Tobias Koenig has a proven business model at Marenave, the shipowning company he listed five years ago on the Hamburg Stock Exchange. But now, as he looks for the funds to grow, he is looking far beyond the home market that has fed his company.
“We are trying to get hold of more capital in the U.S.,” he said. “The goal is to get access to the international equity market while keeping the business in Germany at the same time.”
That’s a huge step for Koenig, who is also managing partner of Koenig & Co., one of Germany’s largest KG shipping funds, the investment mechanisms that fueled enormous expansion in global shipping markets and then came crashing down in the worldwide economic downturn.
Related Video: Shaerf on Financing New Containership Orders.
“We have to go global because the German ship finance system is not working any more,” he said. “I would certainly consider listing in New York if there is an opportunity and an advantage to that.”
Koenig’s hunt for new sources of finance for Marenave’s fleet is one sign of a broad restructuring of the world’s market for ship finance, a business once built on distinct, regional sources of capital but now fractured by economic necessity into a sprawling, global search for cash.
The 2009 financial crisis all but closed the doors to the traditional sources for new ship orders, the KG funds and the European ship finance banks. “It’s an enormous wrinkle that’s going to come through the business. How do you access billions of U.S. dollars in a world where they are harder to find in the traditional places they used to be?” said Graham Porter, chairman of Hong Kong investment firm Tiger Group Investments and a director of Seaspan, one of the Tiger Group’s holdings.
The search for the dollars required to finance new ship orders comes as liner companies order scores of new super-sized ships. In just one week at the end of June, major container lines placed billions of dollars of orders for 24 ultra-large container ships, vessels so big they likely will deployed on the Asia-to-Europe shipping lanes that have ports big enough to handle them.
In that week, Maersk Line exercised its option to buy another 10 Triple-E ships, each of which will boast a capacity of 18,000 20-foot equivalent units. Together with its previous order for 10 at $190 million each, the total order comes to $3.8 billion.
Neptune Orient Lines in that same week confirmed it had signed contracts worth $1.54 billion for 10 14,000-TEU and two 9,200-TEU vessels. MOL, which will charter five of these new ships, confirmed it is ordering an additional two 8,600-TEU vessels.
That’s just the tip of the iceberg. Carriers are expected to firm up orders for more than 50 ships with capacities exceeding 10,000 TEUs by the end of the year, according to Alphaliner.
Owner-charterers such as Seaspan and container lines such as Maersk, APL, Evergreen and Orient Overseas Container Line have ordered an estimated $12.5 billion worth of new ships in the first five months of this year, compared with $8.4 billion for all of 2010, according to London-based Clarkson Research Services.
The new ship orders are coming on top of a record amount of new container ship capacity scheduled for delivery next year, according to Braemar Seascope’s latest Containership Fleet Statistics. Carriers are scheduled to receive 1.55 million TEUs, increasing available capacity to 16.8 million TEUs, beating the previous record of growth of 1.52 million TEUs set in 2007. That capacity is an ominous specter for carriers already wrestling with softening of prices amid weakening demand.
Braemar is forecasting huge additions to the cellular fleet in the ultra-large sector, which will raise the threat of overcapacity on the Asia-Europe and trans-Pacific trade lanes, where overcapacity has been eroding rates since last winter.
It may sound like it doesn’t make sense to order more capacity in a soft market, but Peter Shaerf, managing director of AMA Capital Markets, a New York investment bank that specializes in the maritime sector, said carriers are doing it for a reason. “They can’t afford not to,” he said. “They have to order the big ships to stay competitive.”
He cites three main reasons for the spree: First, prices for new container ships have fallen 30 to 35 percent from their highs in 2008; second, the major carriers haven’t ordered any new ships since the middle of 2008, leaving a huge gap in the stream of new ships; and finally, the newer ships provide stronger economies of scale carriers need to lower their slot costs and the technology that allows them to burn less fuel and throw off diminished carbon emissions.
The new 10,000-TEU ships provide 30 percent slot savings per TEU compared with a 7,000-TEU ship. The design technology is changing so fast from year to year that ships designed this year already promise to have engines that are 10 percent more efficient than last year.
“We are the lemming industry: Where one goes, the others go,” Shaerf said.
Carriers within alliances are following the lead of their partners in ordering strings of big new ships for their joint services. Shaerf expects carriers to continue ordering vessels throughout next year as operators find ways to pay for them.
But the search for financing is becoming as important to the carriers as the search for container volume to fill the ships. “It’s not going to come from the KG market, that’s for sure,” said Koenig, whose firm owns 76 ships of all kinds, including 24 container ships.
Koenig said the KG funds in Germany are in a kind of capital market dry dock, struggling to raise $14 billion to cover the unfunded portion of ships ordered before the shipping market crashed in 2009. The KG funds finance about $27 billion, or 20 percent of the global container fleet, but that financing is on hold.
“Most of the KG funds, including ourselves, are busy getting the existing fleet through the crisis,” Koenig said.
Some 200 KG funds restructured because of the financial crisis, and more are restructuring this year, he said. As a result, ship order financing is moving away from traditional European sources to regional banking sources and to both public and private equity funding.
The large Asian-based carriers are raising the money from their own balance sheets or from financial institutions that have close ties with their corporate parents. European carriers that are getting smaller loans from European ship finance banks are turning to the bond markets or the public equity markets. “It’s breaking down into a regional market and a corporate market,” Porter said.
Neil Dekker, editor of Drewry Shipping Consultants’ quarterly Container Forecaster, said the options for carriers, beyond straight bank loans, include bond issues, the sale of assets and Chinese banks. “A number of Greek players have entered the newbuild market in the last six to nine months, and some of these companies are relatively cash rich and have additional funds from U.S.-based hedge funds, meaning that in many instances they have had no need to approach banks for traditional loans,” he said.
Shipowning charter companies such as Seaspan, are linking up with U.S.-based private equity funds that also promise to become a more important source of ship finance.
Seaspan formed a joint venture with Carlyle Group and Tiger Group Investments and an affiliate of the Dennis R. Washington family that will have more than $5 billion to invest in container, dry bulk, tanker and other vessels. Seaspan will invest up to $100 million in the joint venture during the next five years. The publicly traded company will have right of first refusal on any ships acquired by the new venture and the right of first offer on ships the new company sells.
Costamare, a Greek shipowner/charterer that is building a fleet of container ships, doubled its capital by listing its stock on the New York Stock Exchange in 2010. Technomar Shipping, another Greek shipowner, is negotiating with South Korean shipyards to place a $75 million order for two container ships with an option for two more. It is getting funding from Kelso, a New York-based private equity fund.
Diana Containerships, another independent charter company, is acquiring older ships from the major lines and chartering them back to the carriers that sold them. This frees up capital on carrier balance sheets and enables them to fund the new ships themselves.
The creative solutions are giving carriers more options, but their success at finding the capital to grow also comes with a potentially heavy cost on the operating side. Those new ships, after all, may exacerbate the oversupply of vessel capacity that’s already hanging over major east-west trade lanes.
Porter said there are warnings for the ship operators in the air transport industry. “If you want to understand the container shipping market, fly to Phoenix, and go about an hour out into the desert and see all the aircraft laid up,” he said.
He expects the container industry to go into another round of idling ships after carriers return charter ships to their owners at the end of leases.
“They are going to have to lay up tonnage,” he said, “and that’s the healthiest sign we have seen in our trade.”