Betting on shipping stocks amid related-party deals and dilutive share sales
Shipping has long suffered an image problem on Wall Street, fueled by perceptions that some shareholders have been ripped off by self-dealing management.
No analyst has focused on the fair treatment of shipping’s common stockholders more than Michael Webber. He has published an annual corporate governance scorecard for shipping since 2016, until 2019 at Wells Fargo and since then at his own firm, Webber Research & Advisory.
Bulker owner Genco Shipping & Trading ranks first in this year’s just-released scorecard, followed by container lessor Triton and container line Matson.
The lowest score went to tanker owner Top Ships, with mixed-fleet owner Castor Maritime second to last and gas tanker owner StealthGas the third lowest.
These rankings do not measure the intent of management, only quantifiable practices on corporate governance, and to a lesser extent, environmental disclosures and social practices. “The scorecard is about the cars, not the drivers,” explained Webber.
Nor is the scorecard meant to determine which stocks to buy or avoid. It’s about pointing out the practices investors and traders should be aware of when they’re placing their bets
FreightWaves spoke in depth with Webber on the scorecard, on how he believes shipping has evolved its corporate governance — he thinks it’s getting better — and on some controversial shipping practices that fall outside the scope of his current rankings.
This question-and-answer interview was edited for clarity and length.
When investors focus on governance — and when they don’t
FREIGHTWAVES: Ever since you started the scorecard you’ve argued that there’s no place in public markets for shipping companies that don’t prioritize strong corporate governance, and that companies that don’t will eventually get priced out. A counterargument is: When rates spike, no one seems to care about corporate governance. If you look back to the 2003-08 supercycle, a lot of shipowners IPO’d with related-party structures. Private Greek owners sold a portion of their private fleets to the public entity, which then paid management fees back to the private side. Investors had no problem bidding up these names when the market boomed.
WEBBER: Look, I’m the first to say it will be a gradual process of those entities getting priced out. In a period when rates are really flying and you want to grab as much beta as possible through the entities that are there, the scorecard is not meant to say: Don’t ever invest or trade in these companies. We don’t see and never expected to see investors making decisions based on this one factor [governance]. Grabbing the most levered, high-beta name when rates are screaming — that’s never going to change.
But it’s a very different proposition if someone is coming out and issuing equity. Because that’s not about buying and selling on a short-term basis. That’s about the price point you can come in at to underwrite a deal. If you look at the companies that systematically struggle within our [scorecard] model, I would argue that you haven’t seen many of them able to tap the equity market accretively [positively for earnings per share].
I’m not saying this process is done or will be done tomorrow or next year. But since we started this in 2016, we have seen investors become more selective. We’ve seen some shipping IPOs fail on the back of some of these issues.
Controversy over serial dilutive share offerings
FREIGHTWAVES: A lot of those mid-2000s-vintage companies with related-party structures are still out there, and we have a whole new situation in recent years: an increasing number of micro-cap shipping companies doing serial dilutive equity offerings, not because they’re in distress and have no other choice, but because they’re raising money to buy ships. These offerings decimate share pricing. The two lowest-ranking names on your list have engaged in this practice.
Given your own focus on headwinds to shipping’s image and the recent attention these transactions are getting, I assume you have a view on this. What do you think of this funding practice? And do you think it’s having a negative effect on shipping’s overall reputation in the public markets?
WEBBER: It’s not our place to expand on the legality of a particular funding mechanism. I would say, though, that we’re going to try to look at these in the next iteration of our scorecard. It’s a new wrinkle. It’s certainly on our radar and has been on our radar.
As it pertains to the reputation of the space overall, it’s obviously not helpful. The vast majority of the shareholders that are impacted are not going to come away with a positive experience. This funding mechanism is generally pretty destructive. I’ve yet to hear anyone look at these and say, “That was a good deal. I’m glad they did that.”
But the profile of the companies electing to pursue this funding mechanism is nowhere near the profile of the companies of the vintage that came out in the 2000s. These are smaller entities that have less light on them. And it’s not like Citadel or Neuberger Burman or bulge-bracket retail channels are on the wrong side of these trades. So, I don’t think it has the same cumulative impact on the space as a whole as what we’ve been dealing with in the aftermath of that earlier vintage.
