Reshaping the shipping business model
Soo Cheon Lee, co-founder and chief investment officer at Hong Kong-based financier SC Lowy, highlights the key drivers in a fast-changing landscape of shipping business.
Simin Ngai, principal journalist Singapore | 15 December 2017
Shipping cycles are becoming shorter, thanks to today’s warp-speed flow of information and the emergence of non-traditional financing sources.
“Shipping is always cyclical,” said Soo Cheon Lee, co-founder and chief investment officer at Hong Kong-based financier SC Lowy. “But unlike before, where cycles spanned five to 10 years, today’s cycle is at most two to three years.”
Lee noted a key change in the landscape of commercial shipping. “The [traditional] business model for tonnage providers is not working today. Operators can easily find financing as they have the cargo.”
Today, operators with the cargo and the vessel are likely to secure financing at 85–90% loan-to-value (LTV) ratios. Without the cargo – and therefore earnings visibility – this falls to 60% LTV.
In contrast, tonnage providers were enjoying relatively cheap financing at 90% LTV ratios before 2010.
“That business model only works one way – when the market is going up – and I think that has ended already,” said Lee.
This marks a change in attitudes towards shipping as an investment class. Before, banks were willing to offer cheap funding as they saw the industry as low-risk, low-return.
“Today, my perception of shipping is high-risk, high-return in the kind of sector in which SC Lowy is involved. To do this, you need to be very fundamental, and understand and talk to the market.”
SC Lowy offers alternative financing, a non-traditional source of funding that has come in to bridge the gap as traditional shipping banks reduce their exposure.
Such firms aim to bump up the LTV ratio from that which banks are able to offer. In the case of SC Lowy, it involves itself in complex restructuring, seeking to resolve underlying issues with committed capital.
The company was key to the successful restructuring of Pan Ocean and Korea Line, two of South Korea’s largest dry bulk players. In each case, SC Lowy bought a substantial portion of distressed debt.
Lee firmly believes that the point of restructuring should be to create long-term sustainability, even if it means altering assumptions.
“When it comes to restructuring, people have a tendency to adopt a wait-and-see approach. For me, I’d rather take the hit and be miserable for a short time rather than extend the pain.”
Private equity firms have also been another source of liquidity for the shipping market. Theirs was a very different approach, said Lee, and they were effectively setting up joint ventures with operators to order new vessels, particularly in the tanker markets.
Unlike alternative financing, private equity firms prefer not to get involved in difficult restructuring and their goal is typically to play the cycle.
Lee observed that some shipping banks were now returning to the market, which he found very encouraging.
“On the one hand, there’s so much liquidity out there. Everyone now has a problem deploying capital and you want to deploy it where you have expertise. Banks are realising that, but instead of taking on high-risk ventures, they are targeting operators, the ones with the cargo.”
Offering advice on today’s market, Lee advocates seeking value in the second-hand market.
“I have been saying: if you’re interested, buy a second-hand vessel. Buying a new vessel adds supply to the market. Buying a second-hand vessel doesn’t add supply, but you can still play the game.”