Q: How big is your treasury team?
A: We operate in 50 countries. Hong Kong is our global headquarter where we have a team of 17 in the treasury department.
Q: How tough is the competition?
A: It’s a harsh world. We are a medium-size company and we have to compete with big players and our peers in Japan, Taiwan, Korea and COSCO that have implied support from governments. Because of the competitive environment and the fact that we don’t enjoy quasi-government support, we need to provide liquidity to ourselves and sustain ourselves in this cyclical market. In 2009, we lost about $300 million, so the [cash] burn rate was almost $1 million per day. Hence, you need a lot of cash to sustain your business.
Q: Have you changed your financing strategies since the global economic downturn?
A: Historically, we have used more European banks but in recent years we’ve turned to Asian banks. We finance our ships and our container boxes through the bank market, and raise funds mostly for the long term, say between five to ten years. It’s tough at the moment because a lot of banks have dried up their liquidity, especially for longer-tenor debt.
Q: How do you build your bank relationships?
A: The industry is very volatile and the bank has changed their way of operating since they are under a lot of constraints with Basel III compliance and face liquidity premium issues.
We work with banks on a relationship basis. We don’t just look for the best pricing. We usually look for banks that are familiar with our history and have committed capital to us, and would provide a lot of products, such as bank loans, capital market resources, and have the ability to do FX investment.
We had a lot of financing and relationship with shipping specialized banks which are mainly European banks. But these days, we are working more with Asian banks that don’t have the specialized shipping expertise but are developing it. They have very strong credit analysis [expertise] and they always support [companies] like us because we have strong historical track record and performance. It’s not hard for us to secure funding, but getting the right pricing is challenging these days.
Q: How do you manage your counterparty risks?
A: We can’t just rely on the banks with shipping specialities since some of them have too much exposure in the shipping industry. These banks tend to be sovereign, state-owned banks, and they are dealing with their local issues now. But we still keep a close tap with them. They may be unable to give us committed capital now, but they still provide us with the special shipping financing structure. We still work with them on the structuring side, and then with the Asian banks that can provide the credit and capital for our business.
Q: Why is it difficult to tap the bond market?
A: The banking market and the capital market are not quite there for the shipping industry. There are few players such as Maersk that can tap the capital market, but not that many shipping companies have done a global bond issuance. It’s difficult for ship companies to tap the bond market since many of them are not rated. Even if they want to, it’ll be challenging to get a good rating—they may end up getting non-investment grade, or high-yield type. Then you run the risk of subjecting yourself to high cost of financing.
Q: Do you have a hedging policy in place?
A: Our revenue is based on container freight, which is not a hedgeable commodity at the moment. This market is very young, so there’s not a lot of liquidity that you can trade like oil, cocoa, or coffee…. It’s also unlike the Baltic freight indices where you can trade a bulk carrier… Each of our containers carries different content, so there’s no standardization for us to hedge. Although freight is still what we commonly term the commodity type product, it’s not feasible to come up with a standardized approach.
On the cost side, we don’t see any instrument in the market that is effective to hedge the cost of bunker, so we have to monitor it closely. The cost of bunker has gone up substantially in the past decade and it accounts for about 20% of our operation cost now. So it’s a huge exposure. We’d rather use operation efficiency to manage that. We pass on some of that cost to our customers, just like how the airlines levy fuel surcharges.
Q: How do you control your currency exposures?
A: We do forwards and options to hedge against our exposure in foreign currencies and interest rate risks. Our exposure to foreign currencies is not that huge. Our business is pretty straight forward: We earn US dollars, our cost is in US dollars. Our biggest cost, fuel oil, is US-dollar based. The ships, equipment that we buy are all priced in US dollars.
Our only foreign currency exposure stems from our operations in 50 countries. The port charges, staff cost, overhead costs are all in local currencies, but they do not add up to be a big exposure. We try to net off our exposure in each country by collecting local revenue and then net off the revenue with local costs and expenses. For the remaining surplus, we will repatriate it back to our head office and revert it back into US dollars. We usually hedge the G7 currencies, but not with the more exotic ones since revenues from those countries don’t really reach a critical mass for us to enter into a hedge instrument.
Q: What’s your cash position?
A: Our balance sheet is very strong. Our debt position and cash position is very, very healthy. Our net debt is about $260 million as of end of last year, and we have about $2.4 billion in cash. We have a tendency to keep a high level of cash because we don’t have a liquidity backdrop, a bank facility to support our cash flow. We rely on our own cash for short-term liquidity. For long-term funding, we will look for financing to pay for our equipment, container vessels and the ships that we buy.
Q: How do you deploy your cash?
A: We place them in deposits and in our investment portfolio. We have another investment team to look after the more medium term assets, which have to be liquid and of investment grade. About 20% of our cash is put into the investment portfolio and the rest is all bank deposits.
Q: Why did you order ten energy efficient ships last year?
A: There’s better economy of scale as you move up the size. As we speak, larger and larger ships that are more energy efficient are being deployed into the waters. They can carry between 13,000 to 16,000 TEU and per unit cost is much smaller when you operate with a larger ship. We can have 25% to 50% efficiency gain when we use larger ships.
The cost of bunker used to be $100 to 200 per metric tonne, now it’s between $500 to $600. With soaring fuel costs, we’d rather go for ships that are more economical with fuel burn and have operational efficiency.
Q: Why are you renewing your lease for the port in the US in April?
A: We’ve extended the lease for the port in Long Beach, California, to another 40 years. For our business to grow, we need to have a terminal that gives us access into a market with good potential. US is really resilient, it’s going to recover.
It’s important for us to invest now and hopefully we can ride on the next economic cycle when more efficient terminals are needed. We have owned the Long Beach terminal for more than 20 years, and it’s getting out dated. It can only house or berth 8,000 TEU vessels. With the extended lease, we are looking for larger coverage of land use, so the new terminal will be able to berth three or four larger vessels at full capacity.
Q: Where are the bright spots for the China market?
A: We only use container ports in China. Strategically, we managed China as northern China and southern China, and we have freight operation as well as logistics operation there. Demand for logistics has been pretty strong in China.
With growing demand in domestic consumption, you see a lot of shipments going from east to west and west to east within China. Internationally, we see the reverse now, with goods manufactured overseas that are being shipped to China. The volume may still be there, but the direction is different. It signals the changes in the global economy.