Gibraltar Shipping Interview: Basil Karatzas Talks Alternative Bunkers, S&P Markets, Vessel Financing, and Trump

by Gibraltar Shipping
Friday March 10, 2017

Basil Karatzas is the CEO of Karatzas Marine Advisors & Co., a well-established, international maritime consulting and shipping finance advisory firm headquartered in the Financial District in Manhattan. Basil provides worldwide shipping market expertise to financial institutions and is active in ship brokerage, financial advisory and private placements, vessel valuations and appraisals.

In the Sale & Purchase ("S&P") market, the vessel has become the "derivative" in the transaction. Please tell us more about this concept:

When freight rates were robust and shipping banks were providing financing to average or above-average quality shipowners, buying and selling vessels had a life in its own right. Hopeful buyers would buy ships for further trading, look after the vessels and the crew, make timely payments to the banks, and they would keep the profits.

A ship was also seen as having a life of its own, and it was not unusual seeing shipowners talking about their ships as they were almost lovers. Fast forward several years later and with a terrible market, a great deal of shipowners are almost too broke to look after their vessels. And as more banks are trying to exit the shipping industry, one sees more "paper" for sale than ships, that is shipping loans are being sold, institutional investors are entering this distressed market, and the physical asset, the ship, is almost an afterthought in the whole transaction.

How has the S&P market evolved over the years?

The typical shipowner used to be the self-made captain, a buccaneer, sometimes a pirate, of the industry. Such players have had tremendous knowledge of the market and the industry, in-house access to technical and commercial information, and for such owners, the S&P broker could only sniff out vessels for sale or purchase to be negotiated privately at best pricing. As more banks and lawyers and institutional investors are now responsible for shipping, the S&P broker has now to be rounded with knowledge of maritime and admiralty law, banking, financing, operations, etc. and have a better skill set for the new type of players in the market. 

The S&P market has been evolving, and for better or worse, many shipbroking shops will not manage to stay afloat, especially if the markets remain weak for a prolonged period of time.

What have been the latest trends in vessel asset prices and how sustainable are these indicators throughout 2017?

Vessel prices are of course influenced by freight rates and availability of financing, but also from smaller, lighter factors such as momentum and expectations. In general, vessel prices are weak by historic standards for tankers, dry bulk, containerships and offshore assets. Sometimes certain markets behave better than others, but again, they are all highly correlated. There is lots of interest and activity in the dry bulk market at present based on the freight rate improvement in the fall and the broad belief that the worst is behind us. Tanker prices have been softening based on concerns of a wave of newbuildings delivering from the shipyards this year as well as OPEC cutting production. The containership and offshore markets can be described as 'disasters' at present, small or large, depending on geography or one's specific point of view.

In your opinion, what are the medium / long term challenges in the container freight market?

In general, there have been too many containerships and not enough cargo to keep them fully occupied. And, of course, the containership market is effectively several smaller markets by asset class and geography, with a great degree of 'cascading' and also risk for technological obsolesce; high speed / high consumption containerships cannot get a break and panamax sized containership have been heading to the beaches at ever younger ages; just in January this year, a seven-year old panamax broke the record of a nine-year old panamax sold for scrap in December. When a liner company such as Hanjin, effectively a quasi-government company, fails spectacularly as they did last year, it's a sign that the particular market segment is in a very tough spot. There is interest for smaller feeder ship vessels as they are considered a bit insulated from the broader market, and given that the outstanding orderbook is almost nil in this segment, some shipowners wish to believe in a hopeful market. At the other end of the spectrum, with the liner companies, it's a game of going after market share and pushing out of the market the weaker hands. It will take some time for the dust to settle in this market.

The traditional financier of the shipping industry have been European banks. Do you expect this role to shift towards US or Asian financial institutions?

We are not sure who will fulfill the role of the primary financier for the shipping industry, but we doubt this will be done from the banks, whether Europe-, US- or Asia-based. For sure, the model of financing shipping assets and shipping companies has been changing drastically, and we expect this to have a massive impact on shipowners, especially the smaller, independent, private owners. When shipping banks were practicing the so-called "name lending", shipowners didn't have to be financially sophisticated to get financing.

However, going forward, for a capital intensive industry like shipping, successful shipowners will have to be financially educated too. Probably this will be a challenge, as many independent shipowners, including in our native Greece, are still betting that shipping expertise alone will be sufficient for success, under the hope that banks soon will be back lending in shipping. Respectfully, we believe alternative sources of capital and the capital markets will be providing most of the financing in shipping going forward, and such financing sources require a much more thorough approach than required for "name lending". Karatzas Marine Advisors, as a shipping finance advisor based in New York, have ever increasingly advising shipowners on how to access capital and has brought financing to several of the shipowners who trusted us with their mandate.

What are the current factors that determine market liquidity?

In short, shipowners have to have a credible business plan and can demonstrate a competitive advantage. "Buy now that ships are cheap" is not a business plan, and institutional investors have seen many variations on this theme.

The recently appointed Trump administration has indicated changes in regulation that may affect the industry. What can we expect?

It's still too early to say at this stage, but no-one believes that the Jones Act market will not receive continued special attention. It's a unique business model that has been working for the US market, and it will be hard to see drastic changes any time soon.

What is your view on alternative fuels and their practical implementation?

Alternative fuels including natural gas and low emissions fuels pose a real technological threat, and potentially a game changer, to the existing status quo in shipping. No doubt, a tighter regulatory environment is to be expected going forward, meaning that vessels will have to be retrofitted for low-emission fuels, resulting into a meaningful CapEx for the shipowners, at a time when they can least afford it (of course there are more regulations on different fronts as well). Natural gas as a bunkering fuel is an interesting concept, as there seems to be plentiful and cheap supply of the commodity to make it an attractive alternative fuel for shipping. Of course, there is the "chicken and the egg" dilemma that ships cannot be retrofitted for natural gas unless there are natural gas bunkering stations worldwide, and a network of natural bunkering stations cannot be developed worldwide unless there is some critical mass. However, we keep seeing several projects in this front seeking financing to make us feel hopeful that there can be a day when many ships will be powered by natural gas. For some, it may seem like a voyage back in time, when coal and the steam engine was replacing the tall ships.

Please tell us about your memorable shipping experience and your favorite ship:

Getting deals concluded and delivering value for our clients is the most rewarding experience we can imagine. A low freight market is cause for concern for many owners who seek financing; also, a low freight market is an opportunity for many shipowners to grow their fleets and business. We are fortunate being based in New York City with good access to the capital and financial markets, and we have been very busy and lucky. 

However, the most memorable experiences are often associated with the ships themselves we have worked on and their shipping management and operations. Our most memorable experience has been the sale of a containership a couple of years ago; between the time the MOA was signed and the scheduled delivery of the vessel, it was discovered that several years prior to the sale, the vessel had grounded in South Africa on soft sand. As the vessel was pounded by the waves, the aft part of the hull was penetrated by a 150-year old cannon that was buried in the sand, likely to have come from a man-of-war, square-rigged warship. The transaction ended up closing as expected, but the incident provided another reminder that shipping is rich in tradition and history.