Maritime shipping is a sector of the economy that has long fascinated investors. Names such as Onasis; Latis and Fredriksen ara iconic in this regard. In shipping, fortunes have been made, and fortunes have been lost. Perhaps more so than in many other industries!
In this article we shall distinguish between two types of shipping investments: industrial and market-based. While market-based shipping involves cyclicality, market time and considerable risk, all shipping need not have these characteristics. Industrial shipping, by contrast, is more long-term, less cyclical and more predictable. Below we will look at the two!
Industrial Play it safe. Go for a predictable cash flow! One way of achieving this goal might be to follow an approach along these lines:
Identify an owner that might want to “free up” some of his/her own capital, by selling one/more ships and taking this/these back on long term charters, typically bareboat
Make a thorough assessment of whether this shipping company is likely to be able to honor this long-term charter commitment (default risk)
Inspect the ship, to be reasonably assured that it is in good technical shape, especially when it comes to the main engine. A good technical inspection is key:
Secure long-term debt financing
Bring in other investors
It would be good if the ship broker involved would also invest his/her own fees
At the end of the long-term charter there should be a put/call clause, so that the initial seller is committed to purchase the ship back if the market value then is below an agreed upon minimum. Similarly the owners would be committed to selling its ownership of the ship, if the market is above a certain level (thus, you take no residual value risk)
It seems important that all of the above conditions must be met before a deal is signed. Perhaps the most critical one would be to agree on the put-call levels in the above sales-lease back structure. The put that you have must cover your minimum return requirement, but still not be too expensive for the seller of the vessel. The call option that the seller has must represent an attractive extra return above your minimum requirements
Expected IRRs for the investor are often in the range of 10-15% pa in USD.
There are several specialized firms structuring sale-lease back deals, such as
Jan. W. Denstad, Sole Shipping
Cato Hellstenius, Pareto Securities Other providers are for instance Fearnley Finance and Ness Risan Partners.
A good broker is key! (It is also fair to say, however, that almost all brokers have both good projects, and less good projects, so using one’s own judgement is equally key!)
Market-focused
Market-focused shipping involves higher risk, but also higher possibilities for reward. Here I would like to highlight the following:
Understand the cycle of the expected freight rates for a given type of ships. Providers of such market forecasts might include:
Marsoft Inc.
Clarksen / Platou
The “Golden Rule”:
Go in/or out based on the cycle – in when the cycle is low, out when the cycle is high
Go long (term charter)/short (spot) – long when the cycle is high, spot when the cycle is low.
This type of “asset play” would typically require strong attention and discipline from the decision-maker at the top of the organization.
Consequence: One’s fleet size would oscillate, thus also creating challenges to maintain a strong crew.
There are several ways of pursuing asset play in the shipping market:
via your own shipping company
some of the project finance firms mentioned before also offer asset play projects
via stock listed companies (eg Golden Ocean, Frontline etc.)
Since shipping is an asset intensive industry, other, often over-looked drivers of performance are currency exposure and interest rate exposure. These two aspects must not be overlooked, whether one opts for industrial or market-focused shipping.
On a personal level, shipping is an industry that has fascinated me for most of my life, and it is the ultimate source behind much of my wealth. While I may not be fully objective, I would recommend that more investors to a look at the asset class, and I would be happy if you contacted me in order to discuss further!
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