Private-Equity Funds Bet $5 Billion on Shipping Rebound
By Isaac Arnsdorf
Feb. 18 (Bloomberg) — Private-equity and hedge funds are accumulating shipping debt at the fastest pace since they began buying the risky loans from banks two years ago, raising prospects of the firms eventually owning the vessels.
About $5 billion in shipping loans has changed hands in the past year, estimates AMA Capital Partners LLC, a fund manager and adviser in New York. Investor demand is driving prices as high as 90 cents on the dollar, from 70 to 80 cents a year ago, according to Hartland Shipping Services Ltd., a London-based shipbroking and consulting company that split off from HSBC Holdings Plc in 2012.
The influx illustrates a broader shift as investors load up on debt being abandoned by banks amid regulations intended to prevent future taxpayer bailouts. Funds are betting ship prices that collapsed as much as 71 percent in five years will rebound from historic lows. And if a prolonged downturn drives borrowers to default, the funds are preparing to do something banks historically resisted: take over vessels themselves.
“The markets are flush with liquidity in terms of investors looking for homes,” said Randee Day, the president and chief executive officer of Day & Partners LLC, an advisory and consulting firm specializing in shipping, who ran JPMorgan Chase & Co.’s shipping division in the 1980s. “If I was still managing a portfolio at a bank, I’d be unloading like mad.”
While banks have been trying to reduce their loans to the shipping industry for years, a market for secondary debt didn’t emerge until 2012, Paul Leand, AMA’s chief executive officer, said in a telephone interview. Banks tended to hold onto their loans until regulatory pressure added urgency to divest them in late 2013, Day said. Outstanding bank loans to ship owners totaled $460 billion as of November, according to Petrofin Research in Athens.
Davidson Kempner Capital Management LLC late last year paid $500 million for part of Lloyds Banking Group Plc’s shipping portfolio, according to Marine Money, an industry newsletter. Ian Kitts, a spokesman for Lloyds, and Catherine Jones, an external spokeswoman for Davidson Kempner at ASC Advisors LLC in Greenwich, Connecticut, declined to comment.
In December, Commerzbank AG, Germany’s second-biggest bank, sold 14 chemical tankers to a fund managed by Oaktree Capital Management LP, eliminating 280 million euros ($383 million) in non-performing shipping loans. Oaktree declined to comment through Alyssa Linn, an external spokeswoman at Sard Verbinnen & Co.
DNB ASA, Norway’s largest bank, sold loans it had made to Genco Shipping & Trading Ltd. to undisclosed buyers, spokesman Thomas Midteide said. He didn’t disclose the price. Genco has a 7.8 percent chance of defaulting in a year, the lowest rating short of distress, according to the Bloomberg Default Risk Scale.
“When the offer was on the table, we couldn’t let this opportunity pass,” he said by telephone Feb. 6.
HSH Nordbank AG, the largest shipping lender, is preparing to sell a portfolio of shipping loans after a previous package valued at about 300 million euros failed to attract investors, Wolfgang Topp, who heads its restructuring unit, said in a telephone interview on Feb. 10. The bank is only talking to buyers in the industry, not financial firms, because “they pursue a different investment strategy,” he said.
Commerzbank and HSH Nordbank are among about 130 banks deemed to pose a systemic risk and selected to undergo an assessment by the European Central Bank to measure the quality of their assets and the strength of their balance sheets in stress scenarios. The review and new guidelines by the European Banking Authority will lead to increasing bad debt provisions, Moody’s Investors Service said in a December report.
Hedge funds and private-equity firms are approaching ship management companies about hiring them to run acquired fleets, according to Jason Klopfer, Westport, Connecticut-based commercial director of Navig8 Group, which operates 248 tankers and bulkers, up from 175 a year ago.
Rather than take ships onto their balance sheets, banks prefer to sell the debt, Michael Parker, global industry head of shipping and logistics at Citigroup Inc., said Feb. 4 at a conference in New York. Private-equity firms, meanwhile, are willing to take ownership of the asset and put it to work while they wait for prices to appreciate, Klopfer said.
While funds haven’t repossessed ships yet, they first started inquiring about hiring managers about 18 months ago, said Steve Rodley, co-founder of Global Maritime Investments, a London-based manager that operates 50 to 80 vessels. GMI is in talks with debt investors about managing ships they may take over, Rodley said.
