M.I.T. INTERNATIONAL SHIPPING CLUB
CAPITAL MARKETS PRESENTATION
October 2013
Gary WolfeSEWARD & KISSEL LLPOne Battery Park PlazaNew York, New York 10004Tel: (212) 574-1200Fax: (212) 480-8421E-Mail: [email protected]: www.sewkis.com
“Billions to be Made or Lost:What happens when investors search
for the bottom of the shipping market?”
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What is so special about Shipping?• Shipping has been around forever• It has its own special legal regime• It requires a lot of capital• It has its own cycles• (They have their own cycles)
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What is so special about Shipping?
• Ships move around the world• Ships operate in a highly volatile market• Ships generally operate tax free• Ships need services wherever they are and
do not have bags of cash to pay for them
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What is so special about Shipping?
• Ships are owned and managed separately • Ships can be damaged • Chapter 11 for shipping—Not so great• Why bother to invest in Shipping?• Considerations for equity investors
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How Many Deep Sea Ships are There in the World?
Dry Cargo/Bulk – 9,700 Container – 5,100 Tankers – 5,800Total 20,600
________(1) 10,000+ dwt
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(1)
Who Owns Ships?
Many, many, many shipowners Families Entrepreneurs (“Shipping Magnates”) Oil companies (Exxon Valdez, Amoco
Cadiz) Governments Private equity funds Publicly traded companies
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How Much do Ships Cost? Foreign Flag Vessels– VLCC (315,000 dwt/2 million bbl)– NB = $86 million– 5 yr = $55 million– 10 yr = $30 million
– Suezmax (150,000 dwt/1 million bbl)– NB = $58 million– 5 yr = $39 million –10 yr = $25 million
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How Much do Ships Cost?- Product Tankers– LR II (105,000 – 115,000 dwt)– NB = $52 million– 5 yr = $33 million– 10 yr = $23 million– MR II (50,000 dwt)– NB = $35 million– 5 yr = $27 million– 10 yr = 17 million
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How Much do Ships Cost?
Foreign Flag Vessels – Capesize (170,000 dwt)– NB = $52.0 million– 5 Yr = $40.0 million– 10 yr = $20.0 million
– Supramax (52,000 dwt))– NB = $27.0 million– 5 Yr = $23.0 million– 10 yr = $18.0 million
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How do You Come Up with the Money?
Loan from banks – 65 % (used to be 80%) Your own money – 35 % What if bank money and your own
aren’t enough? Suppose banks are not lending? Suppose you don’t want to use your
own money?
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How do You Come Up with the Money?
Wouldn’t it be great to have a 15-year charter from Chevron.
Even then, the bank may not lend to you.
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So Why Invest In Shipping?E c o n o m ic g ro w thE c o n o m ic g ro w th
M a rk e t b o tto m s o u tM a rk e t b o tto m s o u t S tim u la te s v e s s e l d e m a n d
S tim u la te s v e s s e l d e m a n d
F re ig h t ra te s r is eF re ig h t ra te s r is e
S p e c u la tiv e n e w o rd e rs
S p e c u la tiv e n e w o rd e rs
O rd e rb o o ko u ts tr ip s d e m a n d
O rd e rb o o ko u ts tr ip s d e m a n d
D e liv e rie s r is e D e liv e r ie s r is e R a te s b e g in to w e a k e n
R a te s b e g in to w e a k e n
O rd e rin g s u b s id e sO rd e r in g s u b s id e s
S ra p p in g in c re a s e sS ra p p in g in c re a s e s
S u p p ly m o d e ra te sS u p p ly m o d e ra te s
F u n d a m e n ta ls b a la n c e
F u n d a m e n ta ls b a la n c e
Exit
Investment
2003 2008
2011Future
Because shipping is volatile and you know you can predict the market.
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That is how you get to the Capital Markets.
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What are the Capital Markets?• Sources of funds
– Mutual funds (Fidelity)– Pension funds (unions, governments)– Schools (colleges and universities)– Retirement plans (401K, IRA)– Hedge funds– Private equity funds
(Oaktree/Monarch/Blackstone)• In addition to, or an alternative to, the owner’s
equity and bank debt
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What are the Capital Markets?
• Available in many forms of equity and debt
• Available publicly or privately
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What are the Capital Markets?
