Shipping Bonds Issues Momentum Continues
A growing number of shipping companies have taken advantage of the low interest rate environment and tapped the debt capital markets. This comes at a time when the availability of funds for the shipping industry is declining. We highlight four reasons behind the increase in high yield bond volumes coming from the shipping sector.
Scarcity of funds from the banking sector. The regulatory pressures are forcing these institutions to increase impairments associated with shipping loans and thus more and more financial institutions are trying to limit their exposure to the highly volatile shipping sector. Banks with a more diversified portfolio and stronger balance sheet are able to navigate through the downturn and continue to support the industry. However, banking exposure is declining and shipowners are required to adjust in the new environment.
Market rebound YTD, especially in the container shipping sector. The improving market dynamics help mitigate credit risk and can lead to credit rating upgrades. Year to date, large container shipping companies (primarily CMA CGM, Hapag-Lloyd) have issued five new lower priced bonds for an aggregate amount of $2.8 billion equivalent.
A low interest rate environment. Clearly the current situation provides an attractive context for shipping companies to refinance debt and push back the debt maturity profile. Persistently low interest rates challenge investors to hunt out yields and the high yield shipping bond market is a lucrative option. The average yield on dry bulk, tanker shipping and offshore bonds stands at 10 percent, 9.4 percent and 13 percent respectively. At the present time, the offshore sector offers the highest yields in Shipping, although it also comes with the highest risk.
The covenant-lite structure of the securities and their unsecured nature. In the majority of cases, most shipping bonds are senior unsecured notes that lie at the bottom of the debt pecking order with incurrence covenants attached and not maintenance financial covenants. Shipping companies prefer that type of financing as they usually don’t have to pledge any collateral while investors are compensated with higher coupons for taking unsecured risk on the Company. On average, coupon stands at 5.6 percent and the average yield for investors at 6.2 percent.
Assessment by sector
We analyzed a sample consisting of 61 shipping bonds outstanding with an aggregate amount of $28 billion equivalent that filled our criteria: international bonds with a minimum size at issue of $100 million, denominated in one of the major currencies (US dollars, euros, and British pounds). Our Drewry Maritime Financial Research (DMFR) coverage accounts for more than 50 percent of these bonds.
The container shipping and port sectors account for 61 percent of total issues with tanker shipping bonds adding eight issues, gas shipping five, offshore eight and three more bonds raised by companies operating in the dry bulk space.
Bond primary issuance YTD is strong and we have recorded over $4 billion equivalent in new issues. This is also supported by data from the Oslo Stock Exchange that suggest new bonds of NOK 45 billion ($5.65 billion) coming from the shipping and offshore sectors since the start of the year after pretty low volumes in 2016.
Container shipping. The container shipping sector contributed the most of the new notes with five new bonds from CMA CGM and Hapag-Lloyd (two bonds each) and Global Ship Lease (GSL) and an aggregate amount of $2.8 billion equivalent since the start of the year. Both companies have been attracting investor appetite hence all the new bonds were oversubscribed. This month alone, both CMA CGM and GSL raised 500 million euros and $360 million respectively. GSL announced on October 20, 2017 the launch of a new $360 million floating rate 2022 senior secured notes in order to redeem early the 2019 notes together with other debt facilities.
Gas shipping. GasLog, Golar LNG and Golar LNG Partners from the Gas shipping sector have also tapped the bond market this year raising a total amount of $900 million equivalent. Funds were used primarily for refinancing of debt obligations while the new bond from Golar Partners included a conversion into equity option. Euronav NV and Teekay Shuttle Tankers added $400m bringing the total amount YTD to $4.1bn equivalent.
Bonds issued by the companies that operate in the dry bulk and container shipping sectors have benefited the most YTD, in line with an improvement in freight rates for the sectors. The dry bulk sector has strengthened, with the BDI touching a three-year high. As a result, benchmark bonds from the sector with a large amount outstanding (Navios Holdings, Golden Ocean bonds) have rebounded YTD by a remarkable 25.3 percent on average. The rebound of the Navios notes had the most impact on the YTD return in the dry bulk sector, with Golden Ocean also climbing 17.4 percent during the same period.
The container shipping segment has also recognised gains since the start of the year, in line with the industry’s freight market upward trend. The sector, which comprises bonds from APMM, Hapag-Lloyd, CMA CGM and NOL (acquired by CMA CGM), is up 5.9 percent YTD. In the same manner, port operators gained on average 3.7 percent YTD an improvement in port throughput growth figures for the same period.
Bond prices from notes issued by tanker companies have remained relatively unchanged on average, gaining 0.1 percent on since the start of the year. However, the volatility of specific securities was really high in line with the tanker freight market. Navios Maritime Acquisition shed 1.7 percent of the value, while Euronav’s new $150m 7.5 percent 2022 bond lost 3.5 percent since the issuance date. In a similar manner, the bonds issued by DHT Holdings, OSG and Eletson Holdings also came under pressure in the first nine months of the year while Teekay Corporation and Ship Finance International bonds recorded a positive return YTD.
Conclusion and takeaways
We believe that shipping bond volumes will continue to grow. It is a win-win situation as shipowners benefit from the unsecured nature (in the majority of cases) of the indenture and the ability to diversify their sources of funding at the current bank financing environment (although at a higher cost from traditional financing). On the other hand, bond investors are compensated with the higher yields offered by the industry betting on the credit risk of the issuer which comes down as market conditions improve, in our view.
The shipping sector provides a wide range of opportunities in the fixed income space. The credit risk spectrum for the shipping bonds ranges from CCC to BBB of the S&P ratings while yields can reach double digit figures. Volatility is not an issue for the industry’s bonds as is the case for global fixed income. The opportunity lies in early sector calls and accurate pricing of the risk premium investors are required to pay, in our view.
We at DMFR have been long on the dry bulk sector since June 2016 and also assigned an attractive view on the container shipping sector early this year. Both sectors have performed very well in terms of bond returns, in line with market improvement from rock bottom in 2016. Additionally, however, we believe that value can also be found in distressed sectors, for the right credit name.
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