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Shipping’s Wall Street saga: Rags to riches to rags to occasional riches

Container line ZIM just pulled off something extraordinary in ocean shipping: It priced a U.S. initial public offering (IPO).

That doesn’t sound like much of an achievement. The U.S. IPO market is booming; proceeds surged 69% in 2020, according to Renaissance Capital. Yet prior to ZIM (NYSE: ZIM), there hadn’t been a U.S. shipping IPO since Barack Obama was in the Oval Office, when Peter Georgiopoulos-led Gener8 Maritime, a company that no longer exists, went public.

ZIM got its IPO done Thursday — but it was ugly. Pre-IPO, it targeted a market cap of $2 billion. It had to downsize the deal, then shares plunged over 20% at the open. By the end of its first trading session, ZIM was valued at $1.6 billion — $400 million short of its goal.

Shipping IPOs weren’t always this rare and painful to pull off. There have been multiple waves of offerings during the past 20 years.

In honor of the first U.S. shipping IPO in over a half-decade, American Shipper looks back at the rags-to-riches-to-rags-to-occasional-riches tale of ocean shipping on Wall Street.

Pre-2000: Junk bonds, not stocks

Only a handful of shipowners went public before the turn of the century. Among them: tanker company Overseas Shipholding Group, which listed in 1994; Teekay Corp. (NYSE: TK) and Nordic American Tankers (NYSE: NAT) in 1995; Knightsbridge Tankers in 1997; and OMI Corp — with a familiar face to today’s investors, Robert Bugbee, in management — in 1999.

The big shipping action pre-2000 was in junk bonds, not stocks. Over 30 high-yield bonds were issued by shipping companies in the 1990s, primarily in 1997-98, raising over $6 billion. Then came the Asian Crisis and a sudden collapse of rates. Virtually all of the shipping bonds defaulted.

The debacle gave shipowners a taste of the public capital markets, and investors a taste of shipping. Owners didn’t like the control bondholders had over their assets in the event of a default. But they did like “other people’s money.” If they could raise capital by selling equity, not bonds, they’d maintain more control over their fleets when rates inevitably turned south.

Not surprisingly, some of the same owners behind the doomed 1990s shipping bonds set their sights on a Wall Street IPO just a few years later.

Riding the China boom

The shipping IPO ball got rolling in 2001 with Stelios Hajiouannou’s Stelmar Shipping and Georgiopoulos’ General Maritime. In 2004 came Evangelos Pistiolis’ Top Tankers, now Top Ships (NASDAQ: TOPS). In 2005, George Economou’s DryShips debuted. Many others followed.

Seward & Kissel partner Gary Wolfe — who has worked on public shipping offerings from the 1990s till today — once told the shipping magazine Fairplay: “You had bankers going to Greece and telling owners: ‘Do an IPO! It’s like selling your ship for twice the price!’” The Greeks took the bankers’ advice.

The rapid ascent of China in world trade caused an unprecedented spike in spot rates. The rate froth drove shipping stock pricing higher — which attracted ever more shipowners to Wall Street.

In the mid-2000s boom, many of the hottest stocks were dry bulk companies. According to Clarksons Research, earnings for Capesizes (bulkers with capacity of around 180,000 deadweight tons) reached $110,000 per day in August 2007. In 2007-2008, Capesizes sold for over $140 million each. They’re worth around $36 million each today.

On Oct. 29, 2007, the stock of Economou’s DryShips traded at $131.34 per share, more than seven times its 2005 IPO price of $18 per share.

Economou’s personal stake in DryShips was worth $1.6 billion on that particular day.

It wasn’t just dry bulk. In 2008, very large crude carriers (VLCCs, tankers that carry 2 million barrels of crude oil) sold for over $160 million each. They’re worth around $65 million each today. VLCC rates topped $150,000 per day in mid-2008.

The consequence of the multisector boom was a massive ordering spree paid for with extremely cheap bank debt. Both the tanker and container-ship orderbook-to-fleet ratio rose to an astoundingly high 60% in 2008. For dry bulk, it was almost 40% in 2007.

Timing the crash: Winners and losers

And then the financial crisis struck. Rates and asset values collapsed.

OMI gets the prize for best timing. It sold its fleet to Teekay and TORM (NASDAQ: TRMD) for $2.2 billion in April 2007 at the very peak of the boom. Bugbee and CEO Craig Stevenson cashed out. After their noncompetes ended, Stevenson emerged as CEO of Diamond S (NYSE: DSSI) and Bugbee as president of Scorpio Tankers (NYSE: STNG) and Scorpio Bulkers (NYSE: SALT).

The booby prize for worst timing goes to dry bulk company Britannia Bulk.

