By Richard J. Paine, Sr.
Some positive market indicators could presage an investment revival in the U.S. Gulf of Mexico – and beyond.
The good news, reported by Bloomberg, is that in the third quarter of 2016, the largest oil companies increased cash from operations by nearly $26 billion. This reflects a 67 percent increase from the previous quarter and more than twice the amount of the first quarter of 2016. Exxon Mobil (XOM), Royal Dutch Shell (RYDAF), Chevron (CVX), Total and BP (BP) indicated that the increase was due to lower spending, increased output and rising crude prices, although the numbers were still below last year’s numbers.
Current Conditions, Future Trends
It is obvious why this is good news. More cash means more production which in turn means more work for Gulf Coast operators. It comes at a time when many lenders and lessors have fled the Gulf market. While the number of active lenders has significantly decreased, it is only part of the cycle that many of us have experienced before.
With a new, more energy friendly Trump administration soon to be in place, the probability is good that the reversal of the trend may begin early in 2017. This may be just in the nick of time as the reticence of equipment finance sources to lend or lease has increased dramatically. Many have been forced to back off one way or another, and take a seat on the sidelines. During this downturn, as more borrowers and lessees have taken significant hits to their bottom lines, more vessels are cold stacked, underutilized or overpopulated and are not creating the revenue necessary to service an obligor’s debt load.
In normal times, lenders were not as accommodating as they have been forced to become now. Missed or late payments lead to forbearance which could, if the deficiency was not remedied, would lead to foreclosure and seizure of the vessel. Forbearance is an agreement between a lender and borrower to temporarily postpone payments or otherwise amend the ships mortgage to avoid foreclosure and seizure of the collateral. Rather than repossess the vessel, it may be in the bank’s best interest to leave custody of the vessel in the hands of the borrower and have the maintenance, dockage and other costs of a vessel continued to be paid by the obligor. It also allows the obligor to work the vessel and generate revenue from its operation.
While many lenders have left the mainstream borrower high and dry, the solvent, near investment grade credit is still the apple of their eye. The process begins with origination of the loan or lease with rate, term and conditions being acceptable to the obligor. From there, the lender determines it’s “appetite” for the amount of debt it is willing to hold for an obligor. All bank and equipment finance companies have loan size or credit risk limits. To lend outside of those limits, they may choose to sell the entire loan or a portion of it to other lenders or investors. They can either retain the servicing of the loan or sell servicing off as part of the sale. This is known as syndication. Another method to reduce loan size or credit risk is known as participation. If two or more creditors agree to share the amount and credit risk of a transaction equally, all having equal rights of payment or seniority, the participation is considered pari passu (Latin for ‘equal footing’).
In order to have originations, syndications or participations, it is necessary to have an obligor and one or more funding sources. Historically, commercial marine finance companies have come and gone alternately pursuing the market aggressively or disappearing by choice or necessity, buyout or merger. When the marine market is strong, lenders come out of the woodwork. When it hits rough waters, they disappear beneath the waves. Neither scenario benefits the industry as when times are good, “stupid money” drives rates down, but also drives credit quality down. When times are bad, the chickens come home to roost. Bankruptcies, foreclosures, seizures and depressed collateral values are the result of too many uneducated, inexperienced and possibly naïve lenders making too many risky, underpriced loans.
So, who is lending?
2016 saw two major lenders exit the market by selling off their loan portfolios. GE Commercial Credit, who had over the last decade bought the commercial marine assets of many other lenders, sold to Blackstone Group, a private equity firm and Wells Fargo (WFCNO) Equipment Finance. Banc of California Commercial Equipment Finance sold its assets to Hammi Bank; a California-based lender. Notwithstanding its sales and marketing issues, Wells Fargo is arguably the largest commercial marine lender operating today.
Over the last decade, Bombardier (BBD-B.TO) Credit, The Associates, debis, Citicapital, GATX (GMT), Sorus, National City and Prudential Finance, to name just a few, have either curtailed their lending efforts, been bought or simply have gone away. Most of their loan portfolios have been folded into or refinanced by existing lenders.
The equipment finance companies that seem to be providing the bulk of the funding going into the current commercial market are active based on region and asset type. The East and West coast fleets are similar, generally comprised of tug and barge companies, ferries and dinner/excursion boats. Refined products – heating oil, gasoline and diesel – the predominant barge cargoes, plus various types of passenger transportation vessels, make up most fleets. Umpqua, Bank of the West, Signature, JP Morgan Chase (JPJQL), Peoples, Caterpillar (CAT), Fifth Third, Bank of America (BCXQL.PK), Stonebriar Capital, Suntrust and others, are active.
Separately, the Gulf of Mexico was and is primarily the oil and gas capital of the United States. PSVs, OSVs, AHTs, crewboats and other inshore and offshore boats service the energy exploration and production segment. Wells Fargo, Capital One, Regions, Bank of America, Bank of Texas, Key, Caterpillar, PNC and Regions have active marketing efforts to top shelf credits. The Inland Rivers/Great Lakes regions operate aggregate, grain and various other commodity barges, towboats and tugs. Here too you will find Caterpillar (the last captive finance company), TCF, U.S. Bank and others.
Throughout all markets, unnamed individuals, banks, finance companies and other capital sources invest in the commercial marine market through syndications and participations in credit facilities originated by experienced marine lenders. But due largely to the confidential nature of borrowing activities in most companies, the foregoing list of lenders active in the marine market is incomplete.
So ultimately, the good news is that there is no more bad news. With luck and fulfillment of campaign promises, the coming Trump presidency could be a great stimulator for economic and thus marine industry recovery and growth.
The Author
Richard J. Paine, Sr. is the principal consultant at Commercial Marine Finance Consultants. He can be reached at 516-431-9285 or rjcpaine@yahoo.com. His comments are solely his, and do not necessarily reflect the opinions of Marine News and/or its publishers.
(As published in the December 2016 edition of Marine News)
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