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Filing Season - All Change

Posted by William Hogg on May 9, 2019 9:59:04 AM
It’s reporting season again, a time when nerds such as ourselves get excited about seeing whether estimations about last year’s performance of the companies we cover were accurate, and finding that extra nugget of information buried in note 148b. However, 2019 has brought with it challenges which may undermine the value of past financials.

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Accounts for 2018 may not be too surprising: dry bulk was great, and then not so great, conventional tankers struggled before being offered a very temporary glimpse of better rates in 4Q, liner companies continued to consolidate and deliberate over what might constitute overcapacity, and the bunker market reshuffled its deck as it sought to secure long lost margin by reaffirming the value add it could provide.

At the back of our minds, however, there’s always the nag that the picture most accounts are painting is months old, and in some sectors, heavily skewed by a performance that is probably a year in the past. 1Q 2019 has seen significant market movements, macroeconomic and environmental volatility, and a level of forecasting uncertainty up there with Michael Fish’s legendary “what hurricane?”, when even people whose job it is to be certain throw up their hands and admit even their tea leaves are not providing the answers they need. 

Startups and failures

This atmosphere also seems to be leading to a return of our second favourite activity, startups and failures (we clearly need to get out more). Barriers to entry in most sectors are low, new ideas abound, big names are changing jobs, cowboys and borderline criminals are taking a punt and the weakest are reaching the limits of their reserves (and the patience of their banking partners).

The combination of market volatility and the shipping revolving door, creates additional factors to be aware of. Shipping is a people business - what happens to a target’s creditworthiness when a CEO abruptly departs, or key people leave to start their own thing (perhaps taking ideas, colleagues and clients with them)? Or when the “cheap” long-term charters you thought would hedge a counterparty’s long-term book in a refreshed bulk market are now forcing the target to burn bridges with Japanese tonnage providers? Or when failures by people your target company trusted wipe out its cash reserves? (that classic “your client’s client” risk). Or that debt your target maintained with its long-suffering family bank gets sold to someone who cares a lot less about their history and Neapolitan villas? Or your target company or one of its assets gets embroiled in a sanctions-related issue causing its business partners and finance banks to take flight (another classic "client's client" problem).

The impact of 2020

All this, and the impact of 2020 has yet to move the needle on bunker and freight prices when owners have already taken multi-million USD hits to comply, and bunker participants (at least those who can) have spent expensive time securing greater financial liquidity (and publicising it furiously). 2020 in particular brings in the aspect of pricing risk. Are those who have complied going to get paid a premium for their hard work and investment? Let’s hope so, but history would suggest that barring strong regulation and top-down commercial “enforcement”, market participants rarely opt to pay more, particularly in weak markets.

Speaking to contacts in the industry, one gets the feeling the answer is to be short, short, short. Take each day as it comes, maintain a level of flexibility, and, again for those who can, avoid anything you don’t understand. Hardly the environment for entrepreneurial success, but this IS shipping, where the smell of pre-2008 returns still seems to be in the air despite a decade of otherwise; finance certainly appears to be there for those who can make a sufficiently persuasive pitch.

So, what to do? We’ll keep doing what we do best, trying to add that extra edge to your information arsenal. The people at the sharp end of decisions in this market? May the force be with you.

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Topics: Insider

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