Marine Money- The Big Guys Get Bigger and Richer

The 2008 Marine Money event in New York, was one of the best conferences I have attended. A leading equity banker for shipping and energy MLPs saw me banging away on my laptop computer (taking notes) and said, "Barry, are you blogging from the conference?" Upon reflection, my buddy is a good banker because he has many insights, so, at his suggestion (sort of), my notes have been turned into a bit of a blog entry.

The folks from Poten & Partners, with whom I was sitting for much of the conference, were very patient as I was plugging and unplugging various electrical wires and computer cables during the event. And one CFO of a listed company thanked me profusely when my trusty Toshiba Portege' played a role in rescuing his Powerpoint presentation from the computer Gods about to devour it.

The opening session at the New York Stock Exchange (NYSE), was standing room only (albeit in a smaller room than the Grand Ballroom of the Pierre Hotel where the other sessions were held). Dahlman Rose emerged as uber-sponsor, usurping a role previously held by JP Morgan Chase. Simon Rose, CEO of investment bank Dahlman Rose (no, he is not the banker I am referring to) did a fabulous job as the moderator, politely slapping around panelists when needed, and cajoling them into adding real insights rather than road-show platitudes. And, as the event wound down, Dahlman Rose hosted an excellent party in Central Park, not far from the conference venue on Fifth Avenue.

Challenge

Difficulties on the banking side may set the stage for more public equity (IPOs) and private equity ( kick-started by the shipowner as a business incubator). A group of commercial bankers, kicking off the conference at the NYSE, were joking about all the attention they were getting with tighter money constraints. This contrasted with a sparsely attended banking session last year, on the third and final day, when money was plentiful- too plentiful, in fact. Yet, the difficulties faced by the commercial bankers could be sowing the seeds for a renaissance in equity's role in ship finance.

A Paradoxical Asset Class

A major  paradox that emerged during the three day Marine Money event was that the thriving but capital-consuming shipping industry (described as "an attractive asset class" numerous times at the conference) continues to encounter uncertainties in the financial markets. Bank debt has been the major source of shipping finance. It has "had to adjust"- in the words of several panelists. The banking story does not impart  schadenfreude (at least, not from me)- quite the opposite, there are genuine opportunities for equity and other finance structures that can bring fresh money into that attractive asset class.

Suffering

The response of the banks to their difficulties in syndicating loans that they've agreed to, has been to increase margins to compensate for funding uncertainties. Also, covenants are heavy (not light), interest only structures are difficult or impossible to get now. Newcomers need not apply for funding. Nordea's Mr. Ronny Bjornadal put banking syndication in its broadest context, saying: "Our customers have good projects. We need to keep the pipeline open for them." His comment, during the opening session, reflects a point repeated throughout the conference, though nuanced slightly differently each time: - the big borrowers will get bigger.

No Moaning and Groaning Over Here

A few big guys seemed to agree. On the tanker side, Tsakos Energy Navigation's CFO, Paul Durham ("TNP"), described his business's healthy cash buildup and said: "…we could raise finance very easily if we needed to. It's not a problem." Similar sentiments came from panelist Marco Fiore, the CEO of D'Amico International Shipping ("DIS"), and from Ultrapetrol's CEO Felipe Menendez ("ULTR"), who commented that "good industries will attract capital."

Dryships' CEO George Economou ("DRYS") said: "The big owners who are large public companies will continue to get money. The smaller owners may not be supported." Dryships is presently negotiating on fresh finance packages tp support its growth. Co-panelist Sophocles Zoullas, of Eagle Bulk ("EGLE", which last year garnered a USD 1.6 Billion debt package from UK banks to fund its expansion), added: "The strong companies can get capital; for Eagle, it's good."

At last, Opportunity!

