Beware ‘pure play’ financing demands

Shipping needs to stick to its guns on diversification when it comes to attracting finance and not bow to pressure for intense specialism or ‘pure plays’ at the behest of public equity markets.

With some equity providers now demanding less divergence in business strategy, shipping operators are opting to place all their eggs in one basket to attract investment.

Andreas Sohmen-Pao, chairman, BW Group made this observation at Sea Asia in Singapore: “Twenty years ago you had diversified businesses in shipping, working in multiple segments trying to build a business for the long term,” he said. “Now you have pure plays and what I would call ‘pure, pure plays’ where it is no longer that you are just in tankers, you are product tankers. And then it’s not just product tankers, you’re in the LR sector or the MR sector.”

Public investors prefer this specialisation as it gives them a synthetic index where they can invest a small percentage of their portfoilio in, for example, a pure suezmax or crude tanker outcome.

“In terms of business viability this is very risky because you are making a bet on one concentrated sector and if it goes wrong you go under,” said Mr Sohmen-Pao. “How do we manage in a world where public market investors like pure plays and concentration and yet to build a viable business you need diversification?”

Claus V Hemmingsen, member of the executive board of AP Moller-Maersk Group and chief executive of Maersk Drilling went a step further describing pure plays as an “unsustainable requirement” that “won’t stay alive forever”.

Being unreasonable

“It’s an unreasonable demand, and right now they are in the wrong in asking for,” he said, adding that debt markets still prefer diversified business and that the equity markets are not always right.

Representing the banking sector, Christian Clausen, president and group chief executive of Nordea Bank, pointed out that there are alternatives and that companies need to carefully consider the type of investor they want to attract. “With pure plays you attract a certain group of investors and as a diversified company you will attract another group of investors. I don’t think that there is one answer to say that this is the right model or that is the right model,” he said.

Mr Clausen believes that there is still room for diversified companies and that the appetite for them remains big if you look in the right place. His advice is to diversify balance sheets and increase equity.

Mr Sohmen-Pao also raised the question of how banks plan to deal with existing portfolio problems and legacy assets in an era of very low cost of capital: “What about the ‘zombie’ companies with old ships that are ageing, how do banks as a whole deal with? Is there going to be more pulling of the trigger and letting them go or are they going to be rolled over and rolled over indefinitely?”

Mr Clausen believes that those triggers will increasingly be pulled as banks take action earlier, but warned that banks can’t be solely blamed for all the current financial issues.

“The problem with overcapacity is that it is supported by government credit agencies, so banks are not playing rogue here. I think that’s a bigger problem; it’s the wrong allocation of capital.

“The world has and will become much more disciplined in capital allocation. The thing about debt is that it is fine if you have equity to back it, but if you have debt without equity it is obviously a huge problem.

“I think banks that finance healthy shipping companies will continue to do so and all those banks that had a single purpose projects are not with us anymore.”

Lending arm

Mr Clausen added that Nordea was willing to lend and has a great deal of capacity to do so, as long as companies are willing to adjust their balance sheet structures. Indeed, he stressed that banks, by and large, are in ship finance for the long haul.

“Banks will be the ones to finance the global economy for decades ahead, not private capital,” he said. “There is a global trend to bring down business onto a lower level on the risk curve by being more diversified on the balance sheet and by having more capital.

“We finance companies that do projects, not projects. If companies run a diversified balance sheet we don’t mind that as long as all the projects are not in the same risk category.

“There is a lot of cheap liquidity around but there is not a lot of capital around,” he added. “The trend in coming years will be for industry to build more capital and/or to diversify their balance sheet to come down the risk curve.

Check out the Baltic Exchange’s Ship Finance Executive course in London this year. Topics covered include IPO case studies, debt issuance, credit agencies.