Analysis: Break-up talk of 'sleeping giant' Wincanton may be just market noise
London-based investor Gatemore Capital is calling on Wincanton to sell one of its two core haulage ...
Regular readers of this column are likely to be aware of my background in banking. They are also likely to be aware of my penchant for metaphors and similes, and following another week with another major shipping bankruptcy, a truly venerable name this time, I couldn’t help but think of the similarities between banking and shipping, and between the two of them and bloodsports.
Two questions immediately came to mind last week when news broke that Germany’s Rickmers Group was set to file for insolvency after 183 years of glorious history.
As The Loadstar reported, insolvency emerged as the only possible solution because “its bankers ‘surprisingly denied’ approval of its financial restructuring”.
Firstly, just how surprising was the creditors’ refusal to roll over its debts? Secondly, is this an event we can easily overlook?
Death in the afternoon
Around this time of the year, back in 2012, on the occasion of the San Isidro celebrations, I attended the biggest annual bullfight festival that traditionally takes place in the Spanish capital at La Plaza de Toros de Las Ventas. Vivid memories of that event came back with a vengeance on Wednesday, as Madrid took centre stage in the banking world, just a few days after Rickmers’ collapse.
Banco Santander agreed “to buy Banco Popular Espanol SA for a nominal €1 ($1.13) after European regulators determined that the troubled lender was likely to fail and ordered it to be sold”, Bloomberg reported, in a deal forced upon Santander by regulators.
“Santander will raise about €7bn through a rights offer to bolster Popular’s balance sheet”, it said in a regulatory filing on Wednesday, to bail out the sixth-largest lender by assets in Europe’s fourth-largest economy.
Ever heard of Popular?
A banking veteran in London commented: “It’s the biggest piece of cr*p by any measure! I see Santander raising cash to buy this stuff. Clever?” He added: “It was the Opus Dei bank. They used to give out great Havana cigars at their press lunch.”
The futures of banking and shipping have less to do with courage, fear and the magnificence of the humankind than bullfights and, as I have argued in the past – click here and here – these two troubled industries have a lot in common, given billions of highly illiquid assets that, barring state intervention, might end up being impaired in future and leading to possible injection of additional equity capital onto the balance sheet of the major players.
If I had to bet my kids’ inheritance on a plausible scenario, I would almost certainly say that what we have witnessed in the banking industry over the past few years – emergency cash calls to bail out rivals or repair one’s own finances – could be also inevitable in the container shipping sector by 2020.
Naturally, the “who’s next” game is tricky at best, but on this basis container shipping lines are more attractive, to me at least, than banking and containership owners. Further down the value chain, the latter are not enjoying the storm, as testified by Seaspan and a few others.
The sun won’t shine for shipowners if the first domino – their clients, the shipping lines – falls. And I am not going to touch extensively upon their clients’ clients’ clients – the humble consumer, you and I – who could simply decide to purchase less if inflationary forces continue to prevail. With the help of central banks, GDP and CPI trends offer little reassurance worldwide.
Rising freight rates have recently provided a fillip to carriers, but rising bunker prices have not, and as all but few navigate through troubled waters, the asset side of their balance sheets, where goodwill from acquisitions are booked, rings a warning bell alongside rising liabilities.
Lower-quality earnings are likely because the cash flows tied to their earning power could not only become less predictable, being generated by riskier assets, but also should drive the container shipping industry to gauge management performance against return on equity (ROE), as well as how each component of ROE performs. ROE is split into three levers – net income margin, assets turnover and leverage – which suggest sector revenues might have to grow at a steeper rate than assets, while discipline on costs is maintained, and thus hoping leverage remains manageable in this cycle for executives to deserve a bonus of any size.
But I am afraid that’s not going to happen.
There is a side question here: should regulators be tougher with major container shipping lines?
The bankruptcy of Hanjin still spurs anxiety.
Maersk Line has pushed back execution risk to 2019 and beyond, following the purchase of Hamburg Süd, at least if you trust its own projections.
Unfortunately for me, MSC’s financials are sketchy at best, but those trailing the market leaders – France’s CMA CGM and China’s Cosco – have also postponed short-term risk stemming from challenging market conditions and the integration of sizeable assets, while funding their consolidation plans with new debt.
It looks to me as if they are all still chasing unprofitable growth, spurred by volumes rather than wise capital allocation – although, in fairness, there is no easy fix for their woes.
Hapag & regulators
On cue comes Hapag-Lloyd, which with UASC now ranks fifth behind Cosco in terms of capacity, according to Alphaliner. Its latest trading update confirmed that headwinds are here to stay, as the group’s “net debt stood at €3.588bn at 31 March 2017”.
“This was virtually the same as the figure from 31 December 2016,” it noted, and doesn’t include UASC, which will change the way Hapag-Lloyd looks.
To start with, it plans to shed 1,000 employees of the combined workforce, in case you hadn’t noticed. Its net leverage is high before UASC is consolidated – way too high, in my opinion, and it is unsurprising that cost-cutting measures and booking cancellation/no-show fees have recently been announced.
In all this, maritime regulators from the US, Europe and China have so far supported consolidation, giving the green light to all major deals while only patronising the actions of the Japanese container shipping lines pre-merger, as if the industry’s problems were not theirs.
Likewise, they seem unfazed by the fact the banks becoming overly selective, forcing consolidation upon the largest players, and holding them to ransom if they are not big enough.
Apart from Rickmers, the Yang Ming saga is another case in point. Which led me to the container shipping and bullfight analogy: outside the top three, all the others are just like the bulls lined up in Las Ventas, waiting for the crowd to cheer the matador’s next move.