Friday December 1, 2017 Daily Briefing Leading maritime commerce since 1734 LEAD STORY: Gulf in shipping industry s gender pay gap revealed Hapag-Lloyd completes integration with UASC Gulf in shipping industry s gender pay gap revealed OUTLOOK 2018: Finance: The future might lie in the past NEWS: Big Marinakis VLCC order emerges at Samsung Pan Ocean orders six VLOCs worth $444m MARKETS: Third-quarter box line results reflect improving market Congestion build-up supports capesizes and panamaxes ANALYSIS: Disciplined: Scorpio gets punished APMT focused on home improvements Data Hub: Trade Statistics NEWS IN BRIEF: CMA CGM to merge MacAndrews and OPDR subsidiaries BIMCO looks to build bridges in modernisation push Port of Amsterdam to be linked to Chinese city by rail Korea s shipping consortium reviews overseas routes to boost efficiency Yang Ming to launch $88m private placement MSC orders two cruiseships from Fincantieri for $2bn FMC seeks changes to NVOCC service and negotiated rate arrangements Hyundai Mipo Dockyard wins tankers orders worth $107.9m Euronav offloads elderly suezmax for $9m as part of fleet renewal plan MPC Container Ships posts first profits AN ANNUAL SURVEY has found the gender pay gap in the UK maritime industry now stands at 46.4%, with women earning 16.50 per hour compared to 30 per hour for men. The gulf compares with a national gender pay gap of 17.4%, according to the Office of National Statistics. The UK maritime gender pay disparity has worsened over the past two years, with the mean difference in hourly wages in 2016 sitting at 39.1%, compared with 46.4% in 2017, according to an annual survey compiled by employment agency Spinnaker Global and diversity and inclusion consultancy Brook Graham. Hapag-Lloyd integration finishes as Maersk's begins GERMAN container line Hapag-Lloyd has completed its integration of United Arab Shipping Co into the Hamburg-based carrier, following the completion of its merger, which it finalised at the end of May. Already in 2018, we will benefit from the merger of the two shipping companies due to significant cost reductions, Hapag-Lloyd chief executive Rolf Habben Jansen said. Meanwhile, Maersk Line is about to start the process of integrating Hamburg Süd after announcing it had received all regulatory approvals for its $4bn acquisition of the German carrier and had completed the deal. The Danish giant will become even bigger as it integrates 105 ships operated by Hamburg Süd into its own fleet, taking its total container capacity to 4.2m teu, giving it a 19.3% share of global fleet capacity. Lloyd s List Daily Briefing Friday 1st December Page 1
OUTLOOK 2018 Finance: The future might lie in the past CONSIDER a loan that provides leverage up to 100%. Borrowers keep control of the asset, whether their incomes justify it or not. Lenders extend credit not based on cash flow criteria but based on the prospect of rising assets values. This borrowing mechanism is often called alternative financing by industry participants. To many of our readers, the above can be used to describe ship leasing when no long-term charter is attached. But take a step back through time, and one may use it to describe subprime mortgages, the same mortgages that led to the collapse of Lehman Brothers 10 years ago. Of course, there are differences between the two products. Ship leasing has emerged from a dearth of traditional bank loans, while subprime mortgages were born from a credit bubble. But both products depend on rising asset values to work in the long term. And more importantly, both are associated with systemic risk. For Lehman Brothers, it led to a housing oversupply. For shipping, it could eventually lead to a vessel oversupply. Through a complex global economic system, the Lehman Brothers bankruptcy ended the wildest run in freight rates and asset values in shipping. As we approach the 10th year anniversary of this Great Financial Crisis, what lessons has the shipping industry learned? Ship finance today However, the most prevalent form is ship leasing. In a typical deal, a vessel is sold to a leasing institution and then it is chartered back to the shipping company for a period of five to seven years. Depending on the deal, the shipping company has either the option or the obligation to purchase the vessel at the end of the term. There are a few things to note here. First, the lender or leasing company is a non-regulated entity (unlike a bank) that applies its own credit standards on approving each deal. Second, the vessels are sold for their market value, which means a shipping company can effectively borrow up to 100% of the value of the ship. Third, depending on each case, a vessel may or may not be fixed on long-term charter. At the beginning, ship leasing was strictly for containerships that were chartered to big liner companies on fixed-rate charters. Now ship leasing is expanding beyond containerships and into dry bulk carriers, crude oil tankers, and product carriers. These vessels are mostly trading in the spot market, in many cases not earning enough to cover the bareboat cost of the lease plus operating expenses. Put these three things together and you get lots of upfront cash, up to 100% financial leverage, possibly 100% operating leverage if no time charter is involved, and an obligation to make a high fixed monthly payment over the next five to seven years. What could possibly go wrong? Ship finance in 2018 will be shaped by further inroads of alternative finance, trying to fill a void created by the exodus of European banks from the shipping sector. The exodus was precipitated by an avalanche of non-performing loans. Many of these distressed loans, as well as subsequent vessel purchases, are now being funded with the help of some creative financial engineering. Alternative finance can come in many different shapes and forms that resemble mezzanine debt. That debt is subordinated to bank debt but has a senior claim over common equity. What could go wrong is too many ships (whether newbuilding or secondhand) continue trading in the hands of shipping companies with no capacity to pay for them. That to us is the biggest risk as we enter 2018. But to further elaborate on this, it is useful to take a step back and remember what happened to Lehman Brothers 10 years ago. A brief history lesson The financial collapse of Lehman Brothers was triggered by a housing crisis born from a credit Lloyd s List Daily Briefing Friday 1st December Page 2
