Does shipping even belong on Wall Street?

Greg Miller, Senior Editor | 24 February 2016

Over the past decade, shipping has gone backward on Wall Street. Photo: PA

In shipping’s Wall Street ‘dream’, blue-chip sector consolidators boasting multibillion-dollar

market capitalisations and massive trading volumes rise to the fore. Public shipowners are far

fewer and vastly larger. The industry’s stock is coveted by America’s most powerful long-

only investment funds.

The reality for shipping on Wall Street is the exact opposite. Today’s field of US-listed

companies is littered with the rubble of nearly worthless penny stocks. The circa-2016 buyer

of shipping equity is more likely to be an unshaven day trader hunched over his laptop than a

well-coiffed mutual fund manager in a glass-enclosed corner office.

US-listed shipping companies are not getting fewer and larger. They are getting smaller and

more numerous. According to a new data analysis by IHS Fairplay, there were 31 US-listed

companies in January 2006 worth USD25.4 billion (current value, adjusted for inflation). As

of late February 2016, there were 55 companies worth USD23.2 billion. The total market cap

of the US-listed shipping sector has fallen 8% over the past decade, the mean market cap has

fallen 40%, to USD422 million, and the median market cap has fallen 56%, to only USD206

million.

This dismal track record begs the question: Are shipping companies by their very nature a

poor fit for public markets and would owners be better off staying private? The answer will

be important to all owners, whether public or private, given the potential future supply impact

of public-equity-funded newbuilds.

“What has happened has shown that the public market and shipping are not necessarily a

good match,” conceded AMA Capital Partners managing director Peter Shaerf, who

acknowledged to IHS Fairplay that today’s proliferation of micro-cap shipping companies is

“horrible” for the industry’s reputation among investors.

“I really believe public shipping companies are inherently flawed,” said Ridgebury Tankers

CEO Bob Burke at the Norwegian-American/Hellenic-American Chambers of Commerce

(NACC/HACC) conference in New York on 11 February. “They can only raise money when

the market is really hot but the long-term returns in this industry are low due to volatility. Just

do the math. Eventually, you’re going out of business.”

Public shipping companies can raise cash when freight market conditions are favourable but

are pressured by shareholders to acquire high-priced vessels at the top of the cycle to bolster

returns in subsequent quarters. They are also much less likely than a private company to cash

out and sell fleets at the top because there is an inherent pressure on managers to increase

scale and create a more effective platform for stock traders and to retain compensation for

themselves.

Public shipping companies are also driven to pay out a large portion of their cash flow via

dividends and the investors who pocket these dividends are highly unlikely to re-invest their

money in the company when the market drops. Equity offerings also become difficult,

sometimes impossible, during a market trough.

“The type of money raised in the public market is totally unsuitable for a long-term

investment in shipping,” argued First International chairman Paul Slater. “If you look at the

big private Greek companies, they hand the money back [through dividends] to family and

friends, and they know that when the time comes to build new ships, they can go back to the

same family and friends to get the money and finance the rest with bank debt,” he told IHS

Fairplay.

Deutsche Bank analyst Amit Mehrotra addressed the public-versus-private debate at the

NACC/HACC conference. “If you look at it cyclically, it is very beneficial and value-

accretive if you are a public company at a significant point of the up-cycle. The market shows

a willingness to capitalise your earnings at a very high multiple, not to mention the fact that

you’re using somebody else’s money. The downside is that you see exactly the opposite in

the down-cycle, when the equity doesn’t get the credit it deserves.

“If you look at it systemically, the path to being public has always been about scale in terms

of access to capital markets, not operating scale. So if you have 50-100 ships and don’t need

that access to equity markets or you don’t need that financial scale because you already have

relationships with your banks, it probably doesn’t make sense to be public.”

During an interview with IHS Fairplay, Jefferies’ global head of maritime investment

banking Jeff Pribor was asked about public shipping companies’ long list of drawbacks

versus their private counterparts. “Almost everything you just said about shipping could be

said about public companies in general,” he responded.

“There are public companies that make mistakes and it’s certainly true that public companies,

if not structured properly, can be less than perfect stewards of capital for investors. That

doesn’t say to me that public company status is inappropriate for shipping. It says to me that,

as always, it’s important to have good governance, so that if shareholders choose to invest,

they’ll have a good say in the decisions that are made by the company.”

According to Evercore Partners senior managing director Mark Whatley, the issue is not

public versus private, but who runs the public company. “In any highly cyclical, capital-

intensive industry, the people who are good at capital allocation and corporate finance

decision-making will provide above average returns through the cycle and the guys who

aren’t won’t. It’s critically important that you put your money behind guys who manage these

aspects in an appropriate way.”

Basil Karatzas, founder of Karatzas Marine Advisors, also emphasised management decision-

making when judging public versus private shipping companies. “The fact that most of the

shipping IPOs of the last decade are penny stocks today just indicates how lousy the

management teams have been,” he said.

Despite concerns about the public shipping model, Pribor insisted that the benefits outweigh

the costs. “If you look back over the years shipping has had greater access to capital by being

public, it has been able to participate in global growth in a way that creates value, not just for

shareholders, but for the people benefiting from increased global trade,” said Pribor.

“I don’t know if there’s enough capital without having the public markets as one of the ways

to achieve that growth – and I’d hate to see a sector as critical as shipping be entirely

dependent on only family or private equity.”

Contact Greg Miller at greg.miller@ihs.com and follow him on Twitter: @GMJournalist.