In recessions companies with cash flow problems are under the micro-scope. Cash is king; survival of the fittest is the rule; and to the victor go the spoils. Although shipowners under pressure wake with a heavy heart, their colleagues with big balance sheets and small obligations are not necessarily any happier. For them recessions are for building future businesses, and that can be almost as stressful as bank-ruptcy.
Where’re the Bargains, Bosun?
It is a fundamental truth of shipping that market troughs are about change, when the strong take over the weak. In a world of financial easing, however, things are not so easy. Before companies or assets change hands cheaply, someone has to “take a haircut”. That happened big time in the 1980s but the 2013 recession has a very different financial background. In the early 1980s, high interest rates (LIBOR 16+%) put enormous pres-sure on businesses and bankers. If a customer is not paying interest, foreclosure is almost inevitable. Now there is little interest pressure (LIBOR 0.43%) and no banker wants to force a distress sale and drive asset values down if they don’t have to.
Today’s Droopy Prices
Because current financial pressures are so different from the 1980s, asset prices are behaving different-ly. To illustrate this, the graph shows the price of a 5-year-old Panamax as a % of the new price (solid line) and the same for an Aframax (dotted line). In a “normal” market, the price of a 5-year-old ship should be about 75% of the price of the newbuilding, reflecting that merchant ships have a 20-25 year economic life and depreciate at 4-5%pa, other things being equal.
Not so Droopy as the 1980s
The graph suggests that second-hand prices have been very droopy since 2008. The 5-year-old Panamax has halved in value from 140% of the newbuilding price to a current value of 74% and the Aframax is down from 100% to 60%. So, anyone looking at the way prices have collapsed might well conclude that today’s ships are cheap. In fact, they are not nearly as cheap as in the 1980s recession. In 1981, a 5-year-old Aframax was 72% of the new building price; it slumped to 40% in 1982 and stayed there, on and off, until 1986. Now that really is distress pricing. By these standards, far from being bargains, today’s Panamax is still priced at a pretty normal level and though the Aframax looks more reasonable, it is still not super-cheap.
Lies, Analysis and …
So there you have it. We have hit the bottom of the recession, but the banking crisis means asset prices are not behaving in the same way as they did 30 years ago. Then, banks were foreclosing left, right and centre. Today, banks are staring with apprehension at their balance sheets and wondering where to go next. In the meantime the can gets kicked down the road and deals are done “on market”, probably with a little help from sophisticated structuring. Are ships cheap? Well, there’s only one answer – “no comment”. Have a nice day.