Investors are also forming joint ventures to order new vessels, such as Oaktree’s partnership with Navig8 announced in October. Seeing an opportunity in low prices for modern, fuel- efficient ships, the company ordered six chemical tankers at a South Korean shipyard for delivery in 2015, it said in a November statement. GMI ordered six ships financed by a large U.S institutional fund, Rodley said.
Similarly, funds owned by Apollo Global Management LLC teamed up with Hamburg-based ship manager Rickmers Group to invest as much as $500 million in container vessels, the companies said in a Sept. 23 statement. York Capital Management formed a joint venture with Greek ship owner Costamare Inc. to buy five container ships for more than $190 million, Gregory Zikos, Costamare’s chief financial officer, said in a September interview.
Avenue Capital Group LLC, the distressed-debt firm with about $12.6 billion of assets under management, invested “a couple hundred million dollars” in container ships through a partnership with an undisclosed ship owner, co-founder and Chief Executive Officer Marc Lasry said Feb. 4 at a conference in New York.
Banks benefit as investors bid up prices, Jae Kwon, managing director of investment banking at DNB Markets Inc., said at the Feb. 4 conference. Debt is trading higher than it would be without demand from hedge funds, he said.
“Shipping has become a bit of a ‘story,’ and it’s regarded as being at a cyclical low,” Nigel Prentis, Hartland’s head of consultancy, said by telephone Jan. 23. “There’s quite a lot of money chasing fairly few opportunities,” pushing up prices for secondhand debt, he said.
Investors frequently underestimate how long companies can survive unprofitable rates, said Day, who worked on the bankruptcy restructuring of General Maritime Corp., a U.S. tanker owner. Ship values and freight rates have started to rebound from lows that followed owners ordering too many ships before the global recession. The ClarkSea Index, a measure of industrywide earnings, rose 41 percent in the past year to $10,767 a day. The 2012 average of $9,586 was the lowest since at least 1990.
A five-year-old supertanker now sells for $65.2 million, compared with $54.2 million a year ago and less than half the $162 million high in 2008, according to the Baltic Exchange in London. The price of a Capesize, the largest type of dry-bulk carrier, rose 50 percent in the past year to $44.5 million, 29 percent of the 2008 peak of $153.8 million.
The dynamics of shipping markets are difficult to understand and predict, said Basil Karatzas, a shipbroker and adviser in New York.
“Quite a few of the funds that are buying these loans are not familiar with shipping, they are newcomers and some may doubt how fast they can manage to climb the learning curve,” Karatzas said by phone Feb. 6. “When there are 20 funds bidding on the same portfolio, and the consensus is, ‘The markets have turned around and we better get on the wagon or we’ll miss this opportunity,’ that’s when people get too optimistic.”
Just as the industry emerges from the worst glut in decades, fleet growth is poised to accelerate again as orders increase. Contracts for new ships almost tripled last year to 150 million deadweight tons, the highest since 2010, according to Clarkson Plc, the world’s largest shipbroker.
Shipyards are booked to build 290.2 million deadweight tons as of the start of 2014, the first increase since 2009, data show. With a shortage of ships unlikely, values may never return to pre-recession highs, said Leand of AMA.
“The prices that these banks are getting for these shipping loans are for the most part at a pretty significant premium to where they think the loans are valued themselves,” Leand said by phone Jan. 23.
Buyout firms are adding to their credit holdings even as gains on corporate debt retreat. Returns on speculative-grade loans last year fell to 5 percent from 10.5 percent in 2012, according to the Standard & Poor’s/LSTA U.S. Leveraged Loan 100 index. High-yield, high-risk bond returns dropped to 7.4 percent from 15.6 percent in 2012, according to the Bank of America Merrill Lynch U.S. High Yield Index. The S&P 500 Index of U.S. stocks rose 29.6 percent last year.
There are attractive investments in everything from credit card debt to shipping loans, said James Zelter, head of New York-based Apollo’s credit unit, which has swelled to about $100 billion in assets from about $4 billion in seven years.
“The debt is where everyone wants to be,” said Jeff McGee, the founder of Makai Marine Advisors LLC in Dallas. “The risk that values will go down and you’ll be left holding debt you can’t pay for is not there. It’s a chance to pick up attractively priced debt at the bottom of the credit cycle.”
Copyright 2014 Bloomberg.
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