While most of the debate in shipping is focused on any recovery of the freight markets, the small world of shipping finance keeps living one day at a time, one long day after another that is. Freight markets have been moving up and down in the last year, and so have shipping asset prices; however, for ship finance, most of the news has been disheartening for shipowners.
Shipping banks keep divesting of their shipping portfolios, whether those are consisting of bad or good loans. To the extent that certain shipping banks are still viewing the shipping industry as a ‘core’ industry, a handful of big players – who check all the boxes for compliance, regulatory, strategy and value – soak up quickly any liquidity, leaving most of the remaining market as ‘unbankable’. Private equity investors have lost most of their faith in shipping by now, and the alternative funds that have been angling for a lending spot under the shipping sun, are getting ever demanding with each passing day.
The IPO market for shipping has been dead given the uncertainty with the freight market and the prospects of a recovery; and, the much advertised mergers and acquisitions (M&A) (aka consolidation) wave has been surgically applicable. In the liner business, where there is ample reason for consolidation (the latest example being OOCL’s acquisition by Cosco) there has been more hope, while in the dry bulk sector, a fragmented market is the preferred way of doing business for the foreseeable future.
There have been, however, a few recent transactions in the M&A front in the tanker and dry bulk sectors that had gotten attention to the extent that the sellers opted to accept payment in cash and shares (in the buyers’ business or in the new business entity formed). The newsworthy point is that shares have been used as currency in order to make the deals happen in the first place, and also in a manner that could allow for more value creation for both the buyer and the seller if there is a market recovery.
A few cases in point: a few months ago, Golden Ocean acquired Quintana by assumption of debt and by issuing of shares valued at approximately $110m to the seller. Hard cash is a valuable commodity for most shipowners these days, and thus the lack of transaction activity in the market to a certain extent; the purchase of Quintana by issuing shares (or ‘paper’, in investment lingo), had been the key to the transaction, a key that only publicly listed companies hold. The Quintana shareholders exchanged their stock of a privately held company (Quintana) for shares in a publicly listed company (Golden Ocean); seeing through the transaction, in a circumventional way, Quintana accomplished their long aspired goal of going public; in this case, not by having an IPO but by selling to an already listed company. In a similar way, earlier this year, the BW Group sold their VLCC business to DHT for approximately $540m, $260m of which were in the form of newly issued DHT shares. Again, it had been rumoured for a while that the BW Group had explored the IPO venue for a public listing; however, a sale for cash and shares partially accomplished the goal of a public company, allowing not only for liquidity for the BW Group shareholders but also preserving for all the equity benefits, especially those emanating from a recovering and market. Also, in a weak tanker market, Tanker Investment Limited (TIL) – a purpose-set public company sponsored by Teekay and private equity funds to exploit tanker asset appreciation, was folded into one of the Teekay companies (Teekay Tankers) in exchange of shares payable to the institutional investors, while Navig8’s aspirations for a monstrous IPO in the tanker space had to materialise in the form of a sale and payment in shares to Scorpio Tankers.
Issuing shares for the acquisition of assets or companies is standard procedure in the M&A world. By issuing shares, the buyer can lessen the burden of taking on too much debt and jeopardising the transaction and the overall outcome of the transaction by overleveraging. For the seller, accepting, at least partial payment, in shares provides for a better alignment of interests and ensures that they will work hard to see the transaction through; also, it indicates that the seller has faith in the buyer and the market and that they take a position to benefit from an improving market. Quite frankly, none of the four transactions above would had happened if the buyer was not able to issue shares, and vice versa, none of these transactions would had happened if the seller was not agreeable to a partial payment in shares. And, in our opinion, all these transactions happened since payment in shares was the closest the sellers would have gotten to obtaining liquidity and/or public status, given the IPO market is closed shut at present.
Issuing new shares and paying in shares is a distinct benefit of being a public company. Privately held companies (shipowners) have to pay in hard cash for any acquisitions but publicly traded companies can offer their shares as currency, too. Of course, paying in shares is not always indicated (such as when the shares trade below NAV), and not always the buyer is prepared to accept payment (total or partial) in shares – among other considerations, the shares have to have some ‘value’. In a world that’s getting trickier for shipping finance, for a shipping company to have the luxury to issue shares and transact with own shares is a distinct advantage that publicly listed companies have over the privately held ones.
Too bad that many of the shipping IPOs of the last decade have degenerated into penny stocks with their shares of little or no value that no-one would accept as payment. Too bad that quite a few of the shipping IPOs of the last decade were no more than quick cash grabs that have deprived their shareholders of the optionality to presently be able to thrive when the market and competition is stuck in the low shipping finance lane.
Paying in shares is not a panacea and it has both practical and financial, and also regulatory, limitations. Once again, in a world where shipping finance is in a bind, shipowners are compelled to explore every option, and payment in shares is fair game. Actually, there may also be cases where the envelope seems to be pushed to the limit: in its latest announcement, Nordic American Tankers (NAT) announced that payment of the company’s 80th consecutive dividend will be paid in cash and in … shares of another company, Nordic American Offshore (NAO), a daughter company of NAT in the offshore space where the prospects have not played out very well so far.
The ‘sharing economy’ seems to get a completely different meaning for the shipping industry.