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SGX acquires Baltic Exchange

Tue 21 Mar 2017 by Steve Matthews

SGX acquires Baltic Exchange
Singapore Exchange is looking for more maritime business

Completion of the acquisition by Singapore Exchange of the London-based Baltic Exchange is a huge feather in its cap for Singapore in enhancing its credentials as a major global shipping business hub

When talks about the take-over of the Baltic Exchange by Singapore Exhange (SGX) were first revealed in early 2016, Espen Poulsson, president of the Singapore Shipping Association, and since June 2016 also chairman of the International Chamber of Shipping, commented: “Any development that promotes Singapore’s position as a leading international maritime centre and enhances its status as an international financial centre, is to be welcomed.”

The Baltic Exchange has been in London since 1744 since when it has been the global centre for shipowners and charterers and their respective brokers to seal deals. In recent years most of its business has been conducted electronically and it has overseen the growth of freight derivatives trading. The Baltic Exchange provides the definitive benchmark indices for the settlement of such deals.

Singapore and SGX have been seeking to promote this type of business, and SGX has developed as a significant provider of the clearing and settlement of freight derivatives. While the Baltic Exchange headquarters will remain in London as the main location for its traditional business, SGX sees opportunities from its ownership in terms of synergies with its own activities and to add value, such as contributing panellists. It will also retain a multiple clearing house model and has made commitments with regard to the future business of freight derivative brokers.

SGX made an initial bid in February 2016, and by May 2016 matters had progressed sufficiently for an exclusivity agreement to be signed for discussions on SGX’s 100 per cent cash offer to acquire the Baltic Exchange.

At that time SGX said that the acquisition would “bring together the complementary strengths of Singapore and London, two of the world’s most important maritime hubs. Both SGX and the Baltic Exchange would also benefit from new growth opportunities, including potential new shipping benchmarks and clearing solutions that meet the market’s evolving needs for data and trading.” Promoting freight derivatives activity in Asia is one of the key aims of SGX in acquiring the Baltic Exchange. According to SGX, it handles about 40 per cent of the global dry bulk freight derivatives market, although its efforts to develop tanker derivatives business have yielded more mixed results.

SGX chief executive Loh Boon Chye said: “We recognise the integral role the [Baltic] Exchange plays within the global shipping community, which we hope to develop for the benefit of the industry as a whole.”

Negotiations were constructive and positive and in September 2016 the proposal won approval from Baltic Exchange shareholders. In October the deal was cleared by the UK regulator, the Financial Conduct Authority, and in early November 2016 the proposed deal crossed its crucial and final hurdle when it gained formal court approval in London. This approval was followed swiftly by formal completion of the acquisition, which was valued at about £87 million.

Financial support for troubled offshore industry

The sharp slump in the offshore oil and gas industry and related engineering and other support services has created major challenges for companies in this sector based in Singapore, which raises questions about the future prospects of some companies and even their survival. Such is the importance of this activity to Singapore’s maritime industry and the local economy that the Government decided that it needed to step in to offer some relief in an effort to give companies a better chance of getting through the downturn until the market recovers.

In November 2016 Singapore’s Ministry of Trade and Industry confirmed that the system of bridging loans (BL) for marine and offshore engineering companies would be re-introduced and the International Enterprise (IE Singapore) Internationalisation Finance Scheme (IFS) would be enhanced.

The Ministry of Trade and Industry said that the schemes aim to facilitate companies’ access to working capital and financing. The BL scheme will help Singapore-based marine and offshore engineering companies finance their operations and bridge short-term cash flow gaps. Eligible companies will be able to borrow up to S$5 million each, for up to six years, with a maximum total lending for each borrower of $15 million. Companies whose main activities are in the marine and offshore engineering industry, such as shipyards, their contractors, offshore services providers, exploration and production companies, oil and gas equipment and services companies, and their suppliers, are eligible to apply. Companies must have at least 30 per cent local shareholding to qualify.

IE Singapore’s existing IFS, which provides project and asset financing support for companies will be enhanced with the maximum loan increased from S$30 million to S$70 million per borrower group. The Government is taking on 70 per cent of the risks for these loans.

The ministry stressed that these are one-off measures intended to help stabilise the industry.

Minister for Trade and Industry (Industry) S Iswaran said: “The marine and offshore engineering industry, in particular, is facing a deep and prolonged downturn due to cyclical and structural forces.  Consequently, the industry’s financing challenges have intensified in recent months. These targeted measures aim to help preserve the industry’s core capabilities which have been built up over the years and will be important for seizing future opportunities.  The Government will continue to monitor the economy closely and stands ready to act if necessary.”

The two revised schemes became available in December 2016 and were expected to generate about US$1.6 billion in loans during their first year. The minister also announced S$107 million to help develop a new research centre for the industry.