FREIGHTWAVES: Do you think these dilutive offerings will continue and that this process is sustainable? After all, the U.S. has a disclosure regulatory regime and the dilution risks are fully disclosed by the issuers, there are hedge funds that seem to be making money underwriting these offerings, there’s an investment bank — Maxim — that specializes in this funding option, and the end retail buyers seem to have the appetite to gamble on these highly volatile stocks. It doesn’t look like this model has been priced out yet.
WEBBER: I think it’s too early to say whether it’s being priced out. I don’t think there is an endless pit of capital for this. Will it persist in perpetuity? I don’t believe so. I think at some point it gets dealt with, either by the market or by the regulators. But I also would say: Never underestimate the creativity in the financial markets.
High-scoring companies going private
FREIGHTWAVES: These serial dilutive offerings involve micro-cap names. On the other side of the size spectrum, there’s around a half dozen larger public shipping companies that have ranked highly on your scorecards over the years that have been taken private. The second-best-ranked stock on your 2023 scorecard — Triton — is in the process of going private. The stock market isn’t valuing these companies highly enough so private buyers are taking them over. This seems like a case where companies that happen to have good corporate governance are being priced out of the public market. Doesn’t this mean that more of the “good guys” are leaving?
WEBBER: There is always going to be a mechanism for companies to exit the public market if private investors see a value dislocation that persists for long enough or if they see synergies from acquiring a public entity. But you’re also seeing new public entities emerge: Look at CoolCo [NYSE: CLCO, which listed in March]. And if a company exits the public market, it’s not uncommon for that private investor to look for an exit eventually, which could involve taking it public again.
As for “good guys,” I try not to look at this as good guys and bad guys. I go back to the racing analogy: We’re looking at the car, not the driver. There are plenty of companies that I think very highly of that are challenged in our model because they have legacy structures. Danaos [NYSE: DAC] is one. Safe Bulkers [NYSE: SB] is another example. Just because a company has legacy structures that don’t conform to best practices in the U.S. doesn’t mean [shareholders] are getting abused. All we’re saying is: Be aware of it.
For a lot of companies that came out in that 2000s vintage, it’s difficult to remove those legacy structures, short of bringing the entire management structure in-house. If you look at some of the companies that are toward the top of our scorecard, like Genco and Eagle Bulk [NYSE: EGLE], these are companies that have restructured in the last 10 years. They got to start over. They had a chance to institute best practices when they re-emerged.
Related-party fees persist
FREIGHTWAVES: Some shipowners have argued that these related-party structures are a positive, that the public entity benefits because it gets better pricing from the private sponsor than it would from third parties. What’s your personal opinion on this? Are these corporate structures good or bad for shipping?
WEBBER: On the whole, I think it would be difficult to say it’s a good thing for shipping. We’ve had a number of private owners say, “Look, this deal benefited the public shareholders.” And in some cases, it did, but even so, the shareholders are at an informational disadvantage. Any time there’s an informational disadvantage, it’s tough to say it’s good for the space.
I understand why some of them exist. It goes back to the question of vintage. If you had a fleet of 50 ships and 25 of them conformed to something public investors would want and the other half didn’t, and no one was telling you [in the mid-2000s] that you’d be penalized for doing that, I’m actually very sympathetic, because it’s very tough to change that structure on the fly.
We’re not saying that any time you see these relationships you should run away screaming. We’re just saying: Be aware of these relationships. It’s an area where you can see value leakage and you don’t get a ton of visibility if that’s happening. It isn’t [value isn’t leaking] in all cases by any means, but you should know this relationship is there.
Quality improving: ‘We see it in our data’
FREIGHTWAVES: So, putting this all together, now that you’ve been compiling this scorecard for seven years, do you think that shipping’s corporate governance is actually getting better and that shipping’s image on Wall Street has improved?
WEBBER: Yes to both questions. Definitely. There’s also definitely still room to improve. It doesn’t happen overnight. But we can see the improvement in our data. Since we started this in 2016, we’ve seen the average level of corporate governance and capital stewardship increase.
Look at the quality of the companies in the top half of the scorecard. The quality of the companies in the third and fourth quartile is also much higher than it used to be. Even in the fourth quartile. There are definitely more good companies that are engaged in corporate governance in the fourth quartile than before.
What we’re trying to do with the scorecard is highlight best practices. I think that over time, as public shipping companies find opportunities to conform to best practices for common equity holders, the overall quality level just gradually drifts higher.
Source: Freight Waves by Greg Miller