The funding gap, estimated at between $50 Billion to $150 Billion annually, opens up a role for equity. For comparison, banker Hamish Norton pegged equity capitalization of  41 listed shipping companies in U.S. markets at approximately $44 Billion. Unlike that august commercial banking panel, the investment bankers who spoke did not appear particularly daunted by the industry's equity requirements. I mean, they might need  to raise a minimum annually what is now the total amount out there!!!!!!!! Two IPOs had just been done (Safe Bulkers- "SB" and Britannia Bulk- "DWT") within a few weeks of the event. Navios had announced its SPAC (quite a cool move- the company born from a SPAC, giving the technique a great deal of respectability, is now doing one of its own). In signs of confidence re money raising,  Wachovia Managing Director Eric Schless, on the i-banker panel, said that "…the markets will be there to fund the gap…" Deutsche Bank's Craig Fuehrer suggested that: "With good returns over the past few years, investors will fund the industry."

The Rich Spread Their Wealth (for an accretive hire rate)

The banking panel talked about a "de-leveraging process"- there is less debt in relation to assets. Even though it's being counteracted slightly when appreciated vessel assets are being refinanced, has created a pool of capital that might partially soak up the potential shortfall, the idea of shipowner as banker is interesting to contemplate.

It could come through direct investments in vessels, or through private-equity like intermediation. Variants on the theme are already happening.  Panel members Seaspan and Danaos are fulfilling a de-facto lessor role for the Liner operators in the container trades. Smaller outfits Global Ship Lease ("GSL", which emerged in April, Minerva-like, from CMA-CGM), Rickmers Maritime Trust ("RIMT") and Euroseas ("ESEA") are providing finance to liner companies along with their vessels. Mr. Sai Chu, the CEO of Seaspan ("SSW"), told the panel that "the addressable market for the container chartering sector is USD 250 Billion."  Danaos's CEO John Coustas ("DAC") described containership chartering as "the most stable" of the sectors considered at the conference, a fact not lost on some of the fund managers in the audience. Of course, Paddy Morgan from tanker owner Euronav ("EURN.BR", with 75% of revenue days either spot or spot-linked through profit shares) said "…we like volatility…bring it on". So this whole stability/ volatility thing is another paradox. Maybe worthy of another blog- as there have been enough articles about it- including a few by your humble blogger.

The "Incubator"

Craig Fuehrer, when asked about the ingredient for successful share offerings, said "…it starts with people…" in referring to the SPAC, Navios Maritime Acquisition Corp ("NNA"),  launched by Navios Maritime Holdings ("NMM"). Fuehrer also mentioned another well known shipping entrepreneur, saying "Peter Georgiopoulos <General Maritime Corporation- "GMR", Genco Shipping & Trading "GNK", Aegean Maritime Petroleum "ANW"> makes money for investors."

One other recurring theme throughout the Marine Money event was that of "trusted borrowers with good track records", mentioned by several commercial bankers (and also borrowers) when ticking off attributes of transactions that could be readily funded. In the investment banking context, this same theme provides a hint, perhaps, of the future contours of equity recycling. Such deals may fill in the funding void identified by the commercial bankers, albeit through a different channel, which will be known as "the incubator route".

Other incubators- shipping companies that have spawned new companies, were on Marine Money panels. Frontline ("FRO"), Teekay Corporation ("TK"), Overseas Shipholding Group ("OSG") and Dryships have all looked towards the oil industry, and have created businesses in sectors adjacent to their core activities and have offered them (or will offer them) to investors. Dryships will be offering an extractor of energy commodities ( an owner of drillships and semi-submersible rigs). Teekay Corporation (the company formerly known as "Teekay Shipping") now describes itself as "A manager of shipping assets", with the ability to raise low cost capital and build out new shipping and energy supply-chain businesses.

And, a plug for NYMAR

And, any financial engineers who are still reading- a lot of this action will happen in New York. Wooing Britannia Bulk (English down to its very name- it ain't called "Manhattan Bulk", although there was such a company in the 1980s with that name) must be seen as a sign of New York's vigor. A five year old organization, NYMAR (New York Maritime), now invigorated under new leadership, has been extremely effective in raising New York's profile- so much so that maybe some of that vaunted London infrastructure might move over here, or so I heard around the bar not too far from the Hotel Pierre.