capital markets presentation - gary wolfe

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: wolfe@sewkis.comWebsite: 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