When the US Fed Reserve holds its last meeting of 2022 on 14 December, it is expected to raise its benchmark funds rate for the seventh time this year as it strains to tamp down inflation. Shipping is in no way immune to the changes, which have seen one-year Libor jump from 0.11% in September 2021 to nearly 5.5% today. While there have been no apparent casualties in the wave of pricier money to date, public shipowners have been weighing the reality in their quarterly earnings reports and investor calls in recent weeks, with varying spins on the trend. Who might have been expected to be caught out by the clampdown? How about a company with heavy debt that is mostly at floating-rate margins? That sounds a lot like Scorpio Tankers heading into 2022. But as Streetwise reported last week, New York-listed Scorpio has been in a race to slash that debt before rising interest exacts too deep a toll on its balance sheet. Scorpio has bought out costly lease financing on 24 of the 100 product tankers in its fleet and is on target to pare $1.2bn in debt during the calendar year, from a starting point of nearly $3bn. It would be the first time Scorpio goes under $2bn in leverage since 2016.

The company was saved, first, by its pre-emptive sale of 12 LR1 tankers to Hafnia in January, which freed more than $170m in liquidity. But perhaps more importantly, then the clean product market entered a long-awaited recovery, aided by dislocations from the war in Ukraine. This created the cash flow to let Scorpio start buying back its tankers from Asian lessors. Scorpio’s progress can be viewed in classic glass-half-empty, glass-half-full fashion. On the one hand, Scorpio’s work has meant it can keep its fleet-wide financial break-even at $17,500 per vessel per day despite the rising interest costs. On the other, it has been unable to reduce that figure despite slashing leverage because its money costs are higher. There are other owners who do not have Scorpio’s issues, either because they have lower leverage or locked in fixed interest rates through caps, or both.

US-listed dry bulk owners Genco Shipping & Trading and Eagle Bulk Shipping both fall into this category and were able to reassure investors on their recent earnings calls. BTIG analyst Greg Lewis qualified a question to Genco management by noting that the company does not have much debt. Starting from a much lower base than Scorpio, Genco also has been slashing debt through voluntary repayments in furtherance of its new high-dividend model, with leverage down to $180m at the end of the third quarter. “But clearly borrowing rates do impact asset prices as well,” Lewis ventured. Genco chief financial officer Apostolos Zafolias said the owner had interest caps in place until the end of 2024 at a weighted average of 94 basis points over Libor and its successor, Sofr. “In terms of the existing debt, we are pretty well hedged and covered,” Zafolias said. But for others, rates are now in the high single digits when base rate and margin are combined, “and then there is obviously the alternative financing providers space which has higher financing costs”.

Eagle Bulk was able to remind investors that last year it managed to fix the Libor rate on its $250m term loan at 87 basis points until the end of 2024. Even so, that would not help any new debt needed for vessel acquisitions. Eagle Bulk therefore would hope to use cash in the event it pursues one-ship or two-ship acquisitions soon. Gary Vogel, chief executive of Eagle Bulk, said: “It’s a completely different environment. We’re keenly aware that if you put leverage on a vessel today at 50%, your debt is significantly more expensive. I think it’s helpful in that it will give people pause and limit speculative buying, because it just makes cost of ownership and cash break-evens that much greater.”

Yet there is another reason behind high borrowing costs to consider pausing on vessel acquisitions, and it was cited by a couple of tanker executives in remarks to Streetwise. DHT Holdings chief executive Svein Moxnes Harfjeld said his VLCC company has low debt and swaps in place until the end of the second and third quarters of 2023. But interest cost is not at the forefront of his mind in taking a break from the sale-and-purchase market. “Cost of debt is not the reason we are not buying, it is the nominal prices,” Harfjeld said, referring to the run-up in tanker valuations. A second tanker executive who asked not to be identified said interest costs are a factor, but not the factor in his view. “I think the biggest deterrent to asset acquisitions is simply the higher price of assets,” he said.