Multi-Disciplinary Reading – Book Reviews

The Shipping Man, Matthew McCleery, 2011 – I love books that teach me about a new industry. This one on shipping is among the best of those since it assumes nothing of the reader and yet is filled with so much about the industry conveyed in the most humorous way. Also, one of the most hilarious books I have read as well, as I had tears laughing in several parts. The story is fictional – of a hedge-fund manager who gets sucked into buying a ship and his encounters with the colorful characters of the shipping industry, from Greek and Norwegian shipping men, German and English financiers, Somali pirates and Wall-street bankers

My notes –

• Three types of ships – Bulk carrier (unpackaged dry bulk), container and tanker (transport and store oil)

• BDI – Baltic Dry Index – measures the time charter rates paid by the dry bulk cargo ships (fluctuates wildly – like ATH to 25 yr low in 3 months sort of wild)

• When it comes to buying ships, the best deals come with the worst cash flow – you generally don’t get a good price and good cash flow at the same time (applies to all cyclicals)

• TEU – twenty-foot equivalent unit (Measure of capacity of containers the vessel can hold)

• Intermodal – The transport system where same boxes (containers) can be loaded off ships, into trucks or trains

• Three advantages to compete in shipping – pay less for your ships, pay less to operate them or pay less for your capital (applicable widely!)

• International shipping markets closely mirror general economic and political events – but on steroids (China joining WTO in 2002 resulted in large shortage of ships – anyone who owned a ship became rich overnight)

• Even tripling of charter rates doesn’t destruct demand as large volume transport ensures margin increase per item is low – add in financial leverage and operating leverage and effect is potent

• New ships take 18 months to build. Since most orders are placed at top of cycle, value destruction is wild

• Germans were largest low-cost lenders in shipping industry and they mostly lend to container ships (Hamburg controlled 35% of global container fleet)

• Liquidity is nothing more than a function of finding a market clearing price. At the right price, there is endless liquidity

• A ship worth $56m in 2007 purchased on a loan of $43 million (73% of market value) was worth $25 million in 2009 if you could find a buyer at that price (Lenders to the industry know this sort of thing is like a common-cold and it will pass. So banker might waive payments and ship owner might retain his equity – the stress is only in the imagination – so no assets are sold for cheap at the bottom of the cycle)

• While loan value might be higher than market value of ship – the value of undiscounted cash flow the ship can generate in the next 27 years make the loan sound – keen understanding of this leads to banker and owner retaining their sanity

• When there is stress in the economy, they work as a team to ensure everyone survives and don’t cry “every man for himself” and jump ship (way Europe does business vs America)

• Amend and extend (or pretend and extend) or kicking the can down the road is a legit strategy is shipping loans (Even when the loan is stressed and must be cleaned up, its sold at face value even when collateral is worth half-price to another known borrower who brings in the working capital and a non-recourse loan is provided to the borrower to buy the loan)

• When charter rates aren’t enough to pay operating expenses, lot of working capital loans are required to survive

• Lender raises money for giving out working capital loans at 8% (DIP or debter-in-possession financing) to ensure they tide over the bad phase so they have keep the equity upside for themselves since they assume the equity risk

• Greeks are some of the most hardworking and clever shipping people in the world (Intense rivalry between Greece, Norway and China)

• Shipping is a big industry but a small community and information is everything – like living in a little village

• Everyone knows everyone and everything so you must be careful not to run a stop sign or be seen parked in your neighbor’s driveway (On trust and accountability in shipping)

• If your cost of capital is higher than Germany – naturally you will end up doing the worst deals every time (banking in general works this way)

• The experts are often wrong because they know too much about a market thats inherently unknowable

• One who is most bullish, has lowest cost of capital and a personal motivation for doing a deal wins the ship – everyone else does nothing but talk about the rational reasons they have for not doing deals (Applies to many markets)

• No shortage of money to shipping industry – govt.s, oil companies, grain houses, traders, shipowners, PE funds, capital markets – only time will tell if you make a good deal in shipping

• Money is a commodity just like ships and cargo. Even the broke have money for a good deal – money hides where there’s danger and pops up where there’s value – money drives away value

• If you order a ship you will have dead money for 18 months

• As a shipowner you think the ship will work for you but in reality, you will work for the ship (On a philosophical level, all possessions work this way!)

• Vintage ships – or seasoned assets – the ones without new ship debt amortization schedule are good way to making money in shipping – sweating the assets bought for cheap

• The value of a ship is determined by “perceived” cash flow it will generate. Even when BDI crashes 97%, it has to stay at the level for long time before it erodes confidence

• Replacement parts for old ships are available in scrapyards of India and Bangladesh

• A new ship may cost $30 million and an old one $4 million – but they earn the same charter rate

• An old ship that costs $4 million may generate $14,000/day and have operating exp. of $4,000/day giving an FCF of $10,000/day – $3.65 million / yr – returning back investment in a year, assuming charter rates stay same and 100% util (If lucky it can even generate $60,000/day on a 60 day voyage and post expenses, do that much in a single voyage!)

