Stewart: Maritime finance is the topic of the day. Asset-backed lending is the strategy. We’re joined by Svein Engh, Senior Managing director, and portfolio manager at EnTrust Global. Svein, welcome.
Svein: Thank you, Stewart. Thank you for having me.
Stewart: I’ve got a lot to learn today because I do not know a whole lot about this topic. I’m thrilled to have you on, because you do. Before we get going too far, I’d like to start this off the way we start them all, which is, what’s your hometown, your first job of any kind, and a fun fact?
Svein: First of all, my hometown is Greenwich, Connecticut, even though I was born and grew up in Oslo, Norway. I left that country in, I’ve got to think, 1979, to go to school in the U.S. The reason why I ended up in the U.S. in the first place was because I was an athlete growing up, I was a swimmer. I came here on a swimming scholarship. I was actually planning to study in medicine, become a doctor. After high school, I worked in a nursing home for a year, preparing for studies in Oslo. But, it turned out that it was difficult to combine sports at a high level and a university degree in Norway, so that’s why I ended up in the U.S.
Along the way, instead of studying medicine, I ended up studying finance. Really, it made a big change. I came here in ’79, and apart from a period of six years, between ’86 and ’92, when I went back to Oslo and thankfully met my wife, I’ve really been here in the U.S. almost the entire time. The only other time, I spent two years in Singapore, between ’95 and ’97. My background is on the banking side, that’s where I spent most of my career. The last 12 years or so, I spent mostly on the asset management side. As far as a fun fact-
Stewart: The swimming, what was your event? That’s a very fun fact. What was your swimming event?
Svein: I was really a backstroke swimmer if you are talking about the sport itself, but I was pretty versatile. I was on the national team in Norway for about 10 years, and that’s why I got offered to come to the U.S. on a swimming scholarship.
Svein: Yeah, but that was a long time ago now. I retired from swimming in 1983, when I graduated from college. I was 23 years old at the time.
Stewart: It turns out that you and our editor-in-chief, Lindsay Michaels, both went to Ohio University. You have that fun fact in common, too.
Svein: There you go.
Stewart: You’re involved at EnTrust Global at the senior-most level. You’re on the management committee, you’re on the Global Investment Committee, but your background really is maritime finance and asset-backed lending.
Stewart: Can you just, at a high level, talk about maritime financing?
Svein: As I mentioned, I’ve been in this industry for most of my career, I actually got into the maritime industry in 1987. I worked for a Norwegian Bank at the time. If you look at the history of Norway, shipping was always a very large part of the economy and the history. Of course, now it’s more oil and gas, and renewables, and so on. Throughout the history of Norway, because of the long coastline, the maritime industry was always important, the trade between Europe and Norway, and so on. The fact that I ended up in that industry was not that surprising, because a lot of people in Norway end up working in the industry.
As I said, on the banking side is where I spent most of my career. The reason why I ended up with EnTrust Global, it was interesting, because as I worked in the industry, particularly post-financial crisis, the banks started to pull back from lending. There were new regulations coming into the banking industry, and we also saw private equity getting into the maritime industry in a pretty big way, starting around 2012, and the years thereafter. Also, hedge funds got into the industry by acquiring large, distressed bank portfolios.
I had a lot of dialogue with PE firms as well as hedge funds back in those days. They would call me for advice, sometimes offering jobs, and so on. It was only when I got a call from EnTrust Global, in the fall of ’15, that I really got interested, because they were the first one to call me about the lending side, not buying ships, and the buy low/sell high. They were interested in the lending side because of the banking dissertation. That to me was very intriguing because that was what I really had been doing most of my career, even though, 35 years, you obviously get involved in different aspects.
I got involved in private equity, and the capital markets, and so on, but the lending side was really always my bread and butter. They were the first ones to really look at this industry from a lending perspective, and that was very, very compelling to me. Our chairman and CEO, Gregg Hymowitz, had the same view of the industry that I did at the time. In fact, it was a competitive environment that dramatically changed from before the financial crisis until the end of 2015, when we got in touch, in that it had gone from being overbanked to dramatically underbanked. We both had a meeting of our minds that this is a great time to start a new business focusing on lending, because of that reduced competitive situation. That was the whole thesis why we started this business, focusing on lending. Even though we wanted to have broader mandates, we can do other things, but the lending side is really what drives this business. That’s how it all started.
