Home / Markets / Stock Markets /  Supply-chain snarls deliver windfalls to Wall Street

Global supply-chain bottlenecks are creating headaches for retailers, delays for consumers—and big gains for financial firms that invested in container ships before the pandemic upended the logistics business.

New York-based Mangrove Partners, which managed $1.3 billion at the end of September, was up 70% for the year through October. Roughly half of the hedge fund’s gains stem from shipping investments, said a person familiar with the firm. Mangrove focuses on inefficient or out-of-favor industries.

Dublin-based hedge fund Pilgrim Global was up 105% for the year through September, thanks in part to a stake in Oslo-listed MPC Container Ships, according to an October investor letter. The fund managed about $100 million at the end of last year. MPC Container Ships stock is up 214% this year.

After nearly a decade of distress, windfalls suddenly abound in the notoriously boom-and-bust container-ship sector. Danish giant A.P. Moller-Maersk A/S reported a profit of $5.44 billion for the third quarter—almost as much money as Inc. and United Parcel Service Inc. combined. Container-liner firm Zim Integrated Shipping Services Ltd., which has been restructured several times in roughly the past decade, had a market value of $1.4 billion at the end of its first trading day in January. It had a market value of $6.3 billion as of Wednesday.

“We are on an extreme high" in the container-shipping cycle, said Nicholas Stillman, formerly the head of investment banking at ship-broker Clarksons. He last spring started a small debt-focused shipping fund, Olympic Maritime Partners. Despite recent fluctuations, rates this year largely have “set records week after week," he said.

It isn’t hard to see why. Charter rates have soared, thanks in part to a global economic rebound that is translating into Covid-19-related labor shortages and port logjams. Cargo ships are in demand, following a yearslong decline in the number of container ships ordered and continued consumer spending on goods rather than services.

To capitalize on the boom, hedge funds and lenders are flipping container ships, signing multiyear contracts to charter them out at high rates and taking gains on their equity stakes in container-shipping companies whose stock prices have soared.

Mangrove founder Nathaniel August assembled a fleet of container ships in 2017 and 2018, buying discounted vessels at scrap value, renaming them after major figures for the New England Patriots football team and chartering them out. He saw additional gains if the vessels themselves rose in value. As charter rates soared, Mangrove sold. The firm in September sold four Panamax container ships for $242 million, trade publication FreightWaves reported. Mangrove bought the ships for $32 million in 2017, according to industry-research firm VesselsValue.

Mangrove has continued to sell off its fleet since, selling for $128 million two more Panamaxes that it bought for $27.4 million in 2018, according to VesselsValue. It also sold two Capesize vessels in October. The gains follow a 38% loss last year.

Pilgrim and other large shareholders took additional equity in a July 2020 restructuring of MPC Container Ships so the company could avoid tripping debt covenants. Pilgrim, which has been invested in MPC Container Ships since its first private placement in 2017 and trimmed its stake in July, sees the investment in part as a way to profit from emerging price pressures.

“Inflation is suddenly everywhere," Pilgrim founder Darren Maupin wrote in last month’s investor letter. “Large capital investments are continuously required in forgotten basic industries…to simply keep our economies running."

Even some lenders are benefiting. At New York-based Blue Ocean, EnTrust Global’s maritime-lending platform, rising ship values and shipping-firm financials are boosting the quality of its container-shipping loan portfolio. Blue Ocean also jointly owns stakes in container ships that have seen sharper benefits; with its partners, it has sold or is in the process of selling several container ships that they bought at discounted prices and is chartering others out at market rates, said people familiar with the lender. Blue Ocean has deployed nearly $2 billion since it began investing in 2016.

The recovery is turning what looked like losing bets for earlier investors in shipping into winning ones.

New York hedge fund King Street Capital Management bought debt in Zim at a discount before overseeing a 2014 restructuring in which it exchanged its bonds for a mix of new bonds, shares and several container ships. The firm sold the bonds and vessels over the next several years but held on to its equity. Zim went public around $15 a share in January, and King Street sold nearly 4 million shares in June for around $40 a share, according to people familiar with the investment. The firm retains a stake in Zim, which on Wednesday reported record quarterly net income and set plans to pay dividends quarterly.

To be sure, some analysts say shipping stocks could lose their luster in coming years as the industry looks to replace the use of heavy oil with more-expensive non-carbon fuel. The shipping industry has committed to halving CO2 emissions by 2050, but it is under rising pressure after the recent United Nations climate summit to commit to a net zero target over the same period.

That said, many believe that supply-and-demand in the container-ship sector is unlikely to come into balance soon. While large amounts of orders for new container ships have been placed recently, those ships aren’t expected to hit the water until late 2022 at the earliest, shipping companies, bankers and investors say.

Uncertainty over new emission standards aimed at improving the maritime industry’s ecological profile also are constraining new orders for ships, said Michael Parker, Citigroup Inc.’s chairman for shipping and logistics.

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