Shipping May Float Distressed Strategy

Chidem Kurdas

Opportunities for distressed investing have been scarce, despite serial financial crises. The shipping industry, which has been in serious difficulties for five years, looks like the right place for distressed strategy managers.

New financing is hard to come by for struggling companies. Banks have accommodated ship owners and tolerated delays in payments but are expected to start cracking down, given the public pressure they’re under—exemplified by the political reaction to JP Morgan’s now infamous $6 billion loss.

Banks will push distressed asset sales in the second half of this year and in 2014, speakers said at a Capital Link conference. Private equity and hedge funds are seen as alternative sources of finance.

Shipping was historically not a good fit for private equity, said Jasvinder Khaira, a principal at Blackstone Group, speaking at the conference. But the current low point in the cycle and the lack of capital in the industry are draws. Shipping asset prices are at 15-20 year lows. He said as a private equity investor Blackstone looks for partners who have the expertise to manage the ships and possess an edge over competitors.

Oceanbulk Maritime Inc. is a shipping company that is in a joint venture with a private equity fund. Hamish Norton, head of corporate development at Oceanbulk Maritime, said the deal is organized so that the shipper will make money only if the private equity partner makes money.

But private equity firms typically do not look for distressed situations, which are more likely to attract hedge funds. Some hedge funds want equity and control but others don’t seek ownership. They may or may not take an active role in restructuring the business.

Shipping companies have so far mostly succeeded in avoiding bankruptcy. Filing for Chapter 11 is the last resort, says Alexander Tracy, managing director at Miller Buckfire & Co. He said there has been a shift in thinking about restructuring, so that companies no longer file for Chapter 11 and then make a plan; instead they make the plan first. Hedge funds can help finance reorganization according to the plan.

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