Temasek sold off NOL, so why save PIL?

Singapore

TEMASEK Holdings decided against taking a long-term view with former flag carrier Neptune Orient Lines (NOL) five years ago. Why is it answering Pacific International Lines' (PIL) call for help now?

The outlook for container shipping is as bleak as ever. Big, slow vessels that carry cargo from port to port while offering little in the way of differentiation have rewarded the average liner with returns that lag its cost of capital.

Fierce competition, in the form of aggressive fleet expansion at the expense of profitability, makes long-term strategising difficult. And the market is plagued by chronic overcapacity.

Pro-globalisation policies that fuelled a decades-long trade boom have also given way to a new era of "slowbalisation", which could limit the volume of electronics and home goods that needs to be containerised.

Yet, there may be an investment angle for PIL, if it gets the right support and is able to execute a new strategy, analysts said.

The opportunity

Starting last year, PIL has pursued a strategy of service rationalisation. In March, it withdrew from sailing the transpacific route between Asia and North America. This is a step in the right direction, said analysts, even if PIL was slow in its decision.

"PIL is not a global carrier," said Lars Jensen, chief executive at SeaIntelligence Consulting.

Although it is ranked as the 10th largest liner in the world by operated capacity, PIL has never had the scale to compete effectively on the highest-volume east-west trade lanes where an oligopoly controls most of the capacity, he said. "When you say 'global carrier', that refers to members of one of the big three shipping alliances," Mr Jensen said, referring to THE Alliance, Ocean Alliance and 2M Alliance. PIL is the only one of the world's 10 largest liners not to be part of an alliance.

Instead, analysts said, PIL's strengths are on the intra-Asia and Asia-Africa routes. These are the routes where its focus should be, said Andy Lane, director at CTI Consultancy.

Being exposed to the right geographies is key for survival as trade patterns change.

Mr Lane explained: "As a collective, we have been moving way too much cargo, way too far, and for way too long. Because we could, because it is cheap, whilst ignoring the environmental impact... Many buyers had already started to diversify their sourcing origins, then US President Donald Trump accelerated that.

"A trend of 'make at home' was already starting, and then Covid-19 taught us that that shorter supply chains might be smarter. We will therefore see gradual declines in freight ton-miles and more intra-regional trade. PIL is well-placed to capitalise on this. It has an established brand and network within Asia."

Intra-Asia freight rates are modest, however, at just US$240 per twenty foot equivalent unit (TEU) from North-east Asia to South-east Asia right now.

Mr Lane said: "To be competitive in this trade you need great agility and a laser-focus on costs, which are areas where PIL needs to further improve."

As for Africa, the continent will continue to be dependent on Asia for imports for a while. He added: "Asia-Africa revenues are good: normally above US$2,000 per TEU, and at US$2,700 currently. But it is a competitive marketplace where large operators such as Maersk, MSC and CMA CGM are quite dominant."

Everyone else is doing it

Temasek's potential rescue of PIL, through investment firm Heliconia Capital Management, must also be seen in the context of other unprecedented moves in the boxship industry globally.

Mr Jensen of SeaIntelligence said: "Since the virus outbreak started in January we have now, overtly at least, seen six of the world's 10 largest carriers looking to get state aid - CMA CGM, Cosco, HMM, Evergreen, Yang Ming, PIL. These six carriers account for 43 per cent of the capacity operated by the top 10 carriers.

"This is not unusual. This is a sector where state aid is very common. It comes in many forms and guises. We've seen that time and time again."

Often, as is the case with South Korea - the world's largest shipbuilding nation - state aid may be motivated by more than pure financial considerations.

Heliconia has been silent about its reasons for looking at PIL, but Singapore does pride itself as a maritime hub. Homegrown PIL employs some 9,000 people worldwide. This number includes 650 based here, of which 90 per cent are Singaporeans or permanent residents. PIL also has active business relationships with 700 to 800 vendors in the Republic, including about 100 homegrown Singapore entities, it told The Business Times.

Temasek's sale of NOL in 2016 also involved broader considerations. CTI Consultancy's Mr Lane said: "NOL was in poor shape and Temasek was able to get an extremely good price for that divestment, whilst gaining additional volume for the port and more maritime jobs as a bonus."

Striking a balance

PIL has not spoken about how much fresh capital it is seeking, but it is in a negative working capital position. As at June 30 last year, it faced more than US$1 billion of loans maturing over the next 12 months. It also has S$60 million of medium-term notes maturing this November.

Sales of containerised consumer goods have been hit hard recently by lockdown measures. Industry group BIMCO expects average freight rates for 2020 to be at loss-making levels, as lower consumer spending will probably persist.

It is unlikely that Heliconia alone has sufficient firepower to give PIL the liquidity buffer it needs to stay afloat, so it will be interesting to see whom they partner with for the rescue.

It will also be interesting to see what terms PIL's trade creditors, such as Temasek-owned port operator PSA International, accept as PIL firms up its debt restructuring plan.

Heliconia will need to strike a balance between getting a fair return on the capital it's risking while giving PIL a decent shot at competing in the capital-intensive shipping business - one that is prone to cycles of short-lived booms and prolonged busts.

Details about any possible deal with Heliconia are expected to be firmed up over the next few weeks.

Till then, being under the auspices of Heliconia's good name is going a long way to keep PIL's lenders calm so it can avoid filing for bankruptcy protection.