Money in the bank

Money in the bank OOIL's terminals, property divisions sales set focus on its container shipping business and put funds away for a rainy day.

By Eric Johnson

      In mid-January maritime news service Alphaliner    released a collated list of all the major container lines that had sought to raise capital in the last 10 months.
      The list of 12 lines, which includes some of the industry's biggest and most well-respected carriers, raised $12.7 billion. That's a staggering figure, even more than the $7 billion in losses the liner carrier industry is expected to have accrued in 2009.
      Later in January, Drewry Shipping Consultants pegged capital raised industry-wide at $15 billion through November 2009.
      Whatever measure one uses, it's important to note that all those capital-raising efforts can be filed under two broad categories ' debt or dilution of equity. All of the measures taken by lines to generate cash involved either borrowing money from lenders, shareholders or governments; or issuing shares or rights in the company.
      The effect of those two types of measures is similar ' a drain on the future profitability of the company for its current owners, either because of debt repayment or because more owners would share in any future success.
      Noticeably absent from that list is Hong Kong container line OOCL. In 2009, OOCL suffered with the rest of the container industry, but it didn't take on additional debt, nor did it issue additional shares in the company.
      In fact, the line didn't do anything extraordinary, even as its revenue fell 35 percent and its volume dropped 14 percent. To know why, one has to look back more than three years ' to November 2006.
      That's when OOIL, OOCL's parent company, made the eyebrow-raising decision (at the time) to sell its terminals division, which consisted of two terminals each in the ports of New York-New Jersey and Vancouver, British Columbia.
      The sale, to a teachers' pension fund in the Canadian province of Ontario, netted OOIL $2.4 billion ' a pretty healthy sum, especially with the current knowledge that the industry was headed for an unprecedented tailspin. But at the time, the sale was questioned. Container shipping was going great guns, containership demand was actually surpassing supply, and the container terminals business looked lucrative both in the short and long terms.
      Half the money from the sale went to shareholders by way of two special dividends while the other half was retained in OOIL for expansion of its remaining businesses in container transportation and logistics and property development. Roughly half of what was retained was invested in the property development business, with the balance available for the growth of OOCL, said Stanley Shen, OOIL director of investor relations.
      The money from the sale essentially acted as a rainy day fund, and the rainy days came hard and fast.
      OOCL is more reliant on the transpacific trade than Asia/Europe. As part of the Grand Alliance ' along with NYK Line and Hapag-Lloyd ' it pools ships on major trades, using the various members' strengths to maximum benefit. OOCL, as American Shipper noted in its September issue ('Top 20 container lines,' at www.AmericanShipper.com/links), essentially acts as the Grand Alliance's specialist express transpacific carrier.
      Most of its east/west vessels are deployed on this trade and, most importantly, its volume on the transpacific surpasses its volume on the Asia/Europe lane by nearly 50 percent. So it's important to note that the slowdown in world shipping actually hit the transpacific well before Lehman Brothers folded and the world economic crisis fully took hold in September 2008.
      That made the $1.2 billion in cash OOCL retained from the sale of its terminals all the more important. It could be argued that OOCL was positioned as well as any line in the world for the downturn, based on its cash reserves and conservative vessel order book. Indeed, no line was set up to actually succeed in such a depressed volume and rate environment as existed in late 2008 and early 2009, but the Hong Kong line was well prepared to weather the storm.

Another Sale, More Cash. American Shipper sought perspective from OOCL on the issue in early January. As it turns out, the request appeared prescient, because on Jan. 18, OOIL announced another cash-raising salvo. The line said it had sold all but two properties from its considerable property and development division for another $2.2 billion.
      Just after the sale of the property division was announced, American Shipper spoke with Shen about the impact the terminals unit sale had on OOCL's business during the downturn, and how the upcoming property division sale would affect its cash position.

