After a five-year slump in shipping, investors are betting on better times by taking over shipowners' debts from European banks keen to offload troubled loans to bolster their balance sheets.
Continue Reading Below
Forecasts of a pick-up in world trade in goods, after the worst slide in decades helped drive some major shipping firms to the wall, are driving interest from hedge funds and others, while pressure on European banks to satisfy new capital regulations next year has created a pool of willing sellers.
With the World Trade Organization forecasting growth of 2.5 percent for 2013 and 4.5 percent next year in merchandise exports - 90 percent of which go by sea - some investors have also been buying ships. But, for many, buying the paper debts of shipping firms offers a more flexible, liquid asset.
Several sources in shipping finance cited Britain's Royal Bank of Scotland and Lloyds Banking Group and Germany's Commerzbank and HSH among European banks seeking to sell loans to the shipping trade as part of strategies to strengthen their balance sheets.
"Shipping loans ... are easy to trade since there is no need to get operational," said ship finance adviser Basil Karatzas in New York. "More banks will be shopping the market early next year to see what they can get for parts of their portfolio and if the price is right, they will sell."
Noting a turn in sentiment over the past six months, he added: "Now it seems that most of the people agree that the market is in cyclical recovery and better get in now before you miss the boat."
Continue Reading Below
Ship finance sources said that in recent weeks Lloyds has sold $500 million of shipping loans to U.S. hedge fund Davidson Kempner Capital Management. Both firms declined comment. Lloyds has also offloaded other parts of its shipping portfolio discreetly to other banks, the shipping sources said.
The sources also said that RBS has sold one $800-million shipping loan to U.S. private equity houses Oaktree Capital Management and Centerbridge Partners. Oaktree and RBS declined to comment. Centerbridge could not be reached.
Ship financing sources said recent sales of debt to private equity firms had priced shipping company loans at around a 15- to 20-percent discount to their nominal value.
Some borrowers have gone bankrupt in the slump but those whose loans are being traded are generally in fair shape. But some have had difficulties meeting payments, prompting some banks to try and cut exposure to the whole shipping sector.
"If you are looking at buying shipping portfolios, it is a fantastic time. A lot of those deals were restructured in 2010 and 2011 and last year," said one shipping financier who said buyers could expect to hold the debt to maturity without a major risk of default.
"All you have to do is run down those portfolios and get paid on that debt and generate a return that way."
With a scarcity of other investments offering good returns in a period of easy money, shipping is now a tempting bet, along with some other classes of debt banks want to offload.
"Hedge funds are shooting in this environment today for single-digit to low-double digit returns," said Jasvinder Khaira, principal with top global alternative asset manager Blackstone, which is active in shipping investments.
A surge in the main sea freight rate index at London's Baltic Exchange, has also helped sentiment. The BDI has pushed above 2,000 for the first time since 2011, well above a record low of 663 recorded in December 2008.
Commerzbank said this week it had signed a deal with an affiliate of Oaktree for the sale of a credit portfolio of 14 chemical tankers. The non-performing loans totalled 280 million euros, the bank said, giving no details.
In November, Oaktree's managing principal John Frank told analysts that financial regulators had identified shipping and real estate loan portfolios as "problem areas" for banks, creating an opportunity for those willing to take them over.
"We are hopeful this flow will continue our increase as European banks make additional provisions," he said.
With asset values expected to rise as confidence returns, buyers are also placing orders at yards for ships or picking up second-hand vessels aiming to sell them as the assets appreciate. York Capital Management and Oaktree are among funds that have formed tie-ups with ship companies to manage vessels.
In one recent case, ship finance sources said U.S. agribusiness group Cargill, which ordered several bulk carriers from China earlier this year in a joint venture, sold on three of them for $57 million each - a quarter more than they cost.
Declining to confirm details of the deal, a spokesman for Cargill said: "We indeed ordered vessels because it made good business sense. But we do not intend to become long-term ship owners."
U.S. private equity firm Tennenbaum Capital Partners said it was looking for assets, particularly in the dry bulk and chemical tanker sectors, together with bank loan portfolios.
"The shipping industry currently offers a unique opportunity to invest at historically cheap valuations and our firm is evaluating a number of compelling deals," said Tennenbaum director Timothy Gravely.
George Logothetis, chief executive of private conglomerate Libra Group, cautioned that the recovery was still tentative.
"It has been a very severe crisis and it is an early stage of recovery," said Logothetis, whose shipping unit Lomar has spent $1.1 billion on buying 73 ships over the past four years.
Calling the recent activity in the market a "buying frenzy", he added: "A lot of money has come into shipping in the last three months."
The risks of premature investment are clear.
Shipping financiers point to one asset management firm, for example, which they calculate has lost out on buying tankers for $70 million apiece about two years ago that are worth just $52 million today - a 26 percent loss.
However, financiers estimate some hedge funds have already recorded gains on shipping assets they have bought this year.
For shipping firms which find themselves in debt to a new type of creditor, however, the trend in loan sales may bring concerns that hedge fund managers will prove less patient than the banks have been if payments fall behind schedule.
"The way the funds will be looking at these situations is not yet known," Michael Bodouroglou, chief executive of Paragon Shipping, said of the trend across the sector. "I am not sure they will adopt the same corporate attitude of banks."