The Container Company

I was surprised to read in the Financial Times (http://www.ft.com/cms/s/0/59266e48-b8ef-11de-98ee-00144feab49a.html) that John Fredriksen is planning on investing in a new 'low cost' container shipping company. Surprised because Mr Fredriksen has a reputation as an astute investor. Container shipping and profitability are uncommon bedfellows. The same can be said for the majority of the airline industry. The exception to this being the 'low cost' airline sector. This apparently is at least part of the rationale of this new container shipping venture which is to be called The Container Company. Direct point-to-point services rather than the 'hub-and-spoke' system employed by the large container shipping companies. However, the parallel dries up there. The low cost airline model also relies on stripping extras such as food and having a route structure that allows an aircraft to be utilised for 11+ hours a day on short sectors (typically no more than 1.5 hours).

I'm not sure how much of a cost advantage this new venture will be able to realise even allowing for the abundance of cheap ships in the early years. The industry won't be thanking Fredriksen for bringing the excess capacity back into the market. Perhaps the best place for these ships is with the cows.

'Once in a generation prices'

I was mildly amused to have read that FreeSeas Inc's chief executive Ion Varouxakis was reported to have described his company's US$11m acquisition of the 1996-built, 30,800 dwt 'Yucatan' from Eastwind Maritime as being a 'once-in-a-generation price'.

The Yucatan is no spring chicken at 13 years old. Ten year Handysizes have been cheaper than US$11m in 1998 and 2001. So the 'once-in-a-generation' comment would seem to be a bit of a throw away line. What's more, I predict that by next year, the Yucatan will be worth less than what Freeseas paid for her as the dry bulk market enters a tail spin.

On the face of it, it does seem a low price for today's market. However, rumour has it that the Yucatan is due for its survey and that it will be an expensive one given that Eastwind Maritime has been cash constrained. I think the sensible course of action would have been for Freeseas to have utilised the US$16.7m from its July equity issue to pay down debt rather than pull the trigger at the start of a dry bulk down turn.

Capesizes - the Supply & Demand Outlook

At the end of July 2009 there were a reported 892 Capesize dry bulk carriers in the global fleet. At the same point there were another 770 Capesizes on order of which around half are due for delivery in the next 12 months. That's 47% of the current fleet due for delivery by mid-2010. Let's assume optimistically that due to contract cancellations, delivery slippage and scrapping only half of that is delivered. We now have a 23% increase in supply. Markets are beginning to wake up to the fact that recent demand has been a result of artificial government stimulus spending, restocking and the reduction is domestic mining production in China (see video). In the absence of continued spending where is a 23% increase in demand going to come from?

Freeseas Inc

Freeseas Inc [Nasdaq symbol FREE] has a pretty website. It's corporate governance does not look so appealing. Anybody bothered to read the company's F1 registration statement back in May 2005? It is stuffed full of so-called 'poison pills'. It reads as follows 'These [anti-takeover] provisions are intended to avoid costly takeover battles, lessen FreeSeas’ vulnerability to a hostile change of control and enhance the ability of its Board of Directors to maximize shareholder value in connection with any unsolicited offer to acquire FreeSeas' Please ! What book of corporate finance theory is that from?

Would you want to be a shareholder in a company in which:

1) 'The Board of Directors may issue shares of preferred stock on terms calculated to discourage, delay or prevent a change of control of FreeSeas or the removal of its management.'
2) 'Directors of FreeSeas serve staggered, three-year terms' presumably to prevent their removal in the event of a take-over.
3) 'The Board of Directors may only change the size of the Board by a vote of not less than 662/3% of the directors then in office. This provision makes it more difficult to increase the number of directors in an attempt to gain a majority of directors through the addition of more directors.'
4) 'any action required or permitted to be taken by the shareholders of FreeSeas must be done at an annual meeting or special meeting of shareholders or by the unanimous written consent of the shareholders. FreeSeas’ By-laws provide that only the Board of Directors, the Chairman or the President may call special meetings of shareholders'
5) 'The shareholders of FreeSeas can make, alter, amend or repeal By-laws of FreeSeas only upon the affirmative vote of 662/3% of the outstanding shares of capital stock entitled to vote generally in the election of directors'

Take-overs are an important tool to release shareholder value. Boards that actively seek to restrain shareholder rights don't get my vote as an investor.

See below for the full text from Freeseas inc:
http://phx.corporate-ir.net/phoenix.zhtml?c=182261&p=irol-SECText&TEXT=aHR0cDovL2NjYm4uMTBrd2l6YXJkLmNvbS94bWwvZmlsaW5nLnhtbD9yZXBvPXRlbmsmaXBhZ2U9MzQ1OTAwNyZkb2M9MSZudW09ODI%3d

Stelios Haji-Ioannou

News reported in Lloyds List that Stelios Haji-Ioannou has sold easyCruise to Hellenic Seaways should come as no surprise. Sir Haji-Ioannou, who probably only comes second to Sir Richard Branson in terms of self-promotion, describes himself as a 'Serial Entrepreneur'. Unfortunately, after success with money from his father Loucas in Stelmar Shipping and easyJet subsequent attempts at entrepreneurship have been muted. The reason for this may lie in the fact that both Stelmar and easyJet were not original concepts. Southwest Airlines for example pioneered the low cost carrier concept in the 1970s. easyCar, easyCruise and easyHotel, however, can be credited to his original thinking. Whether they will ever be successful is another matter. Perhaps the 'easy' brand is running out of steam...

http://www.lloydslist.com/ll/news/stelios-sells-easycruise-to-hellenic-seaways/20017687094.htm;jsessionid=BAC2B779BB8690DC5746E47306E5F575.5fa4e8cc80be35e2653c9f87d8b8be45bf6ba69a

It's all relative!

I digress slightly from the dry bulk sector as I read a piece from the Economist on the box trade. It will also serve to cheer up dry bulk owners as the container trade is a basket case.

http://www.economist.com/businessfinance/displaystory.cfm?story_id=14133794

The container shipping market is the worst of the shipping sector. The reason for this is that it is most like the airline industry. It runs fixed schedules and chases volumes by discounting. Interestingly enough it also faces the Airbus v Boeing size debate. The giant 12,000+TEU vessels are like the A380, restricted to limited routes where volumes and infrastructure can accommodate them. Like the A380 they also miss the point on cost. It is not cost per box or seat on a sector but door to door costs that count...

The shipping debt overhang

Even the most experienced so-called 'shipping banks' (Nordea, DnBNOR, DVB for example) lent substantial sums at the top of the shipping cycle. What was worse they often did so under aggressive terms with loan to values (LTVs) of more than 80% and loose covenants. Since then vessel values have plummeted and with them equity has been extinguished. I have been looking at a number of fleets that are now probably worth less than their debt. I would, for example, put Freeseas Inc www.freeseas.gr and Maritime Capital Partners www.maritime-capital.com in this category to name just two. The number of shipping company bankruptcies has been limited to just a trickle so far (from Allco's mistimed foray into shipping to Eastwind Maritime but in 2010 the flow will increase as banks are unable to put off the inevitable with their clients. Estimates of how much will be written off by the banks vary but around $50billion seems about right. These same banks are now taking a conservative stance and will sit across the table from the shipowner talking about risk and struggling to fund anything over 50% of LTV. The irony. The best time to lend into shipping is the bottom of the cycle when asset residual value risk is lower and pricing higher. Despite this anyone lending in 2010 will have the market to themselves....