bubble. In the years leading to 2008, too many buyers (including speculators) in Florida, Nevada, and elsewhere in the US, bought homes that they could not afford. These buyers did not have the credit, based on their income, to pay for a standard 30-year fixed-rate mortgage. Neither did they have the cash to make a 10% deposit on the purchase of their house. What was the answer to that problem? A new alternative product in the form of adjustable rate mortgages. This is how it worked. The interest rate for the first three to five years would be low enough to make the monthly payment affordable. After the initial period, the interest would be adjusted to market rates. A better solution was an interest-only adjustable rate mortgage that would forgo any principal payments during the teaser period in addition to a lower rate. As for the 10% cash deposit, that could be waived too. After all, what could go wrong? Home prices had never fallen for any prolonged period in the past. Worst case scenario, the homeowners would sell their homes within three to five years and start the process anew. If a buyer s credit could not justify a house purchase, the underlying value of the house certainly would. We all know what happened next, when mortgage rates started adjusting to market rates. There were not enough new buyers to bail out the old ones. Home prices suffered their first prolonged downturn across the US for the first time since the Second World War. And the global financial system almost came to a screeching halt, thanks to some additional financial engineering by Wall Street firms that amplified the correction in housing prices. Who is to blame here? The mortgage companies that extended the bad loans or the buyers who took them? The only intelligent answer is that had the bad loans not been there, the buyers would have never bought houses they could not afford. Reality check The lesson learned from the housing crisis in 2008 is that it s tough to make predictions, especially about the future. Prudent credit policy should be based not on the most likely scenario, but on what could go wrong. D Amico International Shipping s chief executive Marco Fiori, who made a career in finance before becoming a shipowner, once said a golden rule in finance is to never extend a bad loan on a good guarantee. We took the liberty to slightly paraphrase it to never extend a bad loan on a good promise. In the case of adjustable rate mortgages, the promise or guarantee was not the buyer s income, which was insufficient. It was the underlying house value that should rise over time to make homeowners whole. In the case of ship leases, at the beginning the promise, or guarantee, was the cash flow generated from a long-term fixed-rate charter. But now, the promise or guarantee has changed to the ship s underlying value. The theory is that even if vessels don t currently earn enough to break even, assets values should rise in the future to make shipowners whole. What if ship values don t rise high enough or soon enough? Asset prices may have been at historically low levels in the past two or three years, but that alone is not a basis of an inevitable recovery especially given the soft freight environment in many sectors. What if ship values don t rise because of too many vessels financed through alternative products instead of being removed from the fleet? If shipowners do not have the means to afford a ship today, or if a vessel on their fleet becomes uneconomical, they should either sell it or scrap it, instead of relying on alternative finance and the hope of a higher valuation tomorrow. In an adverse scenario, a well-known rule in finance, namely possession is 100% of the law, could quickly apply. What happens next time shipowners have a cash crunch if freight markets turn out to be worse than expected? A big chunk of their fleet will be in the hands of financial institutions and, what is worse, they will most likely stay on the water and extend an overcapacity. As Ted Young, chief financial officer of Dorian LPG, recently put it: New sources [of capital] are more expensive and carry more strings. Hope springs eternal As with the housing crisis in 2008, most homeowners did not overextend themselves with Lloyd s List Daily Briefing Friday 1st December Page 3
adjusted rate mortgages. When the crisis came, they honoured their mortgages, but the damage was already done in the form of falling home prices by too many subprime mortgages. Likewise, we expect that most shipowners will act prudently with their lease obligations and not use them to overextend themselves. Hopefully freight markets will improve and shipowners will generate sufficient income to cover their loan obligations. Of course, there will be some shipowners tempted to buy or order too many ships, or simply hold on to existing ones that they cannot afford. Let us just hope there are not too many of them. NEWS Big Marinakis VLCC order emerges at Samsung CAPITAL Maritime & Trading has lifted its investments across the three main shipping market sectors in the last year to potentially about $1bn with an order for up to eight newbuilding very large crude carriers with Samsung Heavy Industries. The shipbuilding order was placed quietly a while ago, Lloyd s List understands. No decision to equip the vessels with scrubbers