• A ship is like a little factory – you may have to go 30 days to collect charter hire but have to pay all of your expenses (A $4 million ship will still need $1 million in working capital – mainly for bunkers – which is fuel)

• Adcom – or address commissions – like broker fees or illegal fees to do the deal at lower value (like our black money)

• Supply and demand alone doesn’t affect freight rates – while moving cargo has an intrinsic value, the cost of it is determined by perception of the direction of freight rates (Putin banning export of Russian grains for eg. might imply grains moving from US/Canada to Middle-east – so further the distance, higher the ton-miles, which increases freight-rates – and it happens in span of hours)

• Shipping is often best when the world is least stable (as it happened post Covid)

• Shipping wasn’t regulated by one authority, it was regulated by a seemingly endless stream of them

• Tankers could earn $5m in profit for carrying 2 million barrels from Saudi to Japan in good market but could lose half as much when market was bad

• The shipping news, Death of a shipowner, Maritime Economics, Ship finance : credit expansion & boom-bust cycles (Books on the industry)

• FOB – freight-on-board – all costs borne by the shipper before cargo passes through ship’s rail. CNF – Cost-and-freight – incl. of shipping cost to nearest port of buyer

• Avg. charter rates are probably in line with expected return on capital but fortunes were made and lost in the short-term market on the whipsaws of charter rates

• CNF can lead to serious haemorrhaging of cash when freight rates are high (as it happened post Covid). By owning a ship, financial risk is exchanged for operating risk (buying old bulk carriers)

• In shipping, you have to be well-capitalised since unexpected happens every day. Enough cash buys time

• Greatest value in shipping is option value – so entering long-term charters at fixed rates is not only boring but also ends up losing this option value

• Someone is often wrong and its most often the guy who (thinks he) knows the most

• The two happiest days in a shipowner’s life are the day he buys a ship and the one when he sells it for a profit

• Growth is a principle preached by people who have nothing of their own to lose – govts. want growth to keep their ponzi going through tax revenue, people with nothing need growth to get something, and people who feel small think they need growth to feel big

• In shipping its better to own 100% of 10 ships than 50% of 20 ships where you have to beg your board for permission to buy, sell, charter or pay yourself a little dividend

• There are no economies of scale in shipping beyond a fleet of 10 ships. The guy owning 70 ships simply overpaid for 35 of them so had to double down to reduce avg. price of ships (lol)

• If my ship saved your ship from Somali pirates, maritime law requires you to pay me 50% of the value of your vessel

• Venezuelan crude – darkest and dirtiest crude in the world with carbon chain so long that stuff is barely flammable – only the Chinese want it and they burn it in their power plants

• Cornerstone investor – a smart, well-known fund manager that people know will do his homework before making a substantial investment (others will then piggy-back)

• An investment banker is no banker at all as they are not a lender, nor an investor – they are merely a broker and should be called so

• Buy on the sound of cannons and sell on the sound of trumpets – Napoleon

• Thou shalt not believe a single word thy investment banker uttereth

• Higher the promised coupon, less likely the company is to pay it (coupon rate doesn’t matter to the investment banker – their fee is same irrespective of deal prices)

• Reverse hollywood accounting – when studios pay actors a percentage of the net, they would cook the books to make sure the net was close to zero (horseplay between the revenue line and net income line)

• Junk bonds or high-yield bonds raise more than they require – usually double (investment bankers insists on this) and 50% of the amount is locked up in escrow for payment of coupons (credit enhancement is the fancy term used)

• Nothing got an investor aroused as much as the possibility that he might be denied the opportunity to make the investment

• VLCC – Very large crude carrier. In good times also Very large cash cow

• Historical financials and book values – two things American investors look for – both mean nothing in shipping industry

• When Egypt shuts the Suez, navigating around the horn of Africa means VLCC rates can go from $5000 / day to $150,000 / day (Suez blockage post Covid led to same outcome)

• Equity capital with a fixed coupon – if deal works out, you buy the investors out. If the deal doesn’t work out, you buy them out for cheaper

• Earning money is more fun than just having money

• Success in life is basically random and a function of having the willingness to try new things

The notes don’t do justice to the book and I highly recommend reading the book if you want to understand shipping and would at some point like to own businesses in this sector like GE shipping or SCI (Disc: dont own either). Even otherwise, it gives a good idea of the perils of globalisation when so much of goods are moved on the waters several thousands miles. You also get a good idea of the functioning of shipping finance and investment banking industry in the most lucid and hilarious fashion possible. 11/10