Transparency “More information is needed to properly assess shipping risks”

Shipping has become more of a privately owned industry ever since the demise of the big liner companies in the seventies.

More of it has moved offshore for tax reasons and to avoid the manning costs and restrictions imposed by the traditional shipping nations.

Despite the entry into the public share markets the vast majority of ships still remain in private hands and the details of their trading and finances are a closely guarded secret.

One famous shipowner once said to me “My accounts are a matter between my conscience and my bank”. The same man also said “Ships move more money than cargo”.

Faced with this how does an investor assess the risks of buying shares or debt in a publicly traded shipping company, particularly as many of them are an extension of private family controlled companies which may conflict or combine with the public companies trading?

Information is the fountain of knowledge but incomplete or erroneous information can be highly misleading. The decision as to what is relevant information and what needs by regulation to be disclosed is often a matter of legal advice which generally errs on the side of disclosing as little as possible thus extending the habits of the private companies.

In times of strong markets the lack of disclosed information is often ignored as the profits roll in. This can also be said about operating practices that have major conflicts of interest with the related private companies. When markets are weak and profits disappear the need for better information becomes more important.

So it is today on a number of fronts which are becoming increasingly more examined and giving rise to demands for greater transparency.

Firstly there is the issue of accounting for charter contracts of more than one year as proposed by the International Accounting Standards Board and making no differentiation between a Finance Lease (Bareboat Charter) and an Operating Lease (Time Charter). This has led to huge objections being raised including from the Greek led International Chamber of Shipping who think that shipping should be a special case and not conform to any other industry on anything.

Secondly we have the issue of disclosing charter commitments whose size and concentration are material to assessing a company’s exposure to markets. The current case of Korea Line confirming that it is discussing renegotiating contracts it has made on some 100 chartered-in ships has caused investors to demand that some of the owners disclose their exposure to Korea Lines.

Given the collapse of many dry cargo charterers a couple of years ago investors are right to be concerned. Is it not the auditors responsibility to ensure that contracts of a material nature covering say more than 5% of the company’s gross income be disclosed along with those for long periods of time such as 5 years?

The euphemism “first class charterer” or the allusion to unnamed “guarantors or charter insurers” without providing any of the details of the insurer or the amount that has been covered is simply not good enough. We only have to look at the fallout of the AIG credit default deals to understand how important this information is.

Thirdly we have the issue of conflicts of interest and fees and commissions being paid to companies related to some shareholders but not others. One leading shipbroker has already spoken out against the practice of “address commissions”, to which I add, disclose the address and the recipient’s relationship to anyone in the management or any shareholder of the company.

The conflicts of interest also arise when ships are bought or sold between public companies and private ones that are related to some shareholders without independent valuations being obtained. Most of this information is known or should be known by the company’s bankers but other debt providers and shareholders should have the same level of information.

Too much of this is hidden from public company filings as the present regulations don’t require its disclosure and companies are happy not to provide forward looking forecasts despite the fact that their banks insist on them.

More and more public companies listed in New York are raising debt using the non-transparency of Rule 144a in their offering memorandums thereby avoiding disclosure of information which could be material to a buyer of the debt or existing shareholders.

Given the present terrible markets and the outlook for them to remain bad for several years to come, most companies will have to raise new equity and/or debt to survive and transparency of information will become more important to protect new investors and lenders. Also the management and directors need to ensure they are disclosing all material facts and thereby avoid the legal repercussions that flow from non-disclosure.