The Wall Street “window” for offerings of shipping securities rarely opens that wide. At least in recent years, it has generally granted a narrow sliver to slip through, providing just enough opportunity for the fleet-footed to either raise capital via sales to new investors or, for existing investors who’d rather exit, to flee before it slams shut again.
The high-profile spike in tanker rates in October garnered enough headlines and piqued enough investor interest to pry that capital-market window open yet again. After months of silence, there’s renewed activity on Wall Street. There’s also a concurrent move by some legacy investors to use this opportunity to cash out, which raises the question: If they’re so anxious to escape, what’s the point of entering?
Investors seeking to buy in
Freight rates are now well above breakeven for crude tankers, product tankers, liquefied petroleum gas (LPG) carriers, liquefied natural gas (LNG) carriers, container-ship lessors and even dry bulk, despite dry bulk’s slide slide since early September. Listed stocks that previously traded well below net asset value (NAV) — the market-adjusted value of ships and cash minus liabilities — have clawed back ground. The closer to NAV, the more likely that capital-markets activity will rekindle.
According to securities data analyzed by FreightWaves, U.S.-listed owners have raised $1 billion in gross proceeds from the sale of equity and debt securities in 2019 year to date (YTD), including one offering that has yet to price. If you add in secondary offerings by selling shareholders that do not benefit the companies, shipping securities-sales proceeds in the U.S. market now total $1.1 billion YTD.
That may sound like a lot, but it’s not. By this time last year, U.S.-listed companies had raised $4 billion — and 2018 was a bad year for fundraising. In full-year 2014, U.S.-listed shipping companies raised $8 billion.
The current tally is the weakest total for shipping on Wall Street since the industry developed a substantial presence in U.S. capital markets in the early 2000s. The amount of common equity sold this year, at just over $250 million YTD, is particularly low, by far the lowest raised in the modern era.
U.S.-listed ship owners have accelerated their capital-raising pace over the past two months, albeit off of a very low base. In October, container-ship lessor Global Ship Lease (NYSE: GSL) closed a $55.2 million common-stock offering; the shuttle-tanker division of Teekay Offshore (NYSE: TOO) raised $125 million in the Norwegian “green bond” market; and tanker owner Navios Acquisition (NYSE: NNA) raised $15 million through a common-stock offering.
So far this month, GSL has sold $27.5 million in senior notes; LNG carrier owner GasLog Ltd. (NYSE: GLOG) raised $99 million through the sale of Norwegian bonds; container-ship lessor Euroseas (NASDAQ: ESEA) announced a $6 million common-stock private placement; and container-ship lessor Danaos Corp. (NYSE: DAC) has announced the intention to sell $55 million in common stock. (As of market close on Nov. 19, this deal had yet to price.)
Investors seeking to cash out
The recent uptick of stock valuations in relation to shipping companies’ underlying NAV not only creates an opportunity for fleet owners to raise fresh capital, it also allows insiders to sell out. A sale of equity by insiders in which the company receives none of the proceeds is called a secondary offering.
After market close on Nov. 20, two private-equity groups backing tanker owner Diamond S Shipping (NYSE: DSSI), announced a secondary offering. First Reserve is selling 4 million shares and WL Ross & Co. is selling 660,870 shares; WL Ross & Co. was founded by U.S. Secretary of Commerce Wilbur Ross. The two funds have granted underwriters the option to sell an additional 702,371 shares, as well.
On Nov. 19, the largest shareholder in crude-tanker owner DHT Holdings (NYSE: DHT), Singapore’s BW Group, sold a 10% stake in DHT for $101.3 million via a secondary offering. In addition to its internal shipping divisions, BW Group owns strategic equity stakes in DHT, product-tanker owner Hafnia and LPG carrier owner Epic Gas.
On Nov. 6, Oslo-listed Hafnia completed a private placement that included a $105 million public offering and a $125 million secondary offering by several of its fund investors, including PAG, Davidson Kempner, Oak Hill, GNRI, Blackstone, Tufton and Tennenbaum. The original offering plan also included the secondary sale of shares by the BG Group (which owns two-thirds of Hafnia’s stock), but that idea was scuttled and the offering was heavily downsized.
The Hafnia offering drew criticism at the Marine Money forum in New York on Nov. 13. According to Robert Bugbee, president of Scorpio Tankers (NYSE: STNG) and Scorpio Bulkers (NYSE: SALT), that deal was all about “‘Prexit’ — private-equity exit — which is more fun than Brexit. The latest chapter of Prexit is called ‘Hafnia,’ in which they [private-equity investors] waited until the very moment it finally got better and then they sold their shares at a 20% discount to NAV. Stunning.”
Mark Whatley, senior managing director at investment bank Evercore, maintained at the same Marine Money event that the valuation of the Hafnia equity sale was actually close to NAV, but he acknowledged that the optics of the sale were “incredibly confusing.” He lamented, “They spent all that time waiting for a good market, and they were the first ones out the door.”
New York versus Oslo
Fund-raising weakness on Wall Street, particularly in the earlier months of this year, has raised the specter of the No. 2 capital market for shipping — Oslo — actually surpassing New York in 2019.
Despite the recent deal flurry in Manhattan, one could actually argue that Oslo will indeed do better. The year is not yet over, but if you look at where the money was raised as opposed to where companies are listed, Oslo could have the edge.
According to securities data analyzed by FreightWaves, ship owners (excluding cruise, ferry and offshore drillers) and their inside shareholders have raised $813 million YTD in the U.S. equity and debt securities markets. In Norwegian markets, ship owners (regardless of where they are listed and including secondary offerings) have raised $932 million.
Norwegian-listed capital raisers this year have been led by Klaveness, Navig8, Hunter Group, 2020 Bulkers, Epic Gas, Western Bulkers, Belships, Okeanis Eco Tankers and Hafnia.
That said, it is not necessarily true that the funding pendulum is swinging away from the U.S. toward Norway. Norwegian public markets offer a different procedural system (lower offering costs, smaller investment blocks, a quicker pace to market) but in fact, many of the investors in Oslo are the same American institutional investors that buy U.S.-listed shipping stocks. They’re just opting for a different venue.
What’s next for equity sales?
Whatley told Marine Money attendees that he sees more capital-market offerings ahead for the right kind of deal. The wrong kind of deal, he said, is “private-equity sponsors looking to monetize their shares” as they did in the Hafnia transaction.
“I don’t think deals structured that way will go particularly well. I think those looking to grow the business will be more successful,” he continued, adding that equity offerings could also be used by ship owners needing to “reduce the average age of the fleet or ‘refleet.’”
“Public shipping companies have several reasons to issue shares,” he said. “They all need more equity. They need more market cap. They need more trading liquidity. They’ve just been waiting for the right stock price to transact. The bottom line is, the more optimism, the more it builds confidence in future upside and the more transactions will get done. We think the next 12-18 months present an opportunity to really change the direction of companies [through an equity offering].
“We’ve seen too many situations where strong markets haven’t lasted very long and companies have failed to react. Instead, they’ve waited for that next turn of the stock or the next elevation of NAV,” said Whatley, whose stern advice is: “You should not let perfection be the enemy of the good.” More FreightWaves/American Shipper articles by Greg Miller