Notes
6.13 Classifi cation of Shipping Bonds Based on Collateral
advisors and bankruptcy lawyers (most likely they have had to deal with a bond default before, if not in shipping then in other industries). In the past, mostly during the defaults in the 1990s, there have been cases where the majority of retail bondholders didn’t manage to mount a spirited representa- tion and stance or the investment bank holding a stake in the bonds preferred, for their own reasons, to take a meaningful loss. However, as a rule of thumb, in the case of defaulting on shipping bonds where the bondholders’ commit- tee is controlled by institutional investors, typically the borrowers can expect stronger negotiations and professional eff orts to recover as much money as possible, exhausting all options and legal venues.
6.13 Classifi cation of Shipping Bonds Based
right to arrest named vessels as security. As an example of a major shipping company accessing the bond market on a regular basis, AP Moeller Maersk issued USD6 billion in corporate bonds on 11 occasions in fi ve diff erent cur- rencies between 2009 and 2014, with maturities ranging from fi ve to ten years, and an average coupon of 3.68%. Please see adjacent table (Table 6.1 , Selective Bond Issuings by A.P. Moeller Maersk).
Th e majority of shipping companies looking to access the public debt mar- kets have a relatively short history of existence (predominantly much shorter than ten years in business) and often may also lack a proper corporate struc- ture, solid corporate governance or even consolidated audited fi nancial state- ments. For such shipowners, a corporate “promise” that they will perform diligently on new corporate bond issuings is not suffi cient to have a successful bond raising; this disadvantage is even more pertinent for the commoditized and volatile sectors of dry-bulk and crude oil tankers, especially when ves- sels are operated in the spot rate market and thus fully exposed to the vicis- situdes of market forces: bondholders are prepared to take a risk (almost by defi nition) but not a market risk that equity investors should be prepared to take. In such cases, when the “promise” or “faith” in repayment is not strong enough, creditors can provide tangible assurances for the bonds by off ering them collateralized by hard physical assets (ships) and/or earnings associated with such vessels. Th us, in the event of default, the creditors (to the extent practicable) have the legal right to foreclose on the actual, named vessels stated in the prospectus. Under this scenario, certain vessels can be provided as collateral, in the same way that a vessel is provided as collateral in order to secure a ship mortgage from a bank. Additionally, if so desired or feasible, the borrower may off er, as additional collateral for the issuing of the bonds, the earnings—ideally earnings already attached to the vessels through time charter contracts. In such a scenario, the bondholders are off ered both the ships and their earnings as collateral, for which they are expected to lower the interest rate and increase the amount of the bonds, since the likelihood of a default is now lower and the capital at risk in the event of a default is also lower. Such bonds are called covered or asset-backed bonds (as compared with corporate bonds mentioned earlier, which are secured by the cash fl ows of the parent company). Also, asset-backed bonds are directly comparable to typical shipping loans (fi rst preferred ship mortgages, where the named vessel is pledged as security against the shipping loan).
As a variation on a theme, asset-backed bonds in shipping are not always issued solely by shipowners. Shipping banks may opt to issue bonds based on shipping mortgages they hold in order to raise their own capital from the public capital markets; in the go-go days of fi nancial engineering prior to
Table 6.1 ISSUER NAME ISSUE DATE PRINCIPAL AMT CURRENCY USD EQUIVALENT COUPON RATE COUPON DESCRIPTION MATURITY DATE A. P. Moeller- Maersk A/S 16-Sep-14 75,00,00,000 USD $75,00,00,000 2.55% 2.55% 1-Sep-19 A. P. Moeller- Maersk A/S 16-Sep-14 50,00,00,000 USD $50,00,00,000 3.75% 3.75% 1-Sep-24 A. P. Moeller- Maersk A/S 26-Mar-13 30,00,00,000 GBP $45,64,50,000 4.00% 4.00% 4-Apr-25 A. P. Moeller- Maersk A/S 26-Oct-12 1,40,00,00,000 SEK $20,84,60,000 3.75% 3.75% 26-Feb-18 A. P. Moeller- Maersk A/S 26-Oct-12 1,10,00,00,000 SEK $16,37,90,000 2.50% STIBOR+2.10% 26-Feb-18 A. P. Moeller- Maersk A/S 28-Aug-12 75,00,00,000 EUR $93,84,75,000 3.38% 3.38% 28-Aug-19 A. P. Moeller- Maersk A/S 22-Mar-12 3,00,00,00,000 NOK $52,11,00,000 2.50% NIBOR + 2.10% 22-Mar-17 A. P. Moeller- Maersk A/S 24-Nov-10 50,00,00,000 EUR $67,63,00,000 4.38% 4.38% 24-Nov-17 A. P. Moeller- Maersk A/S 16-Dec-09 2,00,00,00,000 NOK $34,44,00,000 2.50% NIBOR+1.85% 16-Dec-14 A. P. Moeller- Maersk A/S 16-Dec-09 2,00,00,00,000 NOK $34,44,00,000 6.25% 6.25% 16-Dec-16 A. P. Moeller- Maersk A/S 30-Oct-09 75,00,00,000 EUR $1,10,68,50,000 4.88% 4.88% 30-Oct-14 TOTAL $6,01,02,25,000 3.68% AVERAGE Source: Karatzas Marine Advisors & Co.
the Lehman Brothers collapse, such bonds were eff ectively collateralized loan obligations (CLOs), but the market for shipping loans off ered as collateral had never taken off . As mentioned already, asset-backed shipping bonds are relatively expensive forms of debt; any bond issuing, in order to have eco- nomic value, should have achieved premium pricing (low interest rate)—an impossible feat when shipping banks were lending at LIBOR + 2%. A special case has been the Schiff spfandbriefgesetz (Pfandbrief Act or “ship covered bond act”) in Germany with its special provisions to allow shipping banks to issue bonds collateralized by ship mortgages. Such practice was followed on limited basis prior to Lehman Brothers, and mostly by wholesale banks like DVB Bank SE 3 which has a higher cost of funding than most traditional retail/ship- ping banks. Post-Lehman Brothers, more German banks have opted to issue shipping bonds based on the Pfandbrief Act, such as Commerzbank AG 4 and HSH Nordbank AG. 5 , 6