Rickmers CEO says ocean shipping must tap new financial sources.
By Chris Dupin
For decades, limited partnerships, or “kommanditgesellschaft” (KG) in Germany, and loans from European banks have been important sources of capital for shipowners.
But in the wake of the 2008 financial crisis, obtaining capital for the maritime industry has become increasingly difficult.
“Given that whole system no longer operates the way it once did, we have a conviction that you’ve got to be able to tap other sources of funds in order to finance your business and to generate new projects going forward,” said Ronald D. Widdows, chief executive officer of Rickmers Holding.
This summer Hamburg-based Rickmers raised 200 million euros ($257 million) selling five-year notes that are now traded on the Frankfurt Stock Exchange.
Widdows estimates about 35 percent of the container fleet was built through the KG system.
“It made sense to us to be able to open up some other avenues rather than sit and hope that at some point in time the system that has built so many ships in Germany finds its way back into operation again,” Widdows explained. “That’s either going to be a long time or not at all. So other ways of doing this are needed, at least that’s our belief.”
Rickmers prospectus, May 14, 2013.
The notes Rickmers issued are unsecured, not tied to a particular ship or other asset, and the company said in the prospectus prepared for investors that of the proceeds, about 96 million euros would be used for refinancing and 94 million euros used for growth financing and investments.
To access the public markets, Widdows said Rickmers spent 18 months undertaking a transformation from a family-owned shipping company to one that was more transparent and structured to make it attractive to the public markets.
KG investment in ships was “investment driven,” he said. Ships were being constructed because of returns they could offer investors and associated tax consequences. Many ships were built speculatively, and there was limited concern about counterparty risk.
The new investors in shipping — private equities, insurance companies and pension funds, for example — are, on the other hand, very focused on counterparty risk and demand transparency from the companies in which they invest.
“They don’t just plow money willy-nilly to building assets on speculation. So the speculative building of assets is largely gone,” Widdows said, adding this should be positive for the liner industry which is suffering from overcapacity.
Likewise, banks that provide funding for shipbuilding are “going to look very deeply at counterparty risk of people like us, the shipowner, and most certainly at the credit risk of the charterer of the ship.
“Even with an export credit-enhanced financing, the bank has to understand the credit risk of the person who is chartering the ship,” Widdows said. That will “temper a bit the number of ships that are built in the near-term. That’s a good thing.”
Thus the Rickmers note sale this summer was “more than just about raising a bond, additional debt,” he said. “It’s transforming a company to be able to have the avenue of using the capital markets potentially raising equity at some point in time. The work has been done to construct the company in a way to be able to have that optionality.”
Rickmers Holding, or the Rickmers Group, is a collection of companies that manages a fleet of about 100 vessels, some of which are owned, held by shipowning funds, or owned by other parties.
It includes 103 consolidated subsidiaries and seven minority participations in other companies.
Rickmers’ businesses include Rickmers-Linie, a breakbulk shipping company that operates multipurpose ships capable of carrying heavy-lift and project cargoes; a maritime assets group that manages vessels and coordinates vessel projects for Rickmers and third party clients; and a ship management company.
The company is no stranger to the public markets — it has a 33 percent interest in Rickmers Maritime, a Singapore-listed business trust that owns 16 ships. The financial statements for the trust, however, do not provide information about the larger Rickmers enterprise. (Separately, the Singapore trust year recently raised $81.5 million through a rights offering to existing unit holders).
The new transparency by Rickmers Holding, exemplified by the detailed 414-page prospectus issued in conjunction with the note offering, will be valuable not only to investors, but to customers, Widdows said.
Shippers moving project cargo with Rickmers-Linie, liner companies chartering Rickmer containerships, or investors wanting to partner with the firm, will now have regular, audited, publicly-available finanical statements to peruse. The company’s financial statements are audited by PricewaterhouseCoopers and rated BB by Creditreform Rating AG.
Going forward, Rickmers is looking to expand in the containership business. In March, it entered into a letter of intent with a Korean shipyard for the design and construction of 10 containerships each with a capacity of 10,000 TEUs, with an option for 10 more.
Widdows, who was formerly CEO at APL, the world’s seventh largest containership operator before joining Rickmers in 2012, said the company is talking to a number of investors and carriers about ships in the 10,000-TEU range.
While liner companies will continue to build and own many of their ships, he said there remains an ongoing need for chartered containerships because carriers can’t, nor do they generally want to, own all their assets.
“They need to have charter tonnage to have flexibility in their asset base,” he said.
Widdows said 10,000-TEU ships will be the most attractive size for carriers moving cargo between Asia and the U.S. East Coast once the widening of the Panama Canal is completed and expects his company may conclude contracts on some by the end of the year.
“But that will depend on the appetite of the carriers, and right now the carriers, most of them, are being cautious and that’s a good thing,” he said.
“The economic improvement of moving up into the 10,000-TEU range is pretty significant so that’s where our primary focus is today,” Widdows said. Carriers, for example, will be able to replace two current Panamax strings with a single string of 10,000-TEU ships, he explained.
While larger ships will be able to pass through the new Panama Canal locks, Widdows believes ships larger than 10,000 TEUs “are going to have a difficult time because of the combination of infrastructure and productivity constraints on the East Coast.”
Rickmers also has some interest in smaller vessels that are available at distressed prices, and in late June the company announced it had signed a contract for the purchase of five 2,200-TEU container vessels for $30 million, stating it “regards this particular vessel size as one of the few market segments with positive short-term upside potential for the charter rates inter alia as the number of vessels in this segment decreased in 2012.”
Widdows said the notes the company sold this summer have “very little to do with going and building a billion dollars’ worth of ships. Most of the investment in new ships that we would be involved in in the near-term, most of that will come from other investors,” who are attracted to the sector both by the low price of assets currently and the need by carriers to get “significantly less costly, fuel efficient ships into their network.”
But he noted many of the investors wanting to invest in vessels are not shipping companies, “so the technical capabilities of a company like ours to partner with the investor who brings the equity and the investment appetite, that kind of cooperation makes a lot of sense.”
Rickmers brings to the table expertise in design, building, supervision, technical management and chartering of ships, and Widdows said “those parts of our business benefit from any ship that we can bring under management.”
Down the road, opportunities to generate more capital will open the door to more considerable investment in assets by Rickmers, he said.
Widdows said shipping companies also have to balance their need to obtain more fuel-efficient ships with the current depressed state of the market, but he noted “the rate environment today has nothing to do with what conditions are when a ship comes into the water two and half years from now.”
He pointed out some 10,000-TEU ships that were delivered in 2011 and 2012 burned 110 tons of fuel per day. (To be fair, he also said some used less fuel.) But today, with new hull designs and better engines, some ships will use only 70 tons of fuel per day, making them vastly cheaper to operate.
Replacing two Asia-U.S. East Coast Panamax strings with a single 10,000-TEU ship string would result in a “gargantuan improvement in economics,” he said. “Even if you didn’t completely fill the ship your economics would be vastly improved.”
Widdows said the movement of carriers to bigger ships may result in the formation of bigger alliances — similar to, say, the G6 alliance of six container carriers — at least, as larger tonnage is phased in over the next several years.
“I think they’re going to find that those kinds of cooperation will be beneficial for quite some time,” he said. “If you look out over the next 10 years the number of ships that the industry is going to require is enormous. So they’ll be plenty of opportunity there.”