Page 15: of Maritime Logistics Professional Magazine (Q2 2012)

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harbor product trades, resulted in a cash sucking vortex. This solution hints at an antidote to risk – which is diversifi ca- tion. The lion’s share of Kirby’s busi- ness is on the inland waterways, tied to contracts with major charterers.

An important lesson from the U.S. fl ag sector, but applicable industry-wide, is that cash requirements for payments to fi nanciers funding ship construction, combined with cash needed for requisite distributions to equity investors, can eas- ily overwhelm cash infl ows from ongo- ing operations in deteriorating markets.

The MLP model, with distributions to limited partners, has been applied more successfully in foreign fl ag shipping by

Teekay Corporation and Navios – where “parent” companies incubate deals, and then drop them down, fully hatched, into “daughter” companies – which benefi t from charter cover without being burdened by construction costs.

Risk, Recovery, and then –

Revitalization?

In the view of S&P, “Jones Act” com- panies may present less risk than their foreign brethren. Funmi Afonja explained that the segment offers certain barriers to entry, and that, especially in the liquid bulk segment, multi-year contracts are in place with strong reputable counterpar- ties from the oil and chemical sector. The result, she said, is that Jones Act compa- nies, in a sector that is less fragmented than the international realm, may offer less volatility – certainly for tank vessels.

Her colleague, Philip Baggaley, adds, “A big part of risk is the sheer capital in- tensity of shipping; it’s hard to cut back once you’ve made the investment. You’ll keep operating as long as you cover marginal costs.” He contrasted this with rail and truck modes- where assets are more discrete.

In some cases, all this risk does give way for opportunity, as seen in the re- cent travails of Trailerbridge, Inc., a

Jones Act company which operates roll- on roll-off assets in the U.S. / Puerto

Rico trades. All eyes are on the re-or- ganized company, now controlled by an investor group led by Seacor - which has had a string of successes in revitalizing down-trodden shipping assets. “Risk” means different things to dif- ferent people. Shipping’s legendary vol- atility has led to great fortunes during the boom years that ended in 2008. But the industry’s hefty capital costs, which stay around long after the outsized hire bubble was defl ated, have caused heart- burn for providers of debt and equity, as the cycle turned downward.

The Author

Barry Parker, bdp1 Consulting Ltd provides strategic and tactical support, including analytics and communications, to businesses across the maritime spectrum. The company can be found online at www.conconnect.com

Funmi Afonja “…Jones Act companies, in a sector that is less fragmented than the international realm, may offer less volatility – cer- tainly for tank vessels.”

Philip Baggaley “We look at both overall business risk – things like the segment funda- mentals, and company operating ef- fi ciencies, and also the fi nancial risk.”

Jonathan Chappell “Although balance sheet strength is important to the dividend payment strategies, visibility and sustainability of cash fl ows are of equal importance.” www.maritimeprofessional.com I Maritime Professional I 15

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