Stewart: When we talk about shipping, and the importance to… and I want to come back to a little bit about the resiliency of the industry. When we’re talking about shipping, it is central to the entire global economy. You see pictures, when we’ve had all these supply chain disruptions, of ships sitting around, and you can’t get a car, you can’t get a this, you can’t get a that. Shipping is the backbone of the global economy, am I right about that?
Svein: Absolutely, that is 100% correct. If you think about global trade, between 85% and 90% is actually seaborne, carried on these ships around the world. There is no substitute for it, it’s by far the most economical. It’s something that really can’t be interrupted. It is difficult to stop global trade, and if you aren’t able to ship anything, everything comes to a grinding halt. We saw that, for instance, back in ’08, in the middle of the financial crisis. If you think about these ships, the cargo ships are secured in the letters of the credit market. There were about one or two days back then where even that market had shut down, and you saw the chaos right away. Everything came to a grinding halt. The fact is, it’s so important that the governments got together and managed to untangle that mess right away. If you really think about your daily life, everything that you use, and you touch, and so on, at some point would’ve typically been on board one of these ships, either as raw materials or as finished goods.
Stewart: You make a great point. I used to start my insurance class, I would hold up my iPhone, and I’d say, “How many of you have one of these?” Naturally, 100% of the hands went up. We started talking about what gets that thing from where it’s made to into their hands, and all of the types of insurance that’s touching it. Along the entire route is global shipping.
Svein: Right, that’s correct.
Stewart: You get nothing without it; as you mentioned, super-efficient, no substitute for it, not going anywhere for sure.
Stewart: With regard to the asset back lending strategy, what is it that you are lending on? What assets are you specifically involved with? Can you help me unpack the lending side of it a little bit?
Svein: Yeah. When you think about the maritime industry, there are a lot of different types of products and goods that are carried on these ships. You have a lot of different types of ships because you need to build ships to carry certain cargo. For instance, you wouldn’t carry LNG in the container ships.
Stewart: LNG is liquified natural gas?
Svein: Yeah. There, you have to purposely build an LNG vessel with the stainless steel tanks, and so on. Whereas, if you’re thinking about a container ship, you’re carrying the steel boxes that you see on the roads everywhere, on the trucks, on the rail lines, carrying finished goods. Very different products, meaning that you also have very different ships. For us, as a strategy, we tend to focus on the vessels carrying your Toyotas, if you compare it to the car industry. Really, the mainstream type of ships that carry either energy products, or tankers, oil and gas, chemicals, refined products, and so on. Or, we finance dry goods vessels, which are ships that are carrying the dry commodities, like iron ore, grain, steel, coal, and so on. We finance container ships, which are carrying these steel boxes with finished goods.
We focus on those three sectors because they are the largest. That’s where you have the most amount of activity, in terms of buying and selling of ships, which also means that’s where you have the most liquidity in the underlying ships that we’re financing. That’s important to us, because ultimately, we’re a secured lending strategy. In the really worst-case scenario, we have security in the ships, and we will retake possession of that security. We want to make sure that these assets that we then take in possession are liquid; if we choose to sell, we can always do it, it’s just a question of price. We don’t get stuck with assets that no one ever wants, and that’s important to us. That’s ultimately the worst-case, fallback position that we have. It’s very rare, though, that we actually end up doing that. We’re not a lender to own, we are a lender to hold, meaning that we just want these loans to continue for the five years, or whatever period that we’re lending, and click the coupon, return capital to our investors that we forwarded. That’s what we’re all about.
Stewart: Just to clarify, the segments that you mentioned, oil and gas, dry goods, and container ships, you are focused there because they’re the most… in other words, you can sell that asset to somebody else, because there’s a lot of people who have demand for that type of vessel, right?
