Ship shape

In April 2017, international asset and investment manager MPC Capital AG initiated an investment firm with a focus on small-size second hand container ships in the feeder segment that are sized between 1000 and 3000 TEU. Named MPC Container Ships AS, this newly established and registered company has expanded rapidly and has gone on to own and operate a portfolio of container ships, with 15 feeder vessels acquired so far; the company has also already attracted $175 million in equity capital from more than 100 institutional investors in the US, the UK and Europe.

Having the broader MPC Group as a 27 per cent shareholder, MPC Container Ships benefits from the structure and capabilities within MPC Capital as it has access to resources when it comes to the technical and commercial assessment of ships that it wishes to acquire as well as the management of ships. “The goal is to grow the fleet to 50 ships by 2018 and at that point we will be one of the largest tonnage providers in the feeder segment globally; we have already been extremely active in this sector through Ahrenkiel Steamship and Contchart, the services units under the MPC Capital umbrella, which have played a key factor in us being able to acquire assets and build up a fleet,” says Constantin Baack, Managing Director of MPC Container Ships.

Discussing the reasons behind the strategic establishment of the company, Constantin continues: “Our main thinking centred around the combination of the following elements: access to capital, which is vital to building up a company with a strong asset base in this capital intensive market; a legacy free solid balance sheet, which, although linked to the first point, is different as the capital market has a lot of players that aren’t legacy free, so to us having a solid balance sheet and being legacy free is very important. Of course, you also need the right partners and through the network of MPC Capital as well as our service providers we have the right people in place to grow the company. The third element is market timing, which is the most difficult part of the equation. However, having analysed the feeder market and the dynamics of supply and demand over the last couple of years as well as the relation of acquisition prices to scrap value and new-building parity we believe it is now a good time to invest and to deploy capital.”

Indeed, following the collapse of Lehman Brothers Holdings and the implications this had on world trade, the shipping market has been in a challenging and volatile position since 2008, with containerised volumes decreasing by nine per cent in 2009. Taking place at a time when the entire market was expecting a rise in containerised volumes, this significant disruption in the economic market had a huge impact on demand and supply, which led to an imbalance in the market and tumbling freight rates for liner operators and as a result also significantly lower charter rates. Nevertheless, on the back of growing containerised volumes MPC Capital noticed that in 2010 and 2011 liner companies continued to order very large container vessels in order to bring down costs and to counter the new cost leadership centric market environment.

“This has had an adverse effect on charter and freight rates as people are now battling for cost leadership and market share and not at rebalancing demand and supply in a difficult market environment,” says Constantin. “This situation has resulted in continuous volatility and a generally low market, which has led to sliding asset values over the time as the earning side wasn’t in good shape for the liner companies or tonnage providers. However, the demand and supply situation is now slightly more favourable when it comes to smaller size tonnage, which is why we have focused on this segment. There are a significant number of ships that have been ordered and the vast majority of the order book is for very large containerships; these are being used on east and west routes to service these large pattern trading services.

“The deployment of larger vessels on long-haul trade routes supports the development of the hub-spoke system that has replaced the previous global trading pattern, therefore enhancing demand for feeder vessels; more specifically, with the big liner companies they had global routes where they deployed 4000 to 8000 TEU ships to trade globally. However, with 13,000 TEU container ships that now only approach a limited number of ports on the east to west trade the containers then have to be distributed by other means – this in particular supports the case of feeder container ships as they will be used to transport the containers from the hubspoke system and into the regional trades and so on. This is where we will come in. Chartering is of interest to us as a tonnage provider and we have had a strong view on taking a position in the feeder segment in expectation of higher demand for feeder tonnage in terms of chartering demand of liner companies.”

The investment rationale of MPC Container Ships is based on the so-called new-building parity, or replacement cost, analysis. For instance, in today’s market, willing buyers may be able to contract 2500 to 2800 TEU container new-buildings at approximately $31 million. Depreciating such asset value over 12 years would implicate a second hand value of $18 million. However, comparable second hand vessels aged between ten to 13 years, with high specification such as low consumption, are in the market for $7 million to $9 million, resulting in a discount to new-building parity of about 50 per cent. This is close to all-time-high discount to new-building parity. At the same time, investors’ downside risk is protected in view of high scrap value coverage of asset values. ”Because we can acquire second hand vessels at comparatively low prices, the new-building of these ships would only make sense in an instance when charter rates improve. We feel we are in a good position to benefit when that happens,” says Constantin.

The company is also benefiting from the great deal of consolidation that has taken place within the shipping industry, with strategic mergers and acquisitions resulting in widening alliances, as Constantin notes: “There previously used to be a top 20 of liner operators that were organised into seven alliances and there are now three big alliances left. The consolidation process has led to an adjustment of trading patterns and services with liner companies as well as a clearer view on what is required in terms of chartering needs. The very large container ships are to a larger extent financed through the liner companies own balance sheets as they are key asset of their cost cutting programme, but they certainly still need small ships to satisfy their customers’ needs, which is the area that we focus on.”

With experienced management and a strong balance sheet with no hidden fees or legacy issues, the Oslo based MPC Container Ships is in a strong position having shown its ability to transact, execute and find the right assets for the feeder segment in the space of a few months. “Amongst the non-operating tonnage providers in this segment, globally there has been no other company in 2017 that has been able to attract both significant funding from the capital market and invest the capital efficiently into such a number of ships at these prices. We are a front runner with a clean balance sheet that is focused on acquiring more ships, of course always with markets permitting, in this picture-perfect environment for deploying capital and investing in container ships. By the final quarter of 2017 we anticipate having 30 to 35 vessels in our fleet and will announce further acquisitions shortly,” says Constantin.

“Looking further ahead, our ultimate goal is to have a listing potentially also in the US, assuming we can keep up the pace of developing the company and raise additional funding. To make this possible, we would need a market cap of $500 million and to be in a position to tap the US capital market. Once this target has been reached, we are then well-positioned as a stock listed, container and asset owning company, free of any legacy issues and with a focus on feeder vessels. This is the position we want to be in going forward,” he concludes.

MPC Container Ships
Own and operate a portfolio of container ships
Focused on the feeder segment
Attracted $175 million in equity capital since April 2017