It has been a brutal few years in the shipping and offshore markets with over-capacity, declining demand and the dramatic fall in the oil price, all contributing to historically low charter rates and plummeting asset values. It is no wonder that owners and operators in these markets have adopted defensive strategies in recent years.
The recent bid by Borr Drilling for Transocean’s jack-up fleet being one of a number of current transactions perhaps suggests that the arrow on the shipping and offshore barometer may no longer be locked on an axis between “stormy” and “rain” and could be about to swing upwards towards “change” or, dare we hope, to “fair”.
History tells us when the Greek and Norwegian investors start to take aggressive positions, the bottom of the market has at least been sighted and recovery may not be far round the corner. Certainly our experience from the last few months shows that already in 2017 there is a marked increase in deal flow since the dark days of 2015 and 2016.
So whilst in recent years, owners have been battening down the hatches in a bid to survive, consideration is now being given as to how and when to act to seize the opportunities that may present themselves in any recovery. In this article we look at a number of opportunities that might now be available.
With order-books at the major shipyards at their slimmest for many years, shipyards are increasingly desperate to sign new orders and build up their back-log and as a result are offering prices that in many vessel classes are 15-25% cheaper than they were only a couple of years ago. Unfortunately for the shipyards however, almost new second-hand tonnage can often be picked up even more cheaply.
Owners on the lookout for new tonnage, either to replace ageing assets or to expand their existing fleet, therefore have an unrivalled opportunity to acquire assets at historically low prices. But as previous shipping cycles have taught us, as the markets pick up so too will the prices, and the best time to pick up assets at the most attractive prices may well be in the coming months.
Any acquisition of a newbuild or second-hand asset requires access to capital and unless an owner is sitting on significant cash reserves or has the benefit of shareholders with deep pockets and an appetite for counter-cyclical play, then they will be forced to raise funds externally.
But with many of the Western shipping banks having had their fingers badly burnt in recent years, traditional bank financing is still difficult to source. Owners are therefore having to consider other financing solutions and we are increasingly seeing ECA financing, alternative lending institutions (such as hedge funds), Chinese banks, Chinese leasing houses, sellers’ credit and private equity playing an active part in the financing new assets, either alone or in combination.
We may also be beginning to see the resurgence of the secured Norwegian high yield bond market which has been almost dormant since 2014, but which in is showing increasing activity with two bonds having been placed early in Q2 2017.
One thing is for certain though, with the traditional banks less active other than for blue chip clients, the cost of financing for owners is becoming much more expensive, at least in the short term, with alternative lenders continuing to price risk into their margins and fees.
In recent years, owners have been faced with some tough choices between accepting off-market terms, including assuming risks and liabilities that have traditionally been regarded as charterer risks, and/or unprofitable rates or risk their vessels or rigs lying idle.
With change on the horizon though, owners must now decide whether to continue to accept such off-market terms or to hold out for better times.
Owners should therefore be wary of locking themselves into long-term charters on the current terms and rates or should at the very least consider trying to insert contractual mechanisms into their agreements for breaking or renegotiating the terms of the charter if and when the markets pick up.
With many rigs and vessels having been cold or warm stacked since 2014, owners may now be considering whether the time is right to consider re-mobilising these assets in readiness for a recovery.
However, the costs of re-mobilisation can be significant depending on the type of stacking that has been used, the length of time an asset has been idle and the standards of maintenance that have been employed, and in some cases the costs of re-mobilising may outweigh the potential income going forward.
In these circumstances, scrapping may be a better option for owners as well as having a wider benefit for the industry as a whole by helping to reduce over-capacity and thereby helping to restore some much needed balance to charter rates.
And with scrap values on the rise so far in 2017, now may be the right time to take this decision.
However in deciding where to scrap – or recycle – their assets, owners will need to weigh up the costs and risks of transportation to the relevant yard as well as the applicable regulations and reputational risks that may influence the decision.
Fortune favours the brave
Despite the potential of a recovery in the offing, times will no doubt continue to be difficult for many owners and operators for some time to come some tough decisions will need to be taken in the coming months as to when and how to act to stay ahead of the curve.