Shipping assets attractive for cash-rich companies

With the prices of shipping assets dipping sharply, cash- rich companies have the opportunity to acquire vessels to generate high returns, a shipping analyst said.

"Currently, liquidity is hard to find with many shipowners cancelling orders for newbuilds, leading to a slump in demand for new vessels. As prices of shipping assets have greatly reduced, it is a great opportunity for companies with enough cash in hand to generate high returns by acquiring vessels now and selling them when the market picks up," Demos Petropoulos, Head of Shipping, SFS Group Public Company, a Cyprus-based non-banking financial institution, told Emirates Business.

"In 2011 and later, there will be a shortage of modern ships because more and more old vessels will be going for demolition. This coupled with an economic recovery, leads to a mismatch between supply and demand and creates investment opportunities for long-term time charter contracts that reduce risk," he said.

Since the beginning of the economic crisis, many orders at shipyards have been cancelled. Renegotiating existing contracts by ship builders has become a normal daily affair with a massive reduction of about 29 per cent. This takes us back to the levels of 2006, he said.

Petropoulos is also the head of shipping in Global Shipping Investments Management (GSIM), a special purpose vehicle created by the joint venture between SFS Group Public Company and Malaysian subsidiaries of the Kuwait-based bank Kuwait Finance House (KFH).

Last week, the SFS and KFH's Malaysia-based subsidiaries KFH Asset Management and KFH Malaysia Berhad announced their partnership to set up a Global Shariah Shipping Fund, a private equity fund that aims to raise $150 million (Dh550m), with GSIM being the general partner.

KFH and SFS Group have together put in seed money of $15m, with the rest $135m to be raised by Shariah-compliant partners from across the world.

"We are finalising the prospectus and will be able to release it by the beginning of January and the fund is expected to be launched around January 15. The first closure of the fund will be around April or June and will target raising $75m. From the feedback of our investors, we are confident that before September next year we would raise the whole amount.

"We will be able to start investing next year as vessel prices in 2010 would be very close to the bottomline," said Petropoulos. On the major limited partners or investors who have shown interest for investing in the fund, he said: "A number of regional investment banks and family businesses from the UAE and Bahrain have shown interest to invest. Beyond the region, financial institutions from Malaysia, Singapore, Hong Kong, Indonesia, and Europe have shown interest. Altogether, we have received interests from more than 50 investment houses, regionally and globally, with 20 to 25 belonging to the GCC alone," he said.

The term of the fund will be seven years from the first closing and it will invest directly in acquiring shipping assets. The vessels will be chartered out on long-term contract to big charterers, he said. Although it will acquire vessels such as tankers and bulk carriers, the prime target will be offshore supply vessels that support the oil and gas industry.

"We are focusing on offshore supply vessels because the market for oil is expected to recover next year and beyond, and therefore there will be more demand for oil from consuming countries around the world. 2010 will be a difficult year for the overall shipping sector, but we expect the recovery to start from the end of next year and 2011 will be much better," he said.

Asked why the fund is going to be launched at a time when the charter rates are not expected to come up, he said: "We will not be just going to the market and buy any vessel. Our philosophy is to understand ship charterers' needs and then buy right vessel type that suits their requirements."

He said the fund is expected to generate a minimum of 15 per cent annual return to its investors.

 

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