Tradewinds – Niton scrap fund begins to take off

(Written y Jonathan Boonzaier)

28 November 2012 – The tsunami of ships heading for the breakers’ beaches bodes well for a project involving cash buyer and commercial manager DTA.

One year after its formation, the shipping industry’s first scrap-investment fund has yet to meet its originally stated goal of buying 40 to 50 ships. But interest is growing and business is starting to take off.

The fund was set up in October 2011 by Niton Capital, while one of the industry’s biggest cash buyers, Dubai Trading Agency (DTA), is acting as commercial manager.

Preference for bigger ships

Its purpose is to acquire ships on an “as is” basis and then sell them on for demolition in the expectation of a reasonable rate of return. The focus is on all types of commercial ships, although the preference is for bigger vessels as they bring higher returns. The fund’s net return is paid back to investors.

In April, fund managers said they were hoping to acquire between 40 and 50 ships. Yves Leyss of Niton concedes that so far this year it has traded over 15 vessels. He does not appear too concerned about the smaller-than-expected tally, claiming it has taken a while for potential investors to grasp the idea.

“This is different to the traditional shipping fund. We are not buying to speculate. We are buying for trading, not to gamble on a possible increase in value,” he explained.

According to Leyss, investors initially expressed an interest in the fund but were reluctant to immediately jump on board. “They said it was a nice idea but told us to come back when we could prove that we could do what we were saying,” he said.

Leyss declines to reveal the cash value of the fund, citing regulatory restrictions, although he admits its size “could be improved”.

With the just over 15 deals done and dusted, Leyss says the fund has proven that it is a viable financial instrument. “We have shown them that it is a nice investment that provides better profitability than putting money into the stock market.”

While Leyss does not provide any financial figures, he tells TradeWinds that the fund is now attracting much higher levels of interest from investors looking to get into what he describes as “the only booming part of shipping”.

“I expect we will be a lot busier next year,” he said.

For regulatory reasons, the fund is not operating in the US or accepting any US investors. Leyss says the majority are from Europe. The fund is aimed at only what he refers to as qualified investors — high-net-worth individuals and family offices. No public offering is permitted.

Leyss maintains that the fund will always remain a niche vehicle and its size and scope will be highly dependent on the state of the shipping markets.

“We have always regarded this as a medium-term instrument. In a few years from now there might be equilibrium in the shipping markets and less scrapping as a result. We know shipping is cyclical,” he said.

With the tsunami of ships heading to breakers’ beaches showing no signs of subsiding, the fund is likely to be especially busy now that it claims it has proven itself to be a viable business model.