Shen

      'I think the story is about how a company quite diversified back in 2006 has narrowed its focus to a single core business,' Shen said.
      He added there's 'never a perfect time to sell; the question is when is it the right time for the company.'
      The sale of the terminals came at a time when the container industry was beyond buoyant ' some might say overheated. A Goldman Sachs report on OOIL in March 2006 ' several months ahead of the terminals sale ' painted a favorable portrait, saying its share price didn't reflect its full value. The report said OOIL's value should have taken into account the viability of its three divisions.
      'We believe that OOIL should be increasingly valued on the basis of the sum-of-the-parts methodology encompassing its diversified business: container shipping, container terminals and property,' the Goldman Sachs report said. 'Not only are the latter two businesses growing, but we believe there are also catalysts that could unlock their real value.'
      The report specifically mentions the high price DP World paid to acquire P&O Ports in January 2006 as a reason to value its
assets beyond ships. The analysts further said OOCL's container shipping business was undervalued because it wasn't appropriate to apply typical rules to the valuation of its assets.
      'We do not believe in (book value) impairment due to the prospect of falling vessel prices: like aircraft values, container vessel values are cyclical,' the Goldman Sachs report said. 'We think that current fleet (book values) undervalue the fleet by 25 percent.'
      To underscore the point about the volatility of ship values, a 6,500-TEU vessel ordered in 2006 for $100 million was selling for $35 million in 2009.
      In any case, smack in the middle of the sourcing boom out of China, OOIL decided to sell its terminals. Then, months later, demand fell off a cliff, leaving lines strapped for cash as rates plummeted below costs.
      'All the analysts gave a lower valuation than what we sold it for,' Shen said.
      Indeed, the Goldman Sachs report valued the terminals at nearly $500 million in March 2006, or less than a quarter of what OOIL fetched in the sale.
      Despite its apparent readiness for difficult times, Shen said OOCL was as surprised by the depth of the downturn as any other line.
      'We were caught off-guard, but we were fortunate in being financially sound and with sufficient operational flexibility,' he said. 'We had cash (more than $2 billion counting the remaining proceeds from the sale of the terminals and previous reserves), and our mix of owned and chartered-in vessels meant we were able to manage our overcapacity without having to lay up vessels.'

Financial Health Table. A recent review of the financial health of the parent companies of 18 shipping lines, released in January by London-based Drewry, found that OOCL was in the best shape of those surveyed.
      Drewry's survey used the Z-score, an economic benchmark that weighs a company's revenue, assets and liabilities and predicts the likelihood of it declaring bankruptcy in the next two years. OOIL, along with Maersk Line parent A.P. Moller – Maersk, were the only companies not to be considered in a distressed state.
      The table was formulated mostly using half-year or three-quarter-year financial reports for 2009, before many of the government or shareholders rescues, or bond and share issues, had occurred.

