Monday, 24 February 2020

Pappas to make most of upturn in dry bulk
By Harry Papachristou, TradeWinds

Petros Pappas completes 40 years in shipping in December, having survived five major market downturns. The Greek owner is perhaps lucky the worst of them was the last, when he had enough experience to know exactly how to deal with the decline in business.

It was a delicate balancing act for Star Bulk Carriers, the New York-listed company where Pappas is chief executive and his family is a key shareholder.

Among moves aimed at soldiering through the downturn, the Athens-based company cut operating expenses — but not so deeply as to impair the trading capacity of its vessels. It restructured loans without hurting relations with its dozen or so banks.

Star Bulk renegotiated, delayed deliveries or cancelled newbuilding contracts, but managed to keep relations with yards on an even keel. And it put in new equity while keeping private equity giant Oaktree Capital Management — its major shareholder — onside.

It also sold 12 newbuildings to improve liquidity.

“That wasn’t an easy thing to do. We sold them at the bottom of the market,” Pappas tells TradeWinds in an interview at his Athens office. “But we needed to have more cash in the company and less obligations for the future.”

His efforts paid off and the dry spell seems to be over, putting the company back on an aggressive footing.

Star Bulk returned to profitability in the last quarter of 2017. This allows it to repay all its restructured debt in the second half of this year and then envisage paying dividends, once the time is ripe.

Emboldened by a positive market outlook and its improved financial situation, Star Bulk announced in April that it had acquired 16 vessels from Italy’s Augustea Holding. The all-share-and-debt deal re-established the company’s status as Wall Street’s biggest dry bulk company. In return, Augustea and York Capital will obtain a 14.1% share in Star Bulk, once the deal is completed.

Pappas and Augustea principal Raffaele Zagari have been close friends and business partners for years. “We discussed joining forces on several occasions,” says Pappas, pointing to the fact that the two men already had a joint venture outside Star Bulk. “This finally culminated now.”

Fleet expansion
Pappas says he is open for further expansion opportunities, provided they make sense — and just four days after this 10 May interview Star Bulk announced the acquisition of a further 15 ships from Songa Bulk for $145m in cash and 13.7 million Star Bulk shares worth $182m at the time. Star Bulk also said it intends to apply for a secondary listing of its common shares for trading in Oslo, where Songa Bulk is listed.

“What’s important is to increase the size of the company, to get more institutions interested in us and also increase our free float,” Pappas tells TradeWinds.

Oaktree has a 50.8% stake in the company that will fall after Augustea and York assume their 14.1% holding. The California-based private equity fund, which manages about $100bn in assets, has proved a reliable shareholder, sticking with Star Bulk throughout the downturn.

“Relationships are usually tested when the going gets tough and we had the best test there is. Oaktree has been a great partner up to now,” Pappas says.

“I remember when we started in 2014, the banks were very worried about a fund having more than 50% ownership of our company. But Oaktree proved during those years that funds can stand behind their investment.”

Pappas is not privy to Oaktree’s strategy for Star Bulk but is confident it is a long-term one. “I think this is 10-year money for them, plus a couple of years of potential options,” he says. “They’re very astute market players and I think they will exit through the stock market when the right time comes.”

That moment is still some way off, according to Pappas, who believes the dry bulk recovery still has legs. “I’m bullish for the next three or four years,” he says.

As with most market participants, he estimates demand will exceed tonnage supply for the next couple of years. More interestingly, he expects environmental regulations starting in 2020 to breathe new life into the market.

Bunker costs will rise as expensive low-sulphur fuel becomes mandatory. This, in turn, should lead to slow steaming and decreased tonnage supply. “Every knot of speed decrease cuts supply by between 5% and 7%,” he says.
Vessels will not just sail more slowly come 2020. There will be fewer of them as owners dry dock ships to clean tanks and install scrubbers or new ballast water treatment systems. “All that will create off-hires and inefficiencies,” Pappas says.

Scrapping should also increase, but Pappas says that it will not be “as much as some people expect, but more than what we see today”.

Over-ordering fears
These favourable trends do not mean shipping is about to shake off some of its bad habits. As market prospects brighten, dry bulk owners are bound to over-order again. “This will eventually happen, but the orderbook will not hit the market before at some point in the period between 2020 and 2022,” Pappas says. “We can enjoy the good ride until then — but there is a major risk that we will shoot ourselves in the foot once again.”

A new down cycle would probably be sparked by overbuilding in combination with any signs of slowing Chinese iron-ore imports. “That’s what I’m afraid about, but not immediately. More like in four to five years from now,” Pappas says.

Calls for protectionist measures issued by policymakers such as US President Donald Trump are also a threat. “Because Trump is a businessman, I hope he’s bluffing. But I wouldn’t bet on it.”

Star Bulk, in any case, is not about to spoil the market by over-ordering. It took delivery in May of its last two newcastlemax newbuildings, which are being fitted with scrubbers. “We’re not going to order any more newbuildings,” Pappas adds.

He is also active in tankers and containerships but has been reducing those activities to concentrate on Star Bulk. “My first priority is how Star Bulk does,” he says.

In cooperation with Oaktree, Pappas has already wound down his presence in the containership segment. His Oceanbulk Containers used to manage eight large modern boxships and had five under construction. Over the past couple of years, he profitably sold the entire active fleet. Newbuildings were cancelled or converted into newcastlemax bulkers and sold on to Star Bulk.

Pappas and Oaktree were attracted to the segment in 2013 by the prospects of new, fuel-saving eco-type containership designs. “We had great expectations, but unfortunately this market is an oligopoly,” Pappas says. “After we ordered, there was a deluge of ordering, which basically created an oversupplied market.”

The investment, however, was overall profitable: “I can’t complain. We got a double-digit internal rate of return at a time when most containership companies were losing a lot of money.”

Pappas is not planning any major initiatives on the tanker side, where his Product Shipping & Trading (PST) manages 18 product tankers. Oaktree owns about half of them as a joint-venture partner.

“This market should improve, sooner or later,” he says, mainly because the world will need more distillate oil products from 2020.

Secondhand prices have not fallen enough to spur him into buying, however. And ordering newbuildings is not PST policy. “I don’t think this market needs newbuildings for a while, whether we talk about dry bulkers, tankers or containers.”

Pappas expresses satisfaction at the IMO’s decision to reduce shipping’s carbon emissions by at least half by 2050. “I think cutting by 50% will be feasible. I’m not sure we can go much higher than that by 2050,” he says.

Much of that target could be achieved instantly, if vessels start slow steaming, he notes, reflecting an increasingly popular view among Greek shipowners. A speed reduction of 15% might end up cutting emissions by about 28%, he calculates. “That would go down very well with environmentalists. It’s one of the rare occasions where green lobbies and shipowners will go hand in hand.”

If it proves too costly or difficult to monitor the entire global fleet, monitoring could be randomly applied to vessels, Pappas suggests.

However, he has no illusions about his colleagues voluntarily sticking to such a deal.

“It would have to be mandatory, there’s no other way. As soon as you reduce speed, tonnage supply falls and charter rates go up — and the minute rates go up, it pays for owners to increase speed again.”
He wants non-compliance sanctioned with stiff penalties.

“I’m not sure whether an average or an absolute maximum speed limit should be set. But whatever it is, if somebody exceeds it without very good reason, penalties should be severe,” he adds.

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