US-listed shipowners have finally emerged from their summer doldrums and resumed follow-on equity and debt sales to Wall Street investors. Transactions have rebounded in October and 2017 is still on track to be a near-record year.

After a very high level of capital raising in the first half – USD4.78 billion, according to data compiled by Fairplay – proceeds slowed to a trickle in the third quarter of 2017 (3Q17), to just USD200 million. But during the first three weeks of 4Q17, capital markets activity has recovered, with US-listed companies or their subsidiaries raising USD790 million in gross proceeds. Debt and equity offerings have been conducted in rapid succession by Global Ship Lease, Navios, Golden Ocean, Teekay LNG, DryShips, and Seaspan.

According to Fairplay data, US-listed shipowners have raised total gross proceeds of USD5.83 billion via 50 equity and debt offerings between 1 January and 24 October. This year’s proceeds are already 87% above full-year 2016 proceeds and 2017 is on track to be the third highest-grossing year ever (see chart, below). The record was set in 2014, when US-listed companies raised USD8.17 billion via 63 offerings. In 2013, these owners raised USD7.41 billion through 62 offerings.

This year’s most important trend has been the preponderance of debt offerings as opposed to equity deals. Of the total money raised through 24 October, USD3.21 billion or 55% was derived from debt sales, and USD2.62 billion or 45% was from equity. If this mix persists through year-end, 2017 will set the record for the highest proportion of debt-to-equity sales by US-listed shipping companies.

Most of the debt capital raised has been deployed for refinancing purposes, while equity is generally being used to acquire second-hand vessels in the sale and purchase (S&P) market, not for newbuild orders.

Broken down by sector, 35.3% of proceeds year to date (YTD) have gone to owners in LNG shipping, 22% to mixed fleets, 19.4% to tankers, 9.5% to container ships, 8.7% to dry bulk, 3.4% to offshore services and shuttle tankers, and 1.7% to LPG.

Broken down by ownership group, the largest recipient of offering proceeds YTD has been the Golar LNG companies (USD772.5 million), followed by DryShips (USD719.1 million), the Navios companies (USD608.8 million), the GasLog LNG companies (USD520.65 million), Dynagas LNG (USD480 million), and Global Ship Lease (USD356 million). Offerings by these six ownership groups account for 38% of total proceeds YTD.

Although follow-on activity has been very high, what remains glaringly absent in 2017 is an initial public offering (IPO) by a shipping company. The shipping IPO drought has now lasted longer than in any other stretch since the turn of the century. The last shipping IPO was for NYSE-listed tanker owner Gener8 Maritime in June 2015, almost two and a half years ago.

IPO prospects were a topic of discussion at the Capital Link New York Maritime Forum on 2 October. Citi managing director Christa Volpicelli told attendees, “The reality is that the bar is higher today [for IPOs] in shipping. Shipping is not an easy place in the capital markets, because there are cycles, there are companies that are smaller than the average company, and the investor base keeps changing. The people at the big long-only funds are different than they were five years ago, and you have different hedge funds that come in and out of the sector in different periods of time. There isn’t a consistent investor base, so you really have to be working with a bank that’s in the market constantly and has a sense of who the current investors are.”

According to Volpicelli, “The reason we haven’t seen any IPOs since 2015 is that there is a general view that the IPO discounts are still wider in shipping than in other sectors. But that can change quickly with the underlying segments [when they perform better].” The IPO discount is the discount an investor gets when buying shares in an IPO versus the valuation implied by the issuer’s already public peers, to compensate the investor for the risk of participating in a new issue.

The currently weak stock valuations of listed owners make shipping IPOs particularly challenging. According to Maxim Group managing director Larry Glassberg, “If you look at the existing public companies, the valuations are all over the map and there are a fair amount of companies trading below NAV [net asset value, referring to assets minus liabilities]. Unless companies are trading above NAV across the board in a sector, the IPO market [for that sector] is going to be closed, unless you have an issuer willing to go public at a discount to NAV for strategic reasons.”

Company size is another key factor, with most investment bankers at the Capital Link event believing that only larger shipowners can do an IPO. “I would love to take a company public that has five or six or 10 ships, but unfortunately, I don’t see that happening any time soon,” said DNB head of corporate finance Jae Kwon. “I think these companies are more suited for a private placement. The reality is that for us to start seeing more IPOs, more shipping companies are going to need to have real scale. And the way I think that happens is through consolidation.”

Numerous private equity (PE) groups invested heavily in shipping in 2011-14 with the intention of profitably exiting via an IPO. The inability to obtain an acceptable valuation through an IPO has pushed them towards a different strategy, informally known as ‘IPO via M&A’. Under this model, the PE investor sells its ships to an existing public shipping company in return for shares. The transaction increases the scale of that public company and allows the PE investor to exit its original investment by selling those shares at a better price than could have been obtained in an IPO of its original vessel assets. This strategy makes existing public companies bigger and reduces the pool of potential future IPO candidates.

Despite such headwinds, bankers speaking at the Capital Link event were confident that shipping IPOs will make a comeback at some point during the next 18-24 months. The catalyst is expected to be a rebound in freight rates that brings stock pricing of already public companies above NAV. According to Wells Fargo Securities managing director Eric Schless, “If we get to the point where shipping companies are trading at 1.4 times NAV, we’ll all be very busy doing IPOs.”

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