In late November, the Baltic Dry Index, which tracks freight charges for shipments of dry bulk goods, hit an all-time low. Its fall underscores just how risky it has been to make macro bets on an economic recovery through exposure to the shipping sector.
Apart from a brief rally in 2010, the downturn in the fortunes of shipyards and shipping groups has endured for longer than many expected. Trade, whether by volume or by value, has been virtually flat for years — largely because slowing growth in China has dramatically reduced demand for commodities, such as iron ore.
As a result, financial distress in the maritime industry persists. Charter rates for container vessels barely cover the operating costs, leaving shipping companies with little ability to pay their debts.
Private equity and distressed debt specialist groups — including Blackstone, Carlyle, Centerbridge Partners, KKR, Oaktree Capital Management and WL Ross — have rushed to fill the void, by offering rescue finance, buying up debt at a discount and turning it into equity, or buying new and secondhand vessels. So far, their results have been mixed, hindsight shows that some groups ventured into the sector too early.
But a more nuanced view suggests that, today, there may finally be pockets of opportunity amid the general rout.
KKR has been among the most active in shipping, adopting a multi-pronged approach. This has involved the creation of a joint venture in 2013 to invest in distressed shipping assets, as well as buying bank loans to shipping companies at a discount. Consequently, the private equity group now owns dozens of ships.
It recently added to this collection with its latest acquisition: Chembulk Tankers, a Connecticut-based division of Berlian Laju Tanker, a listed Indonesian shipping company.
Jakarta-based BLT had originally bought the Chembulk business in the heady days of 2007 — taking on $600 million (Dh2.2 billion) of secured debt and $1 billion in unsecured debt to pay for the purchase. But as freight rates collapsed, the company defaulted and went into a restructuring three years ago. Its debt traded down to only 70-odd cents on the dollar.
At that point, KKR started buying up the secured debt, first from BNP Paribas and Nordea and then from five other European banks. Then it brought in the hedge fund York Capital, converted the debt to equity and took over the Chembulk unit from its parent, in a corporate carveout that also allowed BLT to continue as a going concern.
Following the deal, KKR and York Capital became proud owners of 39 more vessels — 35 of which are chemical tankers.
KKR is confident that these tankers represent a profitable specialism in a generally depressed sector. “It is a niche space, very specialised,” says Jamie Weinstein, co-head of KKR’s special situations fund. “The supply demand dynamics are very different. We could buy these ships below fair value. It was a huge opportunity. We can now consolidate the chemical tanker market which is very fragmented today.”
One big demand driver for such chemical carriers is shipping the plastics made by newly competitive US petrochemical companies to China, where they will go into cars built on mainland assembly lines. Demand remains strong despite recent restrictions on driving in Beijing to tackle pollution problems.
Meanwhile, banks are continuing to cut their exposure to the still troubled shipping industry. In 2013, KKR bought nine vessels originally financed by Commerzbank. Other European banks continue to struggle with their shipping loan books, too. For example, HSH Nordbank’s 25 billion euro (Dh100.3 billion) shipping portfolio accounts for the bulk of loan impairments, according to a new report from research boutique CreditSights.
KKR’s Chembulk transaction is also notable because there have been few successful distressed debt deals involving Indonesian entities — in large part due to the uncertainties of dealing with local courts.
KKR’s apparent success may lead to more. Given the soaring corporate debt to GDP in the emerging markets of Asia — especially in commodity-producing countries such as Indonesia — there will inevitably be more distress to come.
— Financial Times