Svein: Exactly. That’s the case, whether we are at the peak of the market, of the bottom of the market, there’s always buying and selling activity of these assets. That’s an important factor. We tend to shy away from the more specialized areas, because you don’t have that same liquidity there. Those tend to be more oligopolies, where you have a handful of owners controlling the market, meaning that there’s a lot less liquidity in the assets themselves.
Stewart: I was actually going to the Isle of Man, to see the Isle of Man TT, which is a motorcycle race, it happens every year. I saw a container ship, and somebody, we don’t have to put this on the podcast if this is going someplace you don’t want to go, but somebody threw a number at me of how many containers are on one of those big ships. Do you have a sense of the number of those little steel, they look like little steel boxes, they’re huge. But how many containers can you put on one of those things?
Svein: That’s where we probably have seen the most developments over the last decade, in terms of shipping and size. I remember distinctly, back in ’07, ’08, around that timeframe, there were a lot of discussions and concerns around the fact that companies started to order ships that could carry as many as 8,000, 9,000 boxes. At the time the question was, do we really have the infrastructure, the port infrastructure and so on, to handle that many containers? Now, we’ve seen container ships being delivered over the last few years which can carry more than 20,000 boxes. These are huge vessels.
Now, that’s where we’re seeing growth, in terms of the size of ships. If you look at other sectors, like the tanker size, for instance, it’s actually gone the other way. If you go back a couple of decades, maybe even more now, we actually have something called ULCCs, which means Ultra Large Crude Carriers. Those were enormous, 500 deadweight tons, they were just too big, it just didn’t work. Those ships are now completely out of the market, and the largest ones we have, we refer to as VLCCs, which are Very Large Crude Carriers. They’re a little bit more than half that size. There, we’re actually seeing things move back again, because they just turned out to be too large and it just didn’t work, from an infrastructure perspective. That has not happened on the container side yet.
Stewart: The container side, it seems as though with those large ships with 20,000 boxes for example, that’s got to bring the cost of transportation down, right? There’s got to be good efficiency there, it seems.
Svein: That was the whole idea, that you want to have as many boxes as possible on each voyage. You have to be able to fill the vessel, though, and that’s where the problem has been, that they just haven’t been able to, a lot of periods, fill the ships. Instead of carrying 20,000+ boxes, maybe you’re carrying half, and it’s obviously not as efficient, because these are very large ships that consume more fuel, and so on. The whole idea is that you need to be able to fill the ships as well.
Stewart: I’m very happy to be learning about maritime finance. One of the things that is universal across asset classes is volatility. We’ve seen supply chain issues and whatnot, and you’ve seen some inflation become a significant issue. Can you talk about your approach to decreasing volatility as a lender, and how you approach the covenants, the ‘Know your customer’ sort of things?
Svein: When you are focused on lending, it’s all about making sure that you never have to take a loss. It is a cyclical industry, there’s no denying it. What do you need to do to make sure that you don’t get caught out? The simple answer is, you need to become cyclical. In other words, certain sectors, for instance, right now the container sector, we talked about the container ships, have gone to unprecedented, extremely high levels, and part of that is the whole supply chain slow-down, and so on. That’s the time when you need to back off. What happens, when these rates go to these very high levels, the values, because that comes back to the liquidity factor I talked about earlier, the values follow right behind. If you are lending when the values are at the highest level, you end up putting too much debt on these assets for the downturn that’s bound to happen at some point in the future.
This is something I’ve always believed in, in my whole career. As long as you become cyclical, you’re going to be able to manage through the cycles no matter what happens, whether it goes up or down. That’s something you have to be very, very disciplined about. On the banking side, unfortunately, a number of banks don’t really have the same approach, because they are regulated entities, and the regulators tend to focus more on the cash flows than the underlying assets themselves, the security. They prefer the banks to lend when the markets are at high levels, because that’s when you have the most amount of cash flow. That’s also when you have the most amount of downside risks. That’s been a bit of a problem for the banking side, in that they tend to do more business when the markets are high. We don’t have to do that. We have a very disciplined approach.
