Clay Maitland

On a quest for quality in shipping

Goodbye to all that

Posted on | May 31, 2012 | No Comments

The shipping industry has been dependent on borrowed money for as long as anyone can remember. It’s the way things have worked since the start of the post-World War II boom. The growing prospect of a global “credit famine”, however, may change all that.

Consider the following:

Facebook’s poor initial public offering performance shows that public markets cannot reward small investors, and that — tell it not in Gath, publish it not in the streets of Askelon — the IPO market has turned its face to the wall. This is relevant to ship finance, o my children. The so-called “science” of valuing shares, that has earned Wall Street big fees, is alleged to have been deficient in fair disclosure or, as we so politely put it, lacking in transparency.  That familiar cry: “We wuz robbed” that followed the tanking of Facebook’s offering has brought great discomfort — and not just at lead advisor and underwriter Morgan Stanley.   Whether all of the fulminations — and lawsuits — are fair and justified doesn’t really matter. What does matter is that, along with other prospective IPOs, those of many shipping companies could now be on hold, for at least a while.

And what about traditional, asset-based bank lending? Even before the present Eurozone crisis, banks were withdrawing from ship finance. The systemic failure of German KG houses; the virtual collapse, and government acquisition of, the Royal Bank of Scotland (RBS), HBOS and other familiar names; ship finance as a recognized specialty is disappearing from many once- familiar sources.

And so we have a bleak, shell-pocked landscape, reminiscent of the western front in 1918 is relieved to some extent by private equity or venture capital; the Evercores and Bain Capitals of this world. The venture capitalists, like Chinese banks, are that rich uncle who is going to come along to bail us out.  Private equity firms, at the end of last year, had about $900 billion in cash, raised mostly before the financial crisis.  But such deals are expensive.  Bain Capital recently reported that multiples for private equity deals in the first half of 2011 were roughly 8.5 times Ebitda, or earnings before interest, taxes, depreciation and amortization, a common metric for pricing companies.  This compared with multiples of 6 to 7 times Ebitda at the end of the last recession.
Be ready for a possible chain reaction of capital flight. Since Christmas, the European Central Bank has lent more than a trillion euros to euro-zone banks. How much good this has done is debatable, and it is doubtful that the bailout can continue much longer. The talk in Brussels and London is no longer just about Greece, or Spain. Indeed, the handwriting seems to be on the wall for the euro as a reserve currency.  If the dominant European nations cannot agree on a way of dealing with the euro crisis, a credit famine looks like a real possibility. Money is certainly likely to disappear from the banks of troubled debtor nations; even in China, as well as Northern Europe, this could submerge many notable ship finance departments for a long time to come. Sorry to tell you this during Posidonia.

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