Shipping Finance Deals at 11-year low
The fall in shipping deals witnessed since 2014 continued into 2017 as reported deals were valued at an 11-year low of US $28.9 billion. Investor sentiment remains weak as the total value of shipping deals in 2016 fell 40% year-on-year. Institutions continue to exit the shipping space as market fundamentals pressure the earnings environment, reducing investor returns. However, we do note that the emergence of leasing companies has increased the allocation of capital by “other debt” participants to 36%.
The year 2017 represented the lowest value of Initial Public Offerings (IPO) in the last 11 years with just one reported at a value of US $91 million (Figure). Perhaps, more surprising, was the dramatic decline of traditional bank debt captured in recorded shipping deals last year. According to data compiled by Marine Money Deal Database, bank loans totaled US $7.9 billion in 2017, with leasing companies, primarily from the Asian markets adding US $1.8 billion in financing to the marketplace. We expect leasing companies to continue remaining active and taking market share from other lending sources.
In 2017, the tanker markets saw consolidation, in a pre-cursor or what is to come this year. Euronav merged, but really acquired Gener8 in a US $493 million all-stock deal, a premium of 35% over Gener8’s previous closing price. Euronav shareholders would retain 72% of the combined entity. A secondary portion to the deal was the immediate acquisition of 5x 2016-built and 1x 2015-built VLCCs from Euronav by International Seaways, including the assumption of a US $311 million credit facility. Two additional deals this past year were the acquisition of Navig8 Product Tankers by Scorpio Tankers, whereby a total of 27 Long-Range vessels were added to Scorpio’s fleet in a deal totaling US $273.2 million and the re-merging of TIL with Teekay.
Tonnage Oversupply to Remain an Issue during 2018
Those who predicted that 2018 would be yet another challenging year for the tanker market, after a dismal 2017 as well, haven’t been far off. In fact, as shipbroker Charles R. Weber reiterated in its latest weekly report, things could very well stay that way for quite some time. In its latest analysis, the shipbroker said that “crude tanker earnings have commenced 2018 at seasonal lows not observed in decades as a large, ongoing newbuilding program continues to undermine fundamentals. Crude tanker earnings declined during 2017 by an average of 45% from 2016, led by a 46% decline in VLCC earnings to ~$25,309/day while Suezmaxes shed 45% to ~$13,838/day and Aframaxes fell 44% to ~$13,101/day. The annual averages in each segment were heavily supported by seasonal strength during 1Q17 which appears to elude the market presently, implying a potentially horrendous year for average earnings during 2018. Our base expectation is that VLCC earnings will conclude the year with a 30% y/y decline to under $18,000/day. We project a 40% y/y decline for Suezmax earnings to $8,250/day and a 12% y/y decline in Aframax earnings to ~$11,500/day”.
According to CR Weber, “supply Fleet growth remains the key catalyst to the prevailing earnings environment with a long list of units ordered between 2013 and 2014 delivering during 2016 boosting capacity. A subsequent wave of orders penned during the strong earnings environment of 2015 extended high levels of newbuilding deliveries during 2017 – and is ongoing. Phase‐outs concluded 2017 considerably above expectations as stronger $/ldt values against poor earnings incentivized a surge in demolition sales activity across all size classes while an improving offshore market saw conversion works progress on a number of units held for conversion in the VLCC space. All told, some 23 VLCCs were phased out during 2017 – a considerable increase from the just two and three units phased‐out during 2015 and 2016, respectively, and the most since 2011. Twelve Suezmax units were phased out, up from zero and one during 2015 and 2016, respectively and the most since 2012. Thirty‐three units were phased‐out from the Aframax/LR2 asset class, up from 6 and 9 during 2015 and 2016, respectively and also the most since 2012”.
The shipbroker added that “despite the stronger phase‐outs, net fleet growth was still high during the year (if lower than the more extreme levels observed during 2016), clocking in at 4.0% for VLCCs, 8.4% for Suezmaxes and 3.2% for Aframax/LR2s. For 2018, we project net fleet growth of 3.9% for VLCCs, 3.2% for Suezmaxes and 3.3% for Aframax/LR2s. While these levels are broadly within range of historical annual averages, coming on the back of the past two years’ fleet growth levels, any positive net supply growth would only serve to delay a progression into earnings recovery”. In terms of demand, CR Weber says that “collectively, crude tanker demand rose by 4.0%, though a secular look shows that only VLCCs concluded in positive y/y territory. Demand for VLCCs returned to growth during 2017, posting an increase of 11% after a contraction of 4% during 2016. The gains were supported, in part, by an increase in voyages to Asia from the Atlantic basin, particularly during 1H17 due to OPEC supply cuts heavily distributed to Middle East producers and during September and October as US crude exports surged amid long‐lasting US Gulf Coast‐area refining outages after Hurricane Harvey and other storm systems”. “Inversely to VLCCs, Suezmax demand was undermined during 1H17 due to OPEC supply cuts as more voyages from the Atlantic Basin to Asia oriented to VLCCs reduced cargo availability for the smaller class. These losses were partly offset by rising US crude exports (28% of which were serviced by Suezmaxes), but overall demand for the class concluded with a 1.3% y/y contraction. Aframax demand was the hardest hit among its crude tanker counterparts. Like Suezmaxes, demand losses on key routes were partly offset by gains in ex‐USG crude cargoes (for which the class serviced the lion’s share of 42%), but these did little to stem contraction in intraregional Caribbean voyages, and contractions in nearly all other markets. Overall, the class saw demand decline by 10.8%”, CR Weber concluded.
