Costamare Faces Some Difficult Decisions

Costamare Faces Some Difficult Decisions https://seekingalpha.com/article/4021025?source=ansh $CMRE, $SSW, $TEUFF

James Caitlin
Nov 8 2016, 08:51
About: CMRE • Includes: SSW, TEUFF
Summary

The expansion of the Panama Canal which can accommodate Post-Panamax vessels able to transport 14,000 teu's has left the 3,000-5,000 teu Panamax class struggling to compete.
Costamare owns 13 vessels of the Panamax class, all over 10 years of age, and all with time charters scheduled to expire through 2017.
Due to the depressed market for these specific vessels, ships as young as 10 years old are increasingly headed to the scrap yard. Is Costamare sitting on a scrap heap?
Note: This article was originally published November 4th on Value Investor's Edge, a Seeking Alpha subscription service.

Overview

In a recent article entitled Following Hanjin Shipping's Bankruptcy, Could This Container Shipping Company Be Next? I discussed the prospect that Diana Containerships may be the next victim of this extremely depressed market. That thesis largely revolved around the fleet profile which is composed largely of Panamax class container ships.

A key part of this argument rested on the declining prospects for Panamax employment coupled with declining vessel values which left them at greater risk for early demolition.

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Before we get to how this thesis will impact Costamare (NYSE:CMRE), let's go over a few items from that article.

Review

In that article I noted some key developments:

On Sept. 20, The Loadstar reported:

The 4,546 teu 2006-built Viktoria Wulff (ex-MSC Firenze) has become the youngest containership to be sold for scrap as Panamax owners cut their losses and abandon employment hopes in a hopelessly depressed market.

This news comes on the heels of another early demolition, which at the time set a record at 13 years of age.

On Sept. 8, The Loadstar reported:

The 2003-built 4,646 teu Seaspan (NYSE:SSW) Excellence (was sold for scrap) for a sum reported by vesselsvalue.com as $280 LDT [light displacement tonne, the measure used by scrap buyers], equating to a total demolition value of $5.96m.

The deal gives a useful snapshot of the container chartering market - Seaspan bought the vessel from MOL in March 2013 for $17.2m, only to be forced to sell it for scrap for $11.25m less than it paid for it just three and half years later, and at least a decade before the end of its operating lifetime.

Adding to this trend, on October 18th, just hours after this article was originally published on Value Investor's Edge, Splash 24/7 reported:

Belgium's Bocimar has turned bearish about prospects for Panamax container vessels, becoming the latest owner to scrap (two-twin 4,800 teu) 12-year-old boxships.

Finally, on October 17th, The Journal Of Commerce noted:

The value of second-hand Panamax container ships has plunged by as much as 45 percent in a month.

In the comments section at the end of the article I speculated a bit and wrote:

Personally I think buyers will be hard to find for any vessels of the Panamax container class about 10 years old or over. In fact, I would be more apt to value them at the scrap price more than anything else at this point.

Currently

Since that time Seatrade Maritime News proclaimed "The Death Of The Panamax Containership" and noted that Box Ships (OTCQB:TEUFF) had sold the 10-year old 2006-built Box Queen for scrap.

Seatrade Maritime News reports: "According to analyst Alphaliner 101 vessels in the 3,000 to 5,099 teu class are currently idle, a growing figure that is only being tempered from even further rise by scrapping. Back in September Wirana warned that seven to eight year Panamaxes were likely to start hitting the beaches."

Now, it looks like Diana Containerships itself has succumbed to this trend. On November 3rd Diana reported that it has sold the 10 year old "Angeles" formerly the "YM Los Angeles" for scrap at a price of $6.69 million. This now holds the dubious record for the youngest scrapped container ship by a matter of months.

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It was just March 20th of 2015 when Diana Containerships announced that it had acquired this vessel for a purchase price of $21.5 million.

CMRE

Now let's turn our attention to CMRE's fleet and the challenge going forward.

The following table reflects the Costamare's employment schedule for Panamax class vessels as well as the charter expiration dates.

Source: Costamare

Notice that all of these vessels are well over 10 years of age and all have their time charters set to expire between now and the end of 2017.

