returns or negative carry for the prospects of future capital gains. The reason for this is obvious: The critical factor is the future of the family business. A family shipping business without outside investors does not really need profits, investing their own money in their business as long as it stays solvent and supports a good life style.

Another important point to be considered is that the local Greek banks have a lot of older, unattractive dry bulk assets on their books and they will make every effort to keep these assets operating with local family companies rather than scrapping them and taking losses now on weak balance sheets. They will also be willing on a limited basis to finance older vessels for local companies that have the necessary liquidity to carry them.

So there will always be a place in the market, particularly for older bulk carrier operators. More than likely than not, there will be less scrapping and more efforts to prolong trading life than the larger players invested in new tonnage would like to see. The fragmented nature of the bulk carrier industry will allow space for this, even with the lower operating costs and fuel consumption of the newer vessels because the family operator will accept lower margin business and remain viable.

Unless present economic conditions change, however, I do think that there will be inevitable further consolidation in the Greek shipping SME’s as well as the larger operators and less space for new comers in the industry. The profits on capital gains will be subdued and below expectations for some time to come because ship replacement value will remain low and there will not be sufficient banking liquidity to support the sale and purchase turn overs to generate a significant rise in asset prices. The older tonnage will eventually be scrapped at low prices.

Those companies with resources to invest in younger vessels, build up larger fleets and develop good trading platforms will be the best positioned for the future.

Monday, June 27, 2016

BREXIT and other challenges for Greek Shipping

Despite a successful Posidonia this year, our shipping cluster is facing many challenges.  Our competitors in Scandinavia (Norway, Denmark) and Far East (Singapore, Hong Kong) are not in the deep shackles of Eurozone creditors and their debtor in possession bailouts nor the scorched earth of a bankrupt local banking system from years of depression, double digit unemployment/ emigrating youth. 

These countries have their own issues, but no crushing legacy debt burden and also more promising growth prospects than the EU, whose share in world trade has been steadily shrinking over the years and suffers from serious structural problems with a political class in self-denial and complacency and dangerously disconnected from an increasingly desperate electorate on which they have been consistently exploiting by monetizing enormous financial losses from years of constant policy failures.
These points have become even more salient by the recent BREXIT vote in the UK, which is both a challenge and opportunity.   If the EU choses to punish the United Kingdom by repressive actions for the anti-EU popular vote, this will not only disrupt existing trade relations and cause a general recession in Europe but also further  inflame voter antipathy to the EU elite and more exit-type referendums. If the EU opens a dialogue to correct its existing dysfunctionalities and gives more devolution to its members, this may actually lead to better growth and more harmonious trade relations.
The Scottish issue is a microcosm of Greece.  The Scots live above their means with perks like a generous pension system, subsidized by British taxpayers.  The EU could encourage the Scots to seek direct EU membership to spite and pressure the withdrawing UK, but such actions would be detrimental to both the Scottish people and the EU with another weak new member needy of EU transfer funds and who cannot support a heavy currency like the Euro (more of the same EU failure pattern).  In a short time, Scottish unemployment would rise, more Scottish youth will emigrate and Scotland will be become a debt slave of Brussels.  An ‘emancipation’ that risks degenerating to Brussels colonialization and an additional EU vassal state that the Brussels would be ill supported to carry.
The better outcome would be that the UK is given an exit agreement similar to the present EU trade status of Norway.   This arrangement could become a benchmark for other suffering EU members, who want more sovereignty and breathing space from Brussels bureaucracy and escape the stranglehold of German debt deflation economics for better growth rates.  It might even facilitate a future GREXIT along with generous debt forgiveness to allow a new start to Greece as another Norway-like associate membership.  That would be more suitable for Greece as a sea power and on the EU Periphery.  
A customs zone for the EU Periphery would be the best outcome, where the core might still remain in the Eurozone and could support more integration in a controlled and workable context that is unworkable for the periphery countries.
Finally our maritime cluster has excessive exposure in dry bulk, where there are few entry barriers, low earnings margins, no control over pricing and tremendous over supply of ships. 
The Greek vessel provider business model is very heavy in relatively low yielding assets and weak on commercial, trading platform.  This setup works extremely well coupled with low cost bank leverage in times of high inflation, but it’s not effective in times of deflation, where the bank debt and interest expense burn up liquidity and eventually lead to negative equity and bankruptcy or zombification from pretend and extend lending practices of which the Germans are probably the world champions. 
Our maritime cluster needs to take more elements from Norway and Denmark, moving to a wider marine service economy with a bigger cargo operator element over the current vessel provider business model.  We also need to lighten up and consolidate on dry cargo exposure as well as continue expansion into more diverse marine sectors like industrial shipping where there is better pricing power, more of a trading element and less asset speculation.