Small Bulkers in High Demand
Newbuilding activity picked up over the past week, while in the S&P market, the main focus has been dry bulk carriers of the smaller size-segments. In its latest weekly report, shipbroker Allied Shipbroking said that “following the relatively slower flow of activity in the Newbuilding market noted the week prior, things seemed to be warming up slightly again, with a flurry of fresh orders being reported these past couple of days. In the Dry Bulk sector, new ordering activity didn’t start the year with the enthusiasm that was to be expected, given the improved freight market conditions. This all seems to have changed this past week with a number of fairly impressive deals coming to light and showing a renewed interest to invest further. On the tanker side, with the bearish attitude having a strong hold on the sector, new order placing remains minimal, a mere reflection of a market of low earnings and poor fundamentals. In part, the most recent activity boost seems to have been created by a drive in new orders being seen in the containership and Gas carrier sector, which helped fill in the gap left by the Tanker sector. With both of these sectors showing much more promise than what was being noted a couple of months back, it wouldn’t be of great surprise if we were to witness a continual flow of buying interest emerge over the coming months”.
In a separate newbuilding report, Clarkson Platou Hellas said that “in tankers, although contracted last year, it came to light this week that Fukuoka Shipbuilding have won an order for two firm 36,000 DWT Chemical Tankers from an unknown Japanese owner. Set for delivery in 2019 and 2020 from the Yard’s Nagasaki facility, these vessels will go on charter to Odfjell. In Dry, CSBC in Taiwan have announced an order for two 208,000 DWT Newcastlemaxes from China Steel Express. The duo will deliver in 1Q 2020 from CSBC’s Kaohsiung yard and will be the 3rd and 4th vessels in the series. Clients of Seatankers Management have signed a contract for two firm plus two optional 82,000 DWT Kamsarmax Bulk Carriers with Shanhaiguan Shipbuilding in China for delivery in 2019 for the firm units. It is understood that this order was placed in December last year. One order to report in Gas, with Jiangnan Shipyard receiving an order for two firm 84,000 CBM VLGCs from domestic owner Oriental Energy. These two vessels are slated for delivery in 3Q 2020. In the Container market, Imabari have signed a contract for a series of twelve firm 11,000 TEU Container Carriers with Shoei Kisen. These vessels will all go on charter to Evergreen when delivered throughout 2020 and 2021. In other sectors, it came to light this week that Wuchang Shipyard in China have won an order from COSCO Shipping for two firm 2,200 CEU PCC due to deliver in 2020”, the shipbroker concluded.
Meanwhile, in the S&P market this week, Allied Shipbroking said that “on the dry bulk side, activity continues to be ample while we are still seeing a bigger focus still present on the smaller size segments again this week. To some extent this has started to be reflected to some degree in the price levels being noted, though noting considerable thus far. If buying interest and activity continue to hold at their going rate, it will likely not take long before we start to see another price rally take shape, though given the standing conditions in the freight market, this may well end up being delayed until early March. On the tanker side, it feels as though things quietened down further this past week in terms of reported deals, with relatively few coming to surface. At the same time it looks as though we may see things start to improve slowly in this sector, as trade fundamentals start to paint a slightly better overall picture. We have yet to see any strong indication of this take shape in the freight market, though potential buyers may well be already taking notice”.
In a separate note this week, Vessels Value said that in the tanker market, this week has seen a slight softening in older VLCC tonnage and a firming across Afra and LR1 values. Aframax Ridgebury Alice M (105,700 DWT, Oct 2003, Sumitomo) sold for USD 11.3 mil, VV value USD 11.6 million. An en bloc deal of two Panamax Tankers, Kind Darius & King Duncan (73,600/73,700 DWT, Dec 2007/Mar 2008, New Times Shipbuilding) sold for USD 28.0 mil, VV value USD 29.12 mil. SS due March 2018.
In the dry bulk segment though, VV said that it was a very busy week, with 10 Supramax vessels sold, resulting in a slight firming across all vessel types, excluding Cape values which have remained stable. “Capesize Bulk India (177,600 DWT, Apr 2004, Mitsui Ichihara) sold to Bulkseas Marine Management for USD 14.3 mil, VV value USD 15.39 mil. Bank driven sale.
Panamax Sea Trellis (79,500 DWT, Jan 2012, JHM) sold to Axis Bulk Carriers Inc for USD 15.5 mil, VV value USD 14.86 mil. SS freshly passed. Supramax Tasman Castle (56,900 DWT, Jan 2011, Jiangsu Hantong) sold to Load Line Marine for USD 11.7 mil, VV value USD 12.43 mil. An en bloc deal of two Supramax vessels, Dynasty Xia & Dynasty Shang (56,600 DWT, Oct 2012/Apr 2013, Huatai Heavy Ind) sold for USD 25.0 mil, VV value USD 25.88 mil. Handy PPS Ambition (33,300 DWT, Jun 2013, Shin Kurushima Hashihama) sold for USD 14.7 mil, VV value USD 14.36 mil. Handy Glorious Sunshine (28,300 DWT, Jan 2009, Imabari) sold to the CSL group for USD 8.65 mil, VV value USD 8.86 million”, the ships’ valuations expert concluded.
Nikos Roussanoglou, Hellenic Shipping News Worldwide