Now, you combine the cyclical approach with covenants, particularly covenants related to underlying assets securing loans, where effectively have a margin call-type structure. If the gap between the loan amount and the value of these liquid assets go below a certain buffer, we have the right to go in and tell the borrower that they need to fix that, either by prepaying the loan, or providing some alternative security. That’s how you’re able to make sure that you always have equity in these positions. As long as you have equity, and you combine that with the liquidity factor, you’re going to be able to work out of any issue. Right now, as an example, all of our loans are marked at par, and that means that you don’t really get that volatility in the returns, either, because we just clip the coupons, we have fees and so on, on the front end and back end, meaning that we have relatively stable returns throughout the entire area, whether the markets go up or down, because it’s mostly loans that we’re doing.
It’s been interesting, because if you look since we started this six years ago, we actually started working on this almost seven years ago, we have had a very smooth return profile throughout, despite the fact that we had the trade wars, for instance, if you go back to ’19, which obviously had an impact on global trade. We had the pandemic, which in some ways, is the ultimate test for a strategy like ours. We often get the question from investors, “What will keep you up at night?” Now, it’s a relatively easy answer to that question. I just tell them, “We’ve been through it. This was probably as bad as we would ever see, when pandemic hit, and we managed through that, because we focused on senior secured debt, in the cyclical way.” Now, we have the war, and that hasn’t really had an impact on our strategy at all. We’ve basically sailed through all of these events without having this volatility that you often will see, for instance, in the public markets.
Stewart: Can you talk a little bit about deal structure? You touched on fees, but CIOs want to know about coupon structure, and so forth. Are these floating rate, fixed rate? What’s the terms? Can you give me a little bit of background, an overview of typical deal structures?
Svein: Yeah, sure. We typically do three to five-year tenors for the loans. In other words, they might be out there for up to five years. We have not gone above five years, but most of the loans, rather than three years, will be towards the five-year tenor. We typically do loan to values in the 60% to 80% range, keeping in mind that with our cyclical approach, the actual nominal figures are relatively low, because of the low values. We have a two-pronged approach. We are focused on the underlying assets, very important to us. We want to make sure we have high-quality assets. As an example, we have a firm that will actually go on board and inspect these ships before we fund the new loan. They will look at the history, the quality of the build, the ownership history. They will look at the tanks, the engine room, and so on. Then, we effectively give the ship a score, which is important.
One specific task they also have is that they will look at the fuel consumption history of these ships. That’s something that you have to be very mindful of today, because new regulations related to the environment are coming into the industry quickly. You want to make sure that you don’t have the worst in class when it comes to fuel consumption, which also means that they will be worst in class in terms of pollution, or emissions. All of these factors are important to the underlying assets, but we also look at the underlying borrower, the company itself. Typically, the structure of these analysis, the SPV will own the assets. Those SPVs, we are borrowers. Then, you have a parent company that will guarantee all of the obligations of the borrowers. You look at the financial history, financial standing, balance sheet and so on of these companies. In addition, we are very focused on the underlying assets as well. It’s a combination of corporate credit and underlying assets.
Stewart: A fair percentage of your business is with insurance companies, which is our entire audience. How are you working with insurance investors in maritime finance, with asset-backed lending at Blue Ocean?
Svein: It’s interesting what happened there, because after we had worked on Blue Ocean, that started for two, three years, we had started to get a lot of interest from the U.S. insurance companies, really because of the cash flow that we generated. Not only do we charge a pretty high-interest coupon, but these loans, which we didn’t really touch upon, they also have to partly repay. They have to amortize. We do not do a bullet-type structure. When you combine the interest and the principle payments, there’s a lot of cash flow generated that’s then distributed back to investors.
This is something that the insurance market found very compelling, but the one thing we had to solve for was, they needed a certain rating for capital charge reasons, similar to what the banks are struggling with today, post-financial crisis, the more restrictions. We actually started working with two insurance companies on putting a structure in place, we worked jointly on this. We came up with what we call the income fund, which is structure vehicle specific, before the U.S. insurance market. That carries a certain rating, which means that the capital charges are attractive and so on, but they get the same overall return as all of our other investors. Everything that we do, we cull capital on the provider basis, from all of our different investors. This is something that’s been very successful for us. Right now, in terms of investor base, roughly a third is actually from the insurance market, for Blue Ocean specifically.