These moves were welcomed by the Singapore Shipping Association (SSA) which was involved in developing the measures. It said that they will “help preserve the marine and offshore engineering industry’s core capabilities in the face of very severe financing challenges, arising from the prolonged weakness in the oil price, coupled with the great uncertainty facing the global economy.”

SSA president Esben Poulsson said: “Marine and offshore engineering companies are a vital part of Singapore’s maritime ecosystem, and they have been affected particularly badly by the general economic slowdown. Whilst the maritime industry fully recognises that the Government cannot be expected to solve all our difficulties, we nonetheless very much appreciate the introduction of these well thought-out, targeted measures.”

Singapore-based shipmanager Thome Ship Management also applauded the decision. Claes Eek Thorstensen, president of Thome Group, commented: “A healthy marine industry is crucial to the Singapore economy and so it is good news that the Government is taking a serious look at how it might help those sectors of the industry struggling to stay afloat. It is important that Singapore maintains its central position in the Asian maritime hub so any measures which the Government might be able to offer would be welcomed including any support which preserves the diversity of industries, including research and development, in this maritime cluster.”

The sharp downturn in the offshore oil and gas sector is having an effect on the Singapore maritime community and those who have invested in it.

The default of offshore services company Swiber Holdings prompted banks in Singapore to warn investors about risks of further loan and bond defaults by other offshore service companies with high debts and poor cash flows, due to the prolonged downturn and resultant loss of earnings, as further bonds mature during the next two years. Some offshore support companies have sought to restructure their finances and exposure as well as redoubling their efforts to reduce costs.

Ratings agency Moody’s and some analysts suggested that some Singapore banks had not made sufficient provision against likely losses in the oil and gas sector, though the banks insist that they can manage those risks.

Rickmers Maritime Trust fights for survival

It is not just the offshore sector where investors are feeling the pain. Singapore shipping trust Rickmers Trust Management, which owns container ships for charter as trustee manager of Rickmers Maritime, has been struggling to satisfy its note holders who are facing substantial losses on their investments as earnings and ship values have plummeted.

The sharp downturn in earnings and the future prospects for the Panamax container ship market are causing particular problems for Rickmers Maritime, as Panamax earnings and ship values have fallen so low.

Rickmers Trust Management owns a fleet of Panamax container ships, from 3,450 teu up to 5,060 teu, that are chartered out to various operators including CMA CGM, Maersk Line, Mitsui OSK Lines (MOL) and Mediterranean Shipping Co (MSC).

Following note holders rejecting an earlier offer, Rickmers Trust Management produced an improved offer involving a partial redemption of S$60 million for its S$100 million notes due in 2017. This would reduce the outstanding principal amount under the notes to an aggregate of S$40 million which is repayable in November 2023.

The Singapore shipping trust would issue 1.32 billion new units equivalent to 150 per cent of the current number of units outstanding. Søren Andersen, chief executive of Rickmers Trust Management, said: “We value noteholders’ feedback and have reflected their suggestions in this proposal. If accepted, it would make way for a new facility of about US$260.2 million, and extend the maturities of a large part of the trust’s secured bank debts to the first quarter of 2021. It includes, amongst other terms, a generally back-ended amortisation schedule. This would give the trust more time to weather the depressed market, and underpin its solvency.” In late December Rickmers Trust Management noteholders rejected the offer.

Following this decision Rickmers Trust Management said: “The trustee-manager will prudently consider and assess alternative proposals for the restructuring of the notes should such proposals be presented, and continues to discharge its duties as the trustee-manager of the trust. The trustee-manager is in discussions with certain of its senior lenders in relation to a potential divestment of assets for working capital purposes.” At the time of writing no new proposals had been made.

Two days after the rejection Rickmers Trust Management sold its Panamax container ship India Rickmers, at just seven years old, to scrap buyers as part of settlement of a debt with Commerzbank. In January 2017 it sold another Panamax container ship Kaethe C Rickmers for demolition, raising further funds in its efforts to repay creditors.

Failure to satisfy noteholders could see Rickmers Trust Management going into liquidation as it runs out of cash.

Another of Singapore’s shipping trusts has seen its financial performance improve after various measures had been taken. First Ship Lease Trust (FSL Trust) owns a fleet of 22 vessels, comprising tankers and container ships. It achieved a 24 per cent increase in profit for the third quarter of 2016 to US$3.5 million. Although revenue was down by 19 per cent year on year, it made significant savings in operating costs and depreciation. It indicated that the fourth quarter of 2016 would be affected by drydocking-related costs for chemical tankers. In December it received a filip from Singapore Exchange removing FSL Trust from its watchlist with regard to the minimum trading price of its units