Focus intensifies on capital costs of being private, versus being publicly traded
The mantra at New York’s Marine Money Week was ‘bigger is better’ and ‘bigger and public’ is better than ‘bigger and private’. It is not a new argument, but advocates claim the case for accepting it has never been clearer.
Euronav CEO Paddy Rodgers told attendees at the 18–20 June finance conference that shipowners “got very little benefit” from being public before the 2009 financial crisis. “They were up against private owners whose banks were lending at huge advance rates. What’s the point of being public when the private owner is getting 90% advance rates [the percentage of the vessel price covered by a bank loan] at 1% over LIBOR?”
After the financial crisis, banking capital adequacy rules came into play and advance rates fell, said Rodgers. Average shipping advance rates have now declined to the 60s, forcing shipowners to tap other sources for a higher share of the vessel acquisition cost. The relative price paid for this extra slice affects break-even rates and owner competitiveness.
As a result, Rodgers believes “this time there are real benefits to being public. Enough changes have happened to give a real competitive advantage, something very rare in shipping.”
Benefits to public companies go beyond “just the equity cost of capital”, said Deutsche Bank Securities managing director Craig Fuehrer. “It’s also the ability to do convertible debt, bonds, ‘baby bonds’, preferred stock. If you’re public and more investors are aware of you, you have the ability to pull more levers to minimise your cost of capital.”
Panellists repeatedly emphasised that shipowners must be large to go public. “To access public markets, size will be crucial,” said Axia Ventures managing director Alexandros Argyros. “What investors want is large, liquid platforms,” echoed Fuehrer.
The rebuttal to the ‘large and public’ model stems from the most important component of shipping capital cost, which is not the interest rate on debt or the cost of equity, but the price at which vessels are acquired.
As Rodgers acknowledged during his initial public offering roadshow in January, “The biggest cost of capital in shipping isn’t necessarily what you do in the way you raise the capital, but in the way you spend it. Whether you pay USD160 million for a ship or you pay USD80 million makes a significant difference to returns.”
According to Ridgebury Tankers CFO Hew Crooks, “The type of capital you get is important and it could be an advantage, but if you borrowed at LIBOR plus 80 basis points to buy a USD100 million Suezmax you’re a lot worse off than somebody who borrowed at 8% to buy the same ship for USD50 million a couple of years later.”
Historically, the Achilles heel of public shipping companies has been their acquiescence to shareholder pressure to grow, even when they should not. Buying at cycle peaks when assets are overpriced can have disastrous consequences when the market inevitably turns.
“If you are a public company, you’re forced to either reinvest or pay shareholders [dividends] or a combination of the two,” said Bob Burke, CEO of Ridgebury Tankers, a private company owned by Riverstone Holdings and management.
“As a private company, we can sell. It doesn’t matter if we own 30 ships today and five ships tomorrow,” he explained. “If you’re public, you have to keep a certain size to stay in the market and there’s a lot of pressure for growth. You have a different objective: to provide a vehicle for traders to get in and out [of stock positions], which is why everyone wants capitalisation and liquidity.
“We have one shareholder we like a lot,” said Burke. “Why would I trade that for thousands who may be disagreeable?”