Ships ahoy as investors wake up to the environmental merits of the maritime industry. Christopher O’Dea speaks to Andreas Povlsen

Investors with ESG targets should not overlook shipping, says Andreas Povlsen (pictured above), founder of Breakwater Capital and managing director at Hayfin Capital Management. “The maritime industry can be somewhat misunderstood from an environmental perspective,” says Povlsen. “Having undoubtedly been a laggard a decade ago, shipping is now much further along the sustainability curve and is much more responsive to new regulations than many people appreciate.”

Andreas Povlsen_Colour

Andreas Povlsen

As ships are long-life assets, changes need to come to old and new ships. “Technological advancements and new regulations present great opportunities but also a risk of obsolescence, and therefore all parties involved, such as charterers, owners and financiers, need to work together in order to ensure viable green-future technologies are implemented in the sector,” he says. “Improvements are needed but we shouldn’t lose sight of the fact that, even with the technology of the existing fleet, sea transport is a far greener and cleaner form of cargo transport than trucking or flying.”

In addition, Povlsen says, “maritime is one of the most heavily regulated industries, with the fundamental goal for regulation being the safe carriage of cargo and passengers, and the health and safety of seafarers”. International regulatory requirements are imposed by several bodies. 

“Such stringent regulations and their enforcement and documentation provide the industry with a standardised diligence protocol through which we can evaluate investments more easily. Much of the relevant information concerning the regulatory status of a ship is publicly available, and in this sense the maritime industry maintains a level of transparency rarely seen elsewhere.”

Breakwater’s investment horizon is almost as expansive as the open ocean. “We’ve lent across a range of vessel types: dry bulk, containers, tankers, offshore service vessels; virtually everything bar cruise ships or yachts,” he says. “Often we’re active in areas where market conditions are challenging with constrained cash flows but strong asset coverage, such as dry bulk in 2016 or tankers in 2018, where we could provide financing solutions with optimal structure, in situations where capital was otherwise short. We adopt a sector-agnostic approach, focusing on rigorous data and market analysis but importantly also technical due diligence.”

In terms of risk management, Breakwater “has a dedicated and highly experienced team focused solely on shipping, throughout the cycle, rather than just piling in when markets are performing well,” he says. “That gives us the right expertise to be very asset-oriented, both in terms of technical and historical data analysis.”

Fieldwork follows data analysis. “We personally assess the quality of the assets – for instance, the build, yard, age, design, technical specifications and maintenance,” Povlsen says. “We perform independent, third-party physical inspection and insurance review for the ships we lend against and, at least as important, implement transaction documents accordingly. We thoroughly assess and evaluate the various data available but also benefit from our physical on-the-ground presence to validate this data, which enables us to underwrite our transactions based on a consistent methodology.”

Relationships also matter. “We place a great deal of emphasis on knowing our counterparties and only transacting with reputable borrowers with capable commercial and technical platforms – and we actively manage our portfolio and work closely on an operational level with the companies to which we lend.”

Shipping currently presents an opportunity for institutional capital. “Since the financial crisis, European banks, most notably in Germany but also the UK, have radically slashed their exposure to the global maritime industry, not only out of economic necessity, as their existing shipping loan books underwent major distress, but also because of regulatory restrictions and political pressure for bailed-out institutions to refocus on domestic corporate lending.”

Transporting goods by sea is cleaner and greener than trucking

Transporting goods by sea is cleaner and greener than trucking

Over this period, Povlsen says, the world merchant fleet continued to grow and there is still an annual financing requirement of an estimated $100bn (€89.6bn). “Alternative sources of capital, such as Norwegian or US capital markets and Chinese leasing, are only intermittently available and, to a large extent, available to the same borrowers who can still access the few active banks looking for ancillary fees outside of lending.”

Lease solutions are viable, Povlsen says, but can be relatively lengthy and cumbersome in terms of structure, process, execution and drawdown. One alternative approach, as some hedge funds and distressed debt investors have done, “is to buy up portfolios of non-performing loans that were originally extended to shipowners by banks. We do buy loans as well, but are quite picky and we prefer to lend on a bilateral basis, acting as a long-term finance partner to each of our borrowers and building a relationship of the type that nowadays only the very largest and most creditworthy owners get from the banks.” 

In addition, by mainly investing in primary loans, “we are able to maintain the quality of documentation, control of the transaction and the downside protection we deem appropriate”, he says. “Nevertheless, it is critical to have a breadth of products and the ability to pivot across the capital structure, as appropriate at a given point in the respective cycle.”

Breakwater seeks to capitalise on the sector’s inherent cyclicality and asset-price volatility, adopting “a countercyclical investment approach by seeking to deploy capital at low points in the different sub-sector cycles, when the cash flows may be constrained but asset coverage and the transaction structure create strong conviction regarding the timely repayment of debt at strong risk-adjusted returns. We take an asset-focused lending approach, doing equity-type deals only when periods of market dislocation present opportunities that we think offer our investors excellent value.”

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