• New York Stock Exchange• Nasdaq Stock Exchange• Traders sitting at PCs• “Speculators”
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What do You Buy and Sell on the Capital Markets?
• Stock (shares)• Notes, bonds
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What is Stock?• Equity
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What are Notes and Bonds?• Debt
Equity vs. DebtEquity• You don’t have to repay it• You don’t pay interest• You may pay a dividend• You don’t post collateral• Your stockholders may have different ideas as to
what’s best for the company• So, you may lose control
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Debt vs. EquityDebt• You do have to repay it • You may have to post collateral (a
mortgage on your assets)• You will have to pay interest• But you keep control of your company --
unless you default
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The Capitalization Layer CakeSenior Secured Debt*
Senior Subordinated Secured Debt**
Senior Unsecured Debt***
Junior (Subordinated) Debt
Senior Preferred Stock
Junior Preferred Stock
Common Stock
* Bank loans** Also known as “second lien” debt*** Where high yield and many bank loans stand
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Ships move around the World:What is special about that?
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• Ships need to know which laws apply to them• The significance of a ship’s registry • “Good registries”• Reputable inspection of ships
Ships move around the World:What is special about that?
• Ships may go to places like Iran or Sudan• Enforcement of mortgages – where?• Low, or no income taxes
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Ships need a lot of capital
• Borrowing based on time charters and bareboat charters– ability to assign charters– ability to assign revenues– ability to take back ships if the charterers
default• Status of unsecured bond holders
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Ships need a lot of capital
• Protection of bank lenders (ship mortgages)– “good” registries– “good” ports– recognition of ship mortgages– ability to foreclose on a ship
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Ships generally operate tax free
• “Good” open registries (“flags of convenience”)• Tonnage taxes vs. income taxes• Importance of correct structure• Ability to keep shipping profits offshore• Consideration of exit strategy
– capital gains– eventual IPO
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Ships have their own legal regime• Shipping laws are similar around the world• Shipping agreements may come in pre-
printed forms• Common for financing agreements to be
governed by English/New York or Maritime law
• System of arbitration• Ships have a system of secret liens
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Ships can be damaged
• Availability of marine insurance• Pollution Liability
– The corporate veil should be respected– U.S. Oil Pollution Act– Civil Liability Convention
• Other types of claims• Chances that plaintiffs could reach to
investor level extremely small
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Ships: Considerations for equity investors
• Ships are owned and managed separately• Treating shipping as an asset play or as an
operating business helps determine your structure
• Corporate Governance – Who makes the decisions– Boards of Directors/Management
• Fees: Technical Management/Commercial Management/Asset Management
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What are Public Companies?• IBM• GE• Ford• OSG (Chapter 11)• General Maritime• Eagle Bulk• Horizon Lines
• Frontline• Maersk• Torm• Diana Shipping• Dry Ships• Seadrill• Kirby
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What is the Difference Between a Private Company and a Public
Company?• Shareholders• Board of directors• Executive Officers (Management)• Government Involvement (Regulation)• Ability to sell your shares
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The Public Capital MarketsNYSE/NASDAQ
• Ready source of funds• Cheap source of funds• Makes future capital raising easier• Provides a liquid market for company securities and
“currency” for acquisitions and employees’ incentives– You can sell shares.– You can buy shares.
• Very different from a business run from your friend’s garage
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How did Regulation Change Shipping?
• Foreign flag shipping went from unregulated to highly regulated in 20 years
• Consequence for new competitors• Remember how much ships cost• Therefore, shipping companies turned
to the capital markets for money
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How do You Tap the Capital Markets?
• You find an investment bank– Morgan Stanley, Goldman Sachs, UBS, Jefferies, JP
Morgan, Bank of America, Citigroup, Wachovia, Evercore, Maxim
• The role of the Securities and Exchange Commission (SEC)
• What do investors need to know?
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Let’s look at our printouts.
U.S. Publicly Traded Shipping Companies
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Predicting the Future: Age profile of Bulk, Tanker and Container fleets:
Source: Lloyd’s List
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“About 90% of world trade is carried by the international shipping industry.
Without shipping, the import/export of affordable food and goods would not be
possible - half the world would starve and the other half would freeze!”
Source: Shipping Facts
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Ah yes, I remember it well
Things are looking up
There are always surprises