Only cash counts – liquid investors at an advantage

16.12.2008 | Hamburg

Only cash counts – liquid investors at an advantage

· Entry prices in the ship market for equity-heavy funds: ship prices lower than they have been at any
time since 2002
· Continued positive growth rates in container handling; excess supply expected to dissipate by 2010
· Recipe for success in times of crisis: using equity to buy at low market prices

Hamburg, December 16, 2008. International sea trade is currently facing unusually severe obstacles. With the exception of tankers, all shipping markets are feeling the brunt of the slowdown in the global economy. The decline in demand is reflected in a corresponding drop in shipping companies’ income. Thus, for example, the charter rate index of UK freight broker Howe Robinson has dropped by more than half since the beginning of the year from 1,400 to 537 points. As dramatic as this situation sounds, there is no reason for panic. “International sea trade has always been a volatile market,” explains Dr. Albrecht Gundermann, a member of the management of Maritim Equity Beteiligungsgesellschaft mbH (Maritim Equity). “Such downswings occur every four to six years. The last one was in January 2002, when the Howe Robinson index dropped to 451 points. The question is not whether the market will recover, but when.”

No reason for panic; continued positive growth in container handling volumes

A glance at the current growth rates in international container handling volumes confirms Gundemann’s wellconsidered appraisal. These show that global trade is still growing despite worldwide fears of recession. According to the Bremen-based Institute of Shipping Economics and Logistics, international container handling volumes, for example, will still increase by around 8 percent in 2008. Although this is 4 percentage points down on 2007, it is only around 2 percentage points less than the 20-year average of around 10 percent. Says Gundermann: “So we’re a long way from a contracting market.” The temporary decline in charter and freight rates is primarily due to excess supply
and not solely the result of the downswing in the global economy. “With the decommissioning of a number of ships, the cancellation of excess orders of new tonnage from shipyards and the greater appeal of scrapping old ships, ship income will recover again to some extent,” explains Gundermann. In actual fact, large volumes of cargo are waiting at the ports to be shipped. The delays are not due to insufficient demand but solely to uncertainty surrounding the handling of payments. Says Gundermann: “Once the commercial banks start issuing international payment guarantees again, we expect bulker rates, for example, to stabilize, albeit at a low level.”

Now’s the time to enter at market prices: liquid investors at an advantage

“In no other market is an investment as worthwhile at the moment as in the international merchant fleet,” says Dr. Werner Großekämper, managing director of Maritim Equity, “provided that the ratio of costs to income is balanced. Ships ordered at top prices two or three years ago cannot generate any profits given the current charter rates.” The problem faced by conventional ship funds is the delay of an average of between one and three years between the structuring of the fund and the subscription period. However, this model only works in a market with rising prices. But according to the Howe Robinson figures, purchase prices are declining across the board at the moment. For example, the market value of a new 1,700 TEU container ship has fallen by half since the first half of 2008, dropping from around USD 40 million to some USD 20 million in tandem with considerably lower income-generating potential. By contrast, the Maritim Equity funds calculate their income on the basis of real market figures at the time of the ship investment and are therefore able to structure products which generate annual paybacks of 6 to 18 percent even in sagging markets. “We do not invest until the equity has been paid in. In this way, we buy at market prices and perform our calculations on the basis of current figures,” explains Großekämper. The result is fund investments which are able to operate profitably even in the current muted market conditions. At the same time, such crisis-resistant ships offer enormous upside potential once the market starts recovering again. Says Großekämper: “Obviously enough, ships acquired at favorable prices benefit to a disproportionately strong degree from any improvement in charter rates. They don’t have to recoup any accrued losses, meaning that every extra euro earned lands directly in investors’ pockets. For this reason, this new fund structure is proving very popular with subscribers. “We don’t have to sell investors shares which we acquired at prices paid two years ago. This sets us apart from the other offerings currently available in the market for closed-end funds,” says Gundermann, explaining the model.

Heightened security thanks to preferred capital and broad diversification

Maritim Equity currently has no shortage of attractive openings for investment. This is because with its equity investment the Hamburg-based initiator is filling a gap which has arisen in the wake of the financial crisis. “Shipfinancing banks have become far more restrictive in lending to ship owners. Today, a far greater proportion of equity must be held to gain a ship loan and must be obtained in advance,” says Gundermann. This is despite the fact that access to credit is vitally crucial for the maritime sector given that German shipping companies alone ordered around 1,300 ships during the boom, with purchase price commitments falling due over the next few years. With the equity collected, Maritim Equity has sufficient liquidity to acquire shares in good ships immediately. In return for securing
the finance, Maritim Equity expects preferred equity paybacks. “This means that our subscribers have a higher ranking than the shipping companies,” says Großekämper, explaining the co-financing arrangements entered into with
shipping company Hermann Wulff, under which the fund contributed 75 percent of the equity. In return, the shipping company is entitled to recover a disproportionately large share of the company’s dormant reserves, i.e. from a possible increase in the value of the ship, which are recognized when the ship is sold. Says Großekämper: “With favorable buying prices, preferred payouts, diversification across multiple ships, charterers and shipping companies, the model underlying our funds offers substantially greater security without impairing income potential.”

Market outlook: container market still attractive
Most experts assume that the shipping markets will start to recover as of 2010. The main driving force will be the continued growth in the international division of labor. Spurred by the appetite for ever lower prices for intermediate and finished products, this process will tend to gain momentum in weak economic periods. “Emerging markets’ hunger for commodities and exports will additionally fuel sea trade. In the medium to long-term, we continue to see container shipping as forming the core of a good ship investment,” says Gundermann. Benefiting as an investor from the ship financing crisis Investors can still subscribe to Maritim Equity I up until the end of 2008. The fund will be investing in a portfolio of ships diversified by size, market and shipping company. With an investment ratio of around 90 percent, it offers one of the lowest cost ratios in the market. The minimum subscription amount is EUR 20,000 plus a premium of 5 percent. An annual return of 6 - 8 percent is being sought over the twelve-year term of the fund. Thanks to the application of tonnage tax, this will be virtually tax free.

About Maritim Equity
Maritim Equity is a fund issuer which was established in 2007 by Salomon & Partner for innovative investment products for the shipping sector. The shareholders and managing directors of the Hamburg-based company have more than 30 years of experience in shipping and in engineering lucrative ship funds.
www.maritim-equity.com

Press information: Susanne Wiesemann
redRobin. Strategic Public Relations GmbH,
Altonaer Poststraße 13a,
22767 Hamburg
Tel: 040-692 123-20,
Fax: 040-692 123-11,
E-Mail: wiesemann@red-robin.de