The dismal outlook for a prolonged period of time could mean one of three things are going to happen with these vessels:

1) They will be employed at rates far below OPEX.

OPEX for a Panamax class vessel is typically between $6,000 and $6,500 per day. Remember, OPEX does not take into account things like financing costs.

2) They will be laid up. A warm lay-up can cost around $2,500-$2,750 per day for a Panamax vessel.

3) They will be scrapped.

Obliviously there are no good solutions for this dilemma that Costamare will find itself in as these charters expire.

They will either face losses as they attempt to hold onto these vessels in the hope that someday things will improve while recording massive impairment and depreciation charges along the way. Or they must face the music and cut them loose and salvage what the can from the demolition market.

Bigger Alliances For Bigger Ships

The chart below illustrates some interesting developments regarding M&A in the container shipping segment.

Source: NYK

Vessels Value noted that if we remove chartered in fleets, 4 out of the top 5 companies now in existence or expected to merge will be the result of consolidation efforts.

Source: Vessels Value

China Cosco Shipping emerged in January following the merger of state-controlled rivals COSCO and China Shipping Group.

On June 10th, 2016 the CMA CGM Group assumed control of NOL, a Singapore listed company which at the time was 12 in the world for container shipping. NOL is renowned for its APL brand, present in more than 80 countries and employing around 7,000 people.

In July, Hapag-Lloyd and United Arab Shipping Company signed a merger agreement that created the world's fifth-largest container shipping line. The merged carrier has a fleet of 237 (including chartered in) vessels with a total capacity of around 1.6 million 20-foot-equivalent units, an annual transport volume of 10 million teu's.

These large companies are part of a growing trend of Alliances designed to work together to ensure that the competitive advantage of mega-boxships through economies of scale is maximized.

In fact, following the latest round of consolidation 8 out of the top 10 container owners will belong to one of the top three alliances, the exceptions being Seaspan and Shoei Kisen.

Though alliance members still compete on price and are forbidden to market services together members can cooperate operationally.

Ideally, alliances allow carriers to pool their vessels so that they can better fill their ships, thus maximizing capacity and operational efficiency. This pooling has become increasingly important as mega-ships have been hitting the water and their competitive advantage over smaller vessels rests on filling them to capacity.

There are currently three alliances of which 42% of the world's TEU capacity (totaling 23,859,810 teu's) is now currently a part, according to Vessels Value.

Source: Vessels Value

The increasing size of these liners has been an influential part in the formation of these alliances. Notice that the 1,350 vessels that are a part of these alliances are just 25% of the 5,355 vessels that compose the global fleet.

It is through these synergies that members hope to gain increasing operational efficiency. This consolidation and alliance coordination comes at the expense of non-alliance members and those with smaller vessels.

Conclusion

Already Costamare has taken the painful step of drastically reducing its common stock dividend from $0.29 per quarter to $0.10 per quarter. This was in conjunction three major refinancing agreements which has spread out the 2018, $380 million balloon payment over three years. So they are taking steps to mitigate the upcoming damage. Additionally, their newbuilding program is geared toward the larger end of the Post-Panamax class. That's the good news if there is any here.

But the bad news is that these upcoming expirations along with declining asset values for both the directly owned and JV fleet will impact both cash flow and NAV. It is important to note that asset value declines are not limited to the Panamax class, though that is where we seem to be witnessing the most damage. NAV and cash flow are two of the largest factors in valuing shipping companies.

As for the upcoming charter expirations, according the October 24th earnings release, all but two of the employed vessels are earning above $6250 per day. Remember, that is roughly the median OPEX across the industry for this specific class.

But some of these vessels are earning substantially more like the Oakland Express at $30,500/day, the MSC Mandraki and MSC Mykonos at $20,000/day, the MSC Ulsan at $16,500/day, and the MSC Koroni at $13,500/day. It is highly unlikely that these rates will be replicated for these vessels upon expiration. Obviously profitability will be impacted as a result.

Going forward, as these charters expire and if asset values continue to fall, as many project, Costamare and its shareholders will continue to be under pressure.