Heaney

      'Nearly $15 billion had been raised ' as of the end of November,' Simon Heaney, editor of Drewry's new Freight Shipper Insight, wrote in January. 'By far, the most common way of raising cash was through equity/share issues, to the tune of $8 billion. Bond issues are also contributed about $3 billion, while government guarantees and other measures added another $3 billion or so. The rekindling of interest by shipping companies in the equity and bond markets is in part a response to bank lending becoming harder and more expensive to access.'
      OOIL, unlike Maersk, was able to eschew such measures, content in its ability to weather the storm using cash reserves and its ability to secure low interest rates.
      'The sale of the property division will put another $1 billion in the bank, which gives us the ability to ride this out,' Shen said. 'We didn't have to raise debts. We didn't need to borrow money. We didn't offer additional shares or promote rights issues. With cash in the bank, we're also able to borrow at advantageous rates.'
      OOCL's vessel ordering activity over the last decade-plus shines a further light on its conservative but strategic methods. It ordered 5,000-TEU vessels in 1993, with those vessels coming online in 1995, in time to take advantage of China's accession to the World Trade Organization. In 2001, it ordered 8,000-TEU ships, with the first of those vessels arriving just in time for the demand boom between 2003 and 2006, and the last two to be delivered in 2013.
      OOCL has avoided orders for so-called mega-ships, content with the sufficient size and flexibility that the 8,000-TEU vessels offer on major trades ' after all, it's far easier filling an 8,000-TEU ship in a downturn than a 13,000-TEU vessel.
      OOCL's current order book looks downright sparse compared to the huge orders placed by its rivals in the top 20 list of container lines. OOCL operates 73 vessels, of which 41 are owned and 32 are on charter. It has 11 more ships to be delivered (four in 2010), and that coming capacity represents less than a quarter of its current capacity.
      Only three other lines among the world's top 20 are in such a favorable position. And only one other line has an average fleet age younger than OOCL's 5.5 years. Hapag-Lloyd's average fleet age is 5.4 years, while the industry average is 9.7 years, according to Containerisation International. A half-dozen other lines are in a similar position as OOCL in terms of vessels ordered, but of those, none have been able to escape the borrowing or share-raising measures as OOCL has.
      Now, instead of awaiting dozens of vessels that will likely be surplus to demands over the next three years, OOCL is sitting with cash in hand from two major sales.
      OOIL seemingly has the financial wherewithal to see it through the current downturn in container shipping. As of June 30, the company had $7.1 billion in total assets (including $1.6 billion in liquid assets), with $3 billion in total liabilities. And that doesn't take into account the sale of the property division.
      Compare that to a handful of other lines, which have had to lean on shareholders and ship owners to provide billions as they restructure their debts. Such measures have been required at CMA CGM, (where debts are said to be more than $5 billion), at OOCL's Grand Alliance partner, Hapag-Lloyd and at Zim, a partner to the Grand Alliance carriers on a handful of Asia/Europe and transpacific services.
      It should be noted that results for all three of those carriers have picked up significantly, with CMA CGM announcing late in 2009 that it was breaking even on operations and reports in late January suggesting similar developments at Hapag-Lloyd.
      Zim may have also turned a corner by canceling some of its boxship orders and securing interim funding as ocean freight rates firm.

No Second Thoughts. The sales that OOIL made have risks, of course. The different business units were a way to diversify OOIL's revenue streams. Maersk Line, for example, has oil assets upon which to rely if the ocean transportation business continues to struggle. Its terminals division performed well in 2009 despite the global container downturn. Other lines with terminal divisions have largely held on to those assets, and in fact have grown them.
      But Shen said that while there are no regrets or second thoughts, the sales of the terminals and property divisions were difficult decisions.
      'Both businesses had been viewed as strategic and there was no 'moment of clarity' in terms of the decision to sell the terminals division,' which earned the company operating profits of nearly $100 million in the 12 months through June 2006, he said.
      The decision to sell the property division was equally difficult.
      'We have the utmost confidence in the economic growth of China and were very comfortable with our property development activities given our positive view on the outlook for that sector in the mainland,' Shen said.
      He added that the time and investment required to manage the property division can now be focused on the OOCL liner and logistics business.
      When the property division sale was announced, OOIL Chief Financial Officer Ken Cambie said, 'OOIL intends to use the sale proceeds from the transaction for general working capital purposes and to fund growth opportunities in its core business of container transport and logistics service.'
      Those capital reserves will only become more valuable as the depth of the capacity overhang becomes clearer in 2010 and 2011. Rates and revenue may recover over that period, but will it be enough to overcome the debts lines have accrued? Will lines quickly return to the 'supernormal profits' (as characterized by Goldman Sachs) they enjoyed from 2003 to 2005? If not, the backing of governments and shareholders may not be so easy to secure going forward.
      Carriers who borrowed money will have the burden of debt, and perhaps the creditors who have helped a handful of lines will be telling management teams to focus on returns rather than market share.
      As for OOIL, Shen said the company benefits from a tight integration between its shareholders and executives.
      'There's a direct link from our shareholders to our management and that's central to our success,' he said. 'It means stable plans can be put in place over the long term.'
      Its stable and profitable ways ' 2009 will be the first loss-making year for the line since 1992 ' has stood it in good stead among the global giants with more fleet capacity and market share.
      'Based on our fleet size, we are a relatively small carrier in the industry,' Shen said. 'Our alliance membership and cooperation on capacity through slot sharing with other liners is essential to us in delivering the best service to our customers.'