Britannia went public on June 18, 2008, selling $125 million worth of stock and listing on NYSE. CNBC’s Jim Cramer touted the stock on his show “Mad Money.” Britannia went bankrupt just four months later. Shareholders were wiped out.

Amend and extend, loan to own

Combining extremely high financial leverage (debt) with extremely high operating leverage (spot-rate exposure) in an extremely cyclical business (ocean shipping) is a recipe for disaster. It happened to shipping bond investors in the late 1990s and to shipping equity investors in the late 2000s.

The big difference was that in 2009, U.S.-listed shipowners’ debt was largely in the hands of European banks, not U.S. bondholders. European banks had no interest in calling their loans and repossessing the ships, because if they did, it would crystallize the losses to their loan portfolios.

Instead, they pursued an “amend and extend” policy. This allowed maturities of shipowners’ loan payments to be pushed back and principal repayments to be suspended. Banks hoped rates would quickly rebound and get their borrowers back on track.

But banks couldn’t amend and extend indefinitely and they eventually became more willing to sell their distressed shipping debt in secondary markets to private-equity (PE) buyers.

PE owners bought distressed shipping debt as part of “loan to own” strategies. They forced the shipowners (who where now the borrowers of PE-owned loans) into a Chapter 11 restructurings in which the shipowners’ debt was converted into PE-owned equity.

Some of today’s listed shipping companies trace back to loan-to-own deals. They include Genco Shipping & Trading (NYSE: GNK) and Eagle Bulk (NYSE: EGLE), both of which filed Chapter 11 in 2014 after banks sold their debt, and International Seaways (NYSE: INSW), which emerged from OSG’s bankruptcy in 2012. Star Bulk (NYSE: SBLK) bought the PE-controlled fleet of Excel Maritime, which went bankrupt in 2013. Gener8 Maritime — the last shipping IPO before ZIM — was a joint venture that included the PE-controlled fleet of General Maritime, which went bankrupt in 2011.

Yet more newbuildings

PE had another, even greater impact on shipping stocks during this era. It funded a major new wave of fuel-efficient “eco” newbuildings.

Funds had billions of dollars they collected prior to the financial crisis that had to be either deployed or returned. They reportedly looked at the 10-year trailing average of shipping rates and asset values and assumed they would revert to the mean. The fatal flaw in this thinking was that the prior 10 years included a one-off boom that skewed the mean far too high to revert to.

Private-fund money flowed to newly listed companies that ordered newbuildings, such as Scorpio Tankers, Ardmore Shipping (NYSE: ASC) and Scorpio Bulkers, as well as to private entities that ordered ships themselves.

So, not only did ocean freight markets have to digest all those ships ordered during the pre-2009 boom years, they now had to digest PE-driven newbuilds ordered post-2009.

Higher capacity put downward pressure on rates and values, neither of which never reverted to the mean as PE managers had predicted.

This era featured the occasional spikes and trading opportunities for shipping stocks (2015, for example, was a strong year for tankers). But overall, shipping market caps remained low.

The listings keep coming

A common theme at ship-finance conferences during the past decade was that U.S.-listed shipowners would someday mature. There would be fewer, bigger players — the kind of blue-chip vehicles coveted by the long-only funds of Boston and New York.

The trend still seems to be moving in the opposite direction. Despite only two IPOs in the past five-and-a-half years, there are more listed shipowners — and most of them are very small. A lot of the current action involves penny stocks.

During the long stretch between the Gener8 and ZIM IPOs, nine owners went public in the U.S. via direct listings, reverse mergers or spinoffs: Pyxis Tankers (NASDAQ: PXS) in late 2015; International Seaways in 2016; TORM in 2017; Castor Maritime (NASDAQ: CTRM), Grindrod (NASDAQ: GRIN), Navios Containers (NASDAQ: NMCI) and Eurodry (NASDAQ: EDRY) in 2018; and Diamond S and Flex LNG (NYSE: FLNG) in 2019.

There have also been some privatizations (such as DryShips) but additions have outweighed subtractions.

In general, private shipowners go public because they believe they’ll make more money than if they remain private. Owners got a good taste of U.S. public markets in the 1990s on the debt side. They went “all in” from 2001 to 2008 on the equity side. In 2010-2015, they parlayed PE and hedge-fund enthusiasm for shipping into still more listings.

Even in the past half-decade — with investor interest too weak to support many IPOs and market caps increasingly “micro” — the number of U.S.-listed shipowners has kept inching ever higher.
Source: FreightWaves, By Greg Miller, Senior Editor, https://www.freightwaves.com/news/shippings-wall-street-saga-rags-to-riches-to-rags-to-occasional-riches

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