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Maritime Private Credit: The Investment Opportunity Set Making Waves
By: Bryan Schneider, EnTrust Global
The following piece discusses private credit opportunities in the maritime industry, providing an overview of the compelling opportunity sets available to state and local government pension plans, and highlighting the return premium available to investors.
This is an excerpt from NCPERS Summer 2024 issue of PERSist.The following piece discusses private credit opportunities in the maritime industry, providing an overview of the compelling opportunity sets available to state and local government pension plans, and highlighting the return premium available to investors.
Over the last few years, private credit has garnered extensive attention from institutional investors with assets under management across the strategy now approaching record levels. Allocators looking to deploy capital across the strategy generally fall into two categories. One, a group of allocators who have developed their strategic roadmap for building out their exposure; these investors have made initial allocations and are now in the market seeking diversifying approaches. The second is a group of allocators earlier in their capital deployment cycle, who are seeking value-added strategies within private credit while aiming to avoid some of the pitfalls often associated with investment areas that have experienced rapid growth. Maritime Finance, with its compelling fundamentals, offers a solution that can solve the needs of both allocator groups.
Maritime Industry Overview
The global maritime industry, or shipping, plays a pivotal role in the worldwide economy. With 85% of world trade carried out by sea, 1 its importance cannot be overstated. The industry serves as the backbone of international trade and commerce, facilitating the movement of goods, raw materials, and energy resources across the world.
The global fleet, which is generally mobile and can relocate and operate globally, is comprised of approximately 108,000 assets (vessels that have a combined estimated value of approximately $1.8 trillion).1 The industry consists of numerous differentiated and uncorrelated sectors whose earnings and values are driven by idiosyncratic supply and demand factors. The industry's ownership structure is highly fragmented and is estimated to consist of approximately 3,900 shipowners, of which the vast majority are considered small- or medium-sized operations. The industry is capital intensive, requiring an estimated $90 billion per annum2 to facilitate the purchase of new and used vessels and refinancing of existing loans.
Compelling Fundamentals of Maritime Finance
Historically, traditional bank lenders provided the majority of debt capital to service the maritime industry. However, the maritime industry has experienced a steady trend of declining lending activity from such banks, that can be traced back to the aftermath of the 2007-2008 Global Financial Crisis. As a result of the new banking regulations that followed the Global Financial Crisis (Basel III & IV, among others), banks were required to raise the amount of capital they held against certain loans, greatly diminishing their economic desire to add maritime exposure, leading to a material retreat – a decline of 36% in total bank lending and a decline of 62% in European bank lending since 2010 – from providing financing to the capital-intensive maritime industry (see Figure 1).3 Concurrently, the maritime fleet has grown by 30% since 2010, together with global GDP expansion (see Figure 2), amplifying the disparity between capital needed by the industry and its actual availability. Moreover, recent turmoil within the banking sector, exemplified by the collapse of Silicon Valley Bank and the distressed acquisition of Credit Suisse (which had a $10 billion shipping portfolio), has further dampened banks' extension of credit.
Potential Investor Advantages
Given the supply/demand imbalance between the ever-increasing capital required by shipowners and the limited availability of credit due to the pullback by traditional bank lenders, alternative lenders exert a degree of negotiating leverage that generally enables them to extract favorable terms for their investors, due to the scarcity of the capital they provide. These favorable terms come in the form of a notable return premium that can be achieved, and tight risk controls though robust security and covenant packages.
A strong understanding of the maritime industry and the differences among the various assets, as well as proprietary sourcing capabilities, are essential to building a durable portfolio of shipping loans and investments. These conditions have greatly limited new entrants. This distinctiveness sets the maritime industry apart from other over-banked areas characterized by intense competition and easier access to capital – factors that have led to the proliferation of “covenant-lite” structures over time in those other industries.
It is important to highlight that the potential yield premium from maritime private credit, as shown in the table below (Figure 3), is achieved through investments typically characterized by moderate leverage, which are senior in borrowers' capital structures and collateralized by highly liquid assets that are indispensable to global trade, and which have consistently demonstrated limited correlation with a wide range of investment alternatives, including other real asset sectors. For allocators, the attractive fundamentals of maritime finance allow them to diversify their portfolios, while participating in opportunities that can offer superior returns on a risk-adjusted basis.
Endnotes
1 Source: Clarksons Shipping Intelligence Network as of January 2024.
2 Source: Clarksons World Fleet Monitor - September 2022.
3 Petrofin Research – 2023.
Bio: Bryan Schneider is a Senior Managing Director & Product Specialist at EnTrust Global on the Blue Ocean team. Mr. Schneider joined the firm as a Senior Vice President in January 2010 with 10 years of prior experience in the financial services industry. Before joining the firm, Mr. Schneider was a Senior Consultant at NEPC where he was responsible for overseeing more than $20 billion of client investments. Mr. Schneider holds a BA in Mathematics from Saint Anselm College and is a member of the Boston Security Analysts Society, the CFA Institute and holds the Chartered Financial Analyst designation.
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