Private cash and public scrutiny put damper on US shipping IPOs

There is more to the drought of shipping launches in the US than the poor performance of existing players amid turbulent markets. Other industries are avoiding the public route too

It is easy to blame the halt in initial public offerings (IPOs) of shipping companies on US exchanges over the past 18 months on the poor state of freight markets. Record low dry bulk rates early last year pushed several companies into Chapter 11 bankruptcy restructuring and others to make last-ditch loan term renegotiations to save their existence.

Crude and products tanker owners have sailed into choppy waters, while container leasing companies have been battling their own over-capacity crunch.

Amid a sharp shrinkage in the volume of loan business available from traditional shipping banks, as they have adapted to balance-sheet and regulatory pressures, the IPO drought has choked off one valuable source of fresh investor capital.

Broken promises made by shipping companies and their investment bank backers to IPO investors to ­expect good returns have certainly come back to haunt the industry. They are an important factor in why maritime stocks remain off limits for many funds that buy only investment-grade securities.

But shipping’s bad record is not the only reason. Many in shipping will have overlooked that there has been a sharp slowdown in the overall number of IPOs on US markets.

That is now causing much debate over its causes and possible solutions.

Over the past 10 years, the number of US listed companies has fallen from around 4,900 to 3,603 at the end of February this year, according to investment ­advisor Wilshire Associates. At the peak of the bubble in the late 1990s, there were more than 7,000.

As for IPOs, 2016 was not only a desert for new shipping ventures making the step up to the public arena. Overall, it was the slowest year for new US listings since 2009.

Even Thomas Farley, the New York Stock Exchange president, conceded recently that issues such as the heavy focus on quarterly results and the rise of the influence of so-called activist investors may act as ­deterrents to private companies moving into the public sphere.

Regulations that were reinforced after the global financial crisis a decade ago are seen by many as the prime cause of the shrinkage. But that is maybe only half the story.

An explosion in the volume of private funding for companies has perhaps been equally or even more significant, argue some experts who follow these trends closely.

Certainly shipping has benefited from a major ­influx of privately held money, just as much as the American technology sector. That has given companies the ­liquidity to invest for growth while remaining private, rather than taking the often expensive and challenging path to public status.

In the shipping services sector in particular, there has been a noticeable flow of private equity and fund transactions, and virtually no appetite for public ­listings.

For the market as a whole, mergers and acquisitions have been another big factor behind the overall ­reduction in the number of quoted companies. While shipping has seen a limited number of mergers — most notably in the liner shipping market — they have not involved pairs of companies on US exchanges.

For quoted shipping companies, there is little, if any, leverage to be gained from offering an acquisition premium. The investment market remains ­focused on net asset value calculated from mostly private secondhand ship transactions, and fails to give much premium for operational capability.

The new cadre of US regulators appointed by the Trump administration have indicated a desire to ­address the fall in the number of listings.

The new chairman of the Securities & Exchange Commission (SEC), Walter Clayton, has conceded that US public capital markets are less attractive than they were. His appointment of veteran Silicon Valley lawyer and IPO advisor William Hinman to head the SEC’s corporate finance division flagged action on the issue.

Despite the concerns, appetite from investors for US stocks shows no sign of abating. Earlier this week, the S&P 500 and the Nasdaq Composite stock indices again hit all-time highs.

Several shipping IPOs are thought to be under consideration, but for now there are no specific timelines. Any regulatory shifts are likely to take time to come into force, although they would inevitably help refloat those plans.

Over and above any market stimulus to encourage new listings, any prospective shipping IPO will face its own challenges, convincing investors of a credible story. As noted investor Sir John Templeton said, the most expensive words in the English language are “This time it’s different.”