US-listed shipowners go on a buying spree during first half
This story originally published on Fairplay.IHS.com.
US-traded shipping companies embarked on a major wave of acquisitions in the first half of 2017, capped off by International Seaways' 29 June purchase of two Suezmaxes under construction at Korea's Hyundai Samho.
NYSE-listed International Seaways - the spinoff of the international-flag division of Overseas Shipholding Group - announced its acquisitions just seven days after it closed a USD500 million Term Loan B debt facility (plus a USD50 million revolver and an additional USD50 million in contingent capacity), which refinanced USD458 million in previously outstanding Term Loan B debt and provided up to USD142 million in additional liquidity for expansion.
The New York-based tanker owner, led by CEO Lois Zabrocky, "wasted no time on its fleet renewal goals" and should "still be going shopping" with its remaining "firepower" and may do "similar deals in the coming months", said JP Morgan analyst Noah Parquette in a client note.
The quick succession of announcements by International Seaways - first of a capital raise and then of an asset deal - exemplified the prevailing dynamic in the US public shipping market. Money is being raised at record levels from investors - USD4.76 billion year to date - and that money is being rapidly deployed toward fleet growth.
According to data compiled by Fairplay, US-listed shipowners have purchased 119 vessels in the first half of 2017 for an aggregate purchase price of USD4.47 billion. This is over 2.7 times the value of ships bought by US-listed companies in the entire year of 2016. Last year, US-listed owners bought only 31 vessels for USD1.65 billion, according to Fairplay data.
Through mid-March of this year, buying activity was heavily weighted towards the dry bulk sector, but since then, the pendulum has swung towards tankers (see chart, below). During the first half of this year, tankers represented 62% of purchases measured by price (USD1.635 billion for crude tankers, USD1.1 billion for product tankers), while bulkers accounted for USD1.35 billion or 30% of aggregate purchase costs, and the remainder comprised LPG carriers (7%) and container ships (1%).
The top five vessel buyers in the US public market comprised USD3.6 billion or 80% of the group's activity measured by price (see table, below). The top five were: Scorpio Tankers (USD1.1 billion, 27 product tankers purchased from Navig8 Product Tankers), DryShips (USD772.5 million for 17 vessels: four LPG carriers, nine bulkers, and four tankers), Golden Ocean (USD679.6 million for 16 bulkers, 14 of which were bought from Quintana Maritime), DHT (USD537 million for 11 very large crude carriers (VLCCs) purchased from BW Group), and Teekay Tankers (USD517 million for the 18-ship fleet of related party Tanker Investments Ltd).
Three key trends have emerged. The first is the return of en bloc fleet deals, as seen in the transactions of Scorpio Tankers, Golden Ocean, DHT, Teekay Tankers, and the USD153 million purchase of the Greenship Bulk fleet of nine Ultramaxes by NASDAQ-listed Eagle Bulk.
The second trend, as previously reported by Fairplay, is the increasing use of public shares as currency in transactions, as seen in the Scorpio Tankers, Golden Ocean, DHT, and Teekay Tankers deals. In general, private equity (PE) companies that are 'stuck' in companies they invested in during 2011-15 appear more willing to sell out in return for stakes in larger, more heavily traded entities as a means to facilitate their future 'exit' from their original investment. PE-involved companies appear to be more willing sellers because of the inability to do an initial public offering (IPO) - there has not been a shipping IPO since Gener8 Maritime in June 2015 - and the concurrent escalation of financing hurdles, including banking regulations, which gives a competitive edge to larger entities.
The third trend, which is highly positive for shipping fundamentals, is that this year's buying spree by US-listed owners has been overwhelmingly focused on second-hand deals, whether for on-the-water ships or newbuild resales, and not for fresh newbuild orders. There have only been four newbuild orders by US-listed companies in the first half of this year (two Suezmaxes ordered by Euronav, two VLCCs by Frontline), accounting for a mere 6% of the value of total purchases during the first half.
The focus has remained on second-hand deals because banks are less willing to loan against newbuilds; PE has fresh memories of their previous failed bets on newbuilds; bunker prices have generally declined, undercutting the allure of 'eco' newbuilds; and most importantly, second-hand asset prices have remained cheaper than newbuild prices.
The scenario during the first half of 2017 has been very different than the one that prevailed in the previous cycle. Shortly after the 2009 global financial crisis, US-listed public shipping companies arose as a significant engine of newbuild orders. As Fairplay was presciently told in an April 2010 interview with a prominent managing director of a large UK brokerage, "The existence of public money in the shipping business is making it much harder to predict the factors that would make a market go up or down. Normally, it would be gauged on supply and demand, but now, we have a third factor - the supply of money - which can drive a market without the same supply and demand factors that normally make shipping tick. With public money, they [managers] have got to use it or lose it, and if you have to move money, you've got to buy ships. So shipping will never be the same again."
During the 2011-15 period, a surge of PE money into shipping - often in co-ordination with public owners via direct investments in companies like Scorpio Tankers and Scorpio Bulkers or joint ventures with companies like Seaspan and Costamare - further accelerated the newbuild pace.
The previous era's focus on newbuilds, driven by the confluence of PE, publicly listed owners, the eco-ship pitch, and excessive optimism in a fundamental shipping recovery, ultimately pushed back that recovery by creating more capacity. The fact that US-listed shipowners are spending unusually large sums of money on vessel purchases in 2017, but are not placing newbuild orders, suggests that the chances of demand catching up with supply may have finally improved.