To IPO or not to IPO? That is the question

As US equity markets hit new highs and shipping markets recover, are investors ready to back fresh flotations?

Spring has taken hold in the northern hemisphere this week as longer days and a little more sunshine bring the seasonal promise of warmer months ahead. But will the long-awaited, spring-like condition of shipping markets turn into full summer this year after nearly a decade of deflationary pressure on asset prices and a long series of false starts?

Such prospects have already prompted shipowners and their investment bank advisors to start examining the potential of tapping public equity markets once more, especially in the US where the Dow Jones Industrial Average remains near its record 21,000-point level.

Analysts have turned distinctly more bullish in recent months as the rebound from last year’s historical dry bulk lows gathers momentum.

Just this week, Clarksons and Deutsche Bank both gave upbeat assessments on the prospects for continued price appreciation for ship asset values and equity prices, not only in dry bulk but also the tanker space.

Driving some of the optimism has been a faster than expected recovery in commodities demand as the outlook for global economic growth accelerates.

Meanwhile, fleet growth is likely to slow as recent low newbuilding ordering makes itself felt. Just 27 shipyards received new contracts last year — down 85% from the record level seen in 2007, says Clarksons Platou Securities.

Public markets have already bought into the dry bulk recovery story with the equity value of Star Bulk, for example, up 2,200% in the past 12 months.

And there may be more to come if ship values keep rising on the back of buyer demand. For each 10% increase in asset prices, net equity value rises 30% — a 1-to-3 ratio — says Deutsche Bank, leaving plenty of upside yet to come.

Crude and products tankers have been under more pressure, squeezed by new deliveries and OPEC production cuts. Euronav’s Paddy Rodgers expects rates to be range-bound this year, with potential weakness in the next two quarters — additional tonnage being the main factor.

Nevertheless, with operating cash flow remaining more than depreciation, savvy tanker operators will have the opportunity to build their fleets further.

It creates an environment where stronger owners may find investor appetite for initial public offerings (IPOs) rekindled as memories of recent failures fade.

Golden Ocean Management’s recent deal to buy Quintana Maritime has been greeted as an interesting “IPO by proxy”. Quintana’s own plans to float were parked when Golden Ocean made an all-shares offer, fuelled by its own recent stock-price gains.

Such nimble deals could create a back door to public markets for private investors looking for a profitable exit.

Political risk remains a great uncertainty for markets around the globe, with some issues threatening to cut shipping demand.

So far, President Donald Trump’s warnings that his administration will impose swingeing trade tariffs have not played out. Yet there was a hint of potential problems in the statement issued at the end of last weekend’s meeting of the Group of 20 leading economies.

For the first time since 2008, the statement dropped its boiler-plate pledge to eschew protectionist policies, most likely at the demand of the US delegation.

Momentum in shipping markets has now turned positive, and US equity markets also continue to move forward. Yet despite such support any shipowner eyeing an IPO will need skilful management and clever timing to avoid the risks ahead.