Wednesday, September 11, 2013

Investing in Shipping

One of the more exciting areas to invest in nowadays is shipping.

Looking to invest in a sector poised for a turn-around?  Some of the savviest private equity players are going full speed ahead into the beaten-down shipping sector.

Quoting investor Wilbur Ross, the Financial Times reported that private equity investments in the shipping space could easily double by the end of 2014.  The entry of private equity groups could mean an end to the shipping industry's high level of fragmentation, due to massive consolidation.  More than that, private equity could easily make financing shipping companies a lot easier by way of more innovative structures and funding vehicles.

Wilbur Ross, through his Navigator Holdings investment vehicle is becoming a leading investor in liquefied petroleum gas vessels, or LPG tankers and in vessels primarily engaged in the transport of petroleum products. Ross said that investors would probably be attracted to shipping companies because they are forced to look for less traditional sectors with very high prospects for growth.

But just how much are private equity firms investing in the shipping industry?  Ross put the figure at more than $7 billion.  He broke it down to $4 billion in debt and $3 billion in equity.  Even so, that level of investment only represented 2 per cent of the global shipping industry's current market value.

Ross also revealed that there are a lot of private equity funds that are buying into troubled shipping companies, generally buying up the debt that distressed companies are burdened with in order to make it easier for them to take control later on.


Looking towards Asia

It is for this reason that Asian shipping companies are becoming more and more known to Western investors.

Asia's shipping firms have been under a lot of restructuring of late.  The industry has recently been affected by the downturn that has plagued both American and European shipping companies; the worst that we have seen in thirty years.

Asian shipping lines made the mistake of major capital commitments to new shipbuilding in 2007 and 2008.  These new ships were delivered to them at a time when demand for shipping slumped to record low levels of activity.  Oil tanker routes between Asia and the Middle East suddenly became quiet.  The net result was an unprecedented decline in charter rates by as much as 90 per cent.

The list of distressed Asian shipping companies keeps on getting longer and longer even as the downturn continues.  Thankfully, there is a silver lining.  Hampton Securities CEO Peter Deeb relates that Saudi Arabia’s over-all production rates are climbing back to normal levels, and that a return to more sustainable charter rates would likely be achieved in late 2014.

Overall, Marine Money estimates that more than $3.5 billion had already been poured into shipping containers and newbuildings in 2013 alone.  That number has surpassed the $2.7 billion worth of investments for the entire year of 2012, and close to the $4.2 billion invested in 2011.

It is not going to be quick and easy money, but for the patient, the potential for a windfall is there.  Some of the recent deals that are worth noting include:
  • Oaktree Capital Management partnering with Rickmers to secure 16 container carriers.
  • Alterna Capital Partners ordering four tankers from Hyundai Mipo Dockyard in a $130 million deal.
  • A $500 million partnership deal between York Capital Management and Costamere.

Among the leading publicly traded players in the space which represent the most accessible way for investors to gain exposure to an upturn in shipping, Nordic American Tankers (NAT/NYSE), Teekay LNG Partners (TGP-N/NYSE) and for the more risk averse, Knightsbridge Tankers (VLCCF/NASDAQ).  All of these companies have felt the pain of the past 8 years, but with strong balance sheets, steady dividends and a well articulated strategy for both organic and acquisition driven growth, these players seem to be well positioned to take advantage of the greater pain being felt by the industry as a whole.  As always, this is a discussion best had with your investment firm and the risks cannot be over-stated.