The first decade of this century has been characterized not only by the strongest shipping rates of a lifetime, but also by the rise of a new breed of shipowner who was financially literate (sort of the ‘MBA President’) and capital markets savvy and highly conversant on Wall Street values; while previous generations of independent private owners were going in to great efforts to design their house flags and insignia, modern shipowners were focusing on mission statement and shareholder value optimization hanging high from the yardarm of their ships and their roadshow presentations.
True to the spirit of the decade that made securitization of debt a very profitable alchemy in the financial industry by slicing ‘composite’ into different, distinct ‘trade-able’ tranches where certain investors would appreciate especially, the shipping industry was fast on catching up with the ‘divide and conquer’ strategy of its own. While private shipowners stack to what had worked best for them in the past, usually by trial and error and exploiting their special trades and relationships, publicly traded owners devised business models that were appealing and sale-able to Wall Street and the institutional investors primarily rather than to the shipping markets. There were formed companies whose business models were very distinct and ‘pure plays’ such as dependent on spot VLCC market exposure or Suezmax market exposure, companies with ‘yield driven’ strategies irrespective of underlying shipping market conditions, capesize shipowners with full spot market exposure positioned as ‘China play proxy’, dry bulk owners whose chartering strategy to reflect the ubiquitous Baltic Dry Index (BDI) given there is no liquid derivative market for an investor to play directly the BDI; there were even owners who moved into the ice-class products tanker market just to fill the ‘vacuum’ of despite having several publicly traded product tanker owners, there was none in the ‘pure’ ice-class segment. Public ship ownership become a very streamlined business where a financial owner identified a segment that was missing from Wall Street, used Other People’s Money (OPM) to secure the tonnage, involve liberally as much cheap debt financing as possible, engage a third-party vessel manager on a contract basis, and charter out the vessels in the open market.
‘Mono-line’ shipping business models definitely have their advantages. They optimize economies of scale, operational leverage and cost savings, and they level sufficient critical mass of modern tonnage to entice major charterers and trading houses. One additional benefit of such business models is that it’s easily understood and explained to the investment community, without undue complications and multiple layers and overlaps with inputs from other market segments and industries. For example, for a VLCC owner of ten vessels trading on the spot market, the financial model could be sweet in its succinctness: capital requirements and financial expenses were known or easily projectable, operating expenses were contractually assigned to third parties and thus publicly known, and the assumption of expected future rates to be ‘plugged into’ the financial model was really the only big unknown. Modeling out a year or so was rather easy…and unquestionably worked time and again when the times were great.
Fast forward to the lower arch of the business cycle and taking another view at vessel ownership, it seems that shipping companies active in markets with a narrow focus that appealed to the investors in the past, have their fair share of problems. This observation has been valid for both private and public owners who had overweighed exposure to one market. After all, if the VLCC market is oversupplied, in a burning cash mode for some time and with unfavorable underlying economics, a narrowly focused VLCC owner has few options…the market is the market, and no much can change in shipping in the short term (sparing an exogenous shock like a geopolitical or macro-economic event or other event of unforeseen nature such as military action, embargoes, etc.) Such an owner, a VLCC owner will suffer in a bad market, whether the capital structure is private or public; the market is the market, as we said. However, a public company with a VLCC mandate has few options navigating the storm, unless the management or the ‘sponsor’ has the capacity to support the company directly or through their market clout. Things would not be much better for a private owner, except that the private owner may have saved away some of the excess profits (dividends) from the good times, or had diversified away in less volatile or lightly correlated industries like in real estate those earnings; or even may have used the excess profits to enter other shipping segments that offer different (uncorrelated) characteristics and a better chance of survival when the headwinds hit. Shipping companies with broader diversification to be considered ‘industrial conglomerates’ like AP Moeller Maersk or MOL OSK Lines with legs in many industries and segments had never had their survival questioned during the days of the absolute gloom. Also, staying closer to home, without having to reach ‘industrial’ scale, it’s well commented that Dryships would had survival issues when the dry bulk (capesize) market collapsed if not for the management’s ‘thinking outside the box’ and entering heavily the drillship market with the acquisition of Ocean Rig. The recent filing of private Greek owner for an LNG IPO is also another exhibit that diversification in shipping may pay better than ‘mono liner’ plans, possibly to the extent of making the difference between survival and going under. Whether horizontal or vertical integration / diversification is best suited is debatable, however it seems that ‘lard’ rather than ‘leanness’ make better buffers in shipping…
This article is an adaptation from an earlier posting on November 5th, 2011, at The Captain’s Log blogspot.
© 2013 Basil M Karatzas & Karatzas Marine Advisors & Co. All Rights Reserved.
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