has been taken but Capital has the option to fit them, a source familiar with the ships said. Pan Ocean orders six VLOCs worth $444m SINGAPORE-listed Pan Ocean wants to order six very large ore carriers worth $444m to be deployed on long-term contracts of affreightment. In an exchange filing, it noted that vessel deliveries are expected between December 31, 2019, and September 27, 2021. MARKETS Third-quarter box line results reflect improving market THE third quarter saw a significant turnaround from the corresponding period in 2016 in terms of financial results for container lines. In 2017, nine out of 10 lines that had reported results at the time our sister publication Lloyd s List Congestion build-up supports capesizes and panamaxes CONGESTION issues in Asia and Africa recently have provided further uplift to the bullish dry bulk shipping markets, which have already been underpinned by unabated demand for commodities most of the major trading economies this year. The orders come on the back of a COA Pan Ocean signed with Vale International to transport iron ore from Brazil worth about $1.8bn in sales value. Containers went to press showed some measure of profitability, compared with 10 out of 12 showing losses last year, when only Hapag-Lloyd and Wan Hai were in positive territory. Only Hyundai Merchant Marine failed to reach a profit this year. So far, the Baltic Dry Index has improved by 63% in 2017 compared with the average earnings noted in 2016. Some of the most impressive numbers were seen in the capesize and panamax divisions driven by longhaul shipments for both iron ore and coal. Lloyd s List Daily Briefing Friday 1st December Page 4
With capesizes busting at about $26,500 per day level on average, panamaxes are also enjoying their run towards winter and split stems from the capesize market. ANALYSIS Disciplined: Scorpio gets punished WAS Scorpio Tankers disciplined for its lack of discipline? A few months after putting together an audacious acquisition of 27 vessels from Navig8 Product Tankers (aided in part by a $200m equity offering), it raised an additional $90m. Data Hub: Trade Statistics BASED on in-house databases and trade forecasting models updated to mid-november, MDS Transmodal has produced its preliminary projections for the fourth quarter of 2017 and for the full year. Was it necessary and what signal does it send to the market? The fundraiser caught analysts by surprise with most of them calling it defensive. APMT focused on home improvements APM TERMINALS acquisition activity is set take a back seat next year as the focus switches to addressing the heavily underutilised terminals in its network. Morten Engelstoft, who took over as chief executive in November last year, told Lloyd s List that the terminal operator s emphasis would be to generate additional volumes and earnings at both existing sites and the five further facilities in its build pipeline. APMT s third-quarter results, in which the terminal operator incurred losses amounting to $267m and a dip in revenues to $1bn from $1.1bn in the same period last year, suggests this will not be easy. Excluding intra-regional flows, for the fourth quarter of 2017 an annual growth is forecast at more than 7% compared with the same quarter in the year-earlier period, with the annual growth rate for 2017 expected to be in the region of 7%. NEWS IN BRIEF CMA CGM to merge MacAndrews and OPDR subsidiaries CMA CGM is to merge the operations of its MacAndrews and OPDR subsidiaries into a specialist intra-european multimodal operation. BIMCO looks to build bridges in modernisation push BIMCO president Anastasios Papagiannopoulos says a focus on teamwork, transparency of debate and practical support will keep the international industry lobby group at the forefront of international debate on issues such as environmental regulation, piracy and cyber security. Port of Amsterdam to be linked to Chinese city by rail PORT of Amsterdam has unveiled a project that will connect it to the Chinese city of Yiwu, near Shanghai, placing itself on the historical Silk Route from Europe to Asia in its latest intermodal transportation initiative. Korea s shipping consortium reviews overseas routes to boost efficiency KOREA Shipping Partnership, a 14-member national shipping consortium, has reshuffled some of the routes its members use to help them save costs and boost business efficiency. Yang Ming to launch $88m private placement YANG Ming Marine Transport s board has approved a second private share placement to raise about $T2.6bn ($87.5m), as part of the broader capital increase plan made by the Taiwan-based container shipping carrier. MSC orders two cruiseships from Fincantieri for $2bn FINCANTIERI has secured an order to construct two more vessels for MSC Cruises worth 1.8bn ($2.1bn). Lloyd s List Daily Briefing Friday 1st December Page 5
FMC seeks changes to NVOCC service and negotiated rate arrangements THE US Federal Maritime Commission wants to make changes to rules covering nonvessel operating common carrier negotiated rate arrangements and NVOCC service arrangements (NSA) so as to modernise, update and cut regulatory burdens. Hyundai Mipo Dockyard wins tankers orders worth $107.9m SOUTH Korea s Hyundai Mipo Dockyard has won orders for three product and chemical tankers worth Won114.7bn ($107.9m). Euronav offloads elderly suezmax for $9m as part of fleet renewal plan BELGIUM-based Euronav has sold off an older suezmax tanker for about $9.3m as part of its strategy to renew its fleet with younger, modern tonnage. MPC Container Ships posts first profits MPC Container Ships has reported its first profits since being founded in April this year, as the boxship investment vehicle starts to ramp up operations. For classified notices please view the next page. Lloyd s List Daily Briefing Friday 1st December Page 6
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