Stewart: Just to ask this question more broadly, am I right that you have an insurance dedicated fund, if someone is interested in placing this strategy in an ICOLI platform? Is that an option as well?
Svein: Yes, we have that as well. Correct.
Stewart: Do you have insights into the size of the market where your insurers are concerned, and what you see as growth there?
Svein: I don’t really have a clear view on the size of the overall market, but there’s no doubt that, for this particular strategy of Blue Ocean, we do see the insurance market as being maybe the most important one, in terms of growth going forward. That’s why we have a couple of people internally now, here at EnTrust Global, that are 100% dedicated to working in that particular market, in terms of the investment side, or the investor side. That should tell you that this is something that we firmly believe is an important part of our overall investor base going forward as well.
Stewart: You’ve been with Blue Ocean for seven years, you’ve had a lot of success, a lot of growth. The asset class makes tons of sense. The tenor of the loans, the structure, the LTB covenants, the amortization piece of it, it fits, it checks a lot of boxes for insurance investors. Where do you see Blue Ocean three to five years from now?
Svein: First of all, we will stick to our strategy and the approach, number one, in terms of having a cyclical approach, having a dedicated team doing this, which is very, very important. We have a team now of nine people within EnTrust Global, entirely dedicated to this. This is the only thing that we do. We see this growing, because it’s a very capital-intensive industry. We’re estimating that roughly $100 billion of debt capital is needed every year, just to finance acquisitions and refinance debt maturing. We’re literally a drop in the ocean at this point.
However, you also have to be very mindful of how you build a business. Where we see we can grow even further is that we will expand the base a little bit, maybe get into adjacent industries, like ports and terminals. There’s an energy transition going on now. For instance, offshore wind farms need service vessels, and so on. That’s something we’re looking at, in terms of financing. Really, broadening the asset base is one way we’re looking at growing the business further. Ultimately, we will continue to just do what we’ve been doing, make sure that we have the right client base, and most importantly, continue to take that cyclical approach, focusing on high-quality assets and so on.
Stewart: It’s been tremendous. I learned so much on this podcast, Svein, I can’t tell you. I thank you very much for that.
Svein: You’re welcome.
Stewart: Just as we wrap up here, I want to take you back to when you came to the U.S, coming out of university. My background is, I spent a fair amount of time teaching as a professor, and I’ve got a soft spot in my heart for young people coming out of college. The question I’d ask is: as you look out in the world of financial markets, the industry from your chair today, what would you tell your 21-year-old self? What advice would you give yourself?
Svein: That’s a tricky one. The way that I got my first job after college was, I basically just traveled from Ohio to New York. Spent a week just walking around, knocking on doors, that’s how I actually got into the business to begin with. I had sent out resumes to half the world, but got no positive response. It was only when I actually got out on the pavement, and started to knock on doors that I actually ended up with offers, and I had several after that week. That’s something that I think I would… I did it, and I would tell others to do the same thing.
That’s what I told my daughters. I have three of them. That’s how they got jobs, really just going out there and knocking on doors, effectively. That would be my first advice, just go out there and try to meet people, try to make connections. That’s how you get into whatever business you choose to get into. I was lucky, because I always wanted to get into shipping. That was always a goal of mine. I had a father, a grandfather, they both were sailors, so it just was a natural fit for me.
Stewart: That’s good advice, take the initiative. It’s good stuff. Svein Engh, senior managing director, portfolio manager, also on the management committee and Global Investment committee at EnTrust Global. Svein, thanks for taking the time. We’ve learned a lot today.
Svein: Thank you very much. It was a pleasure. Thank you.
Stewart: Thanks for listening. If you have ideas for a podcast, please email me at firstname.lastname@example.org. My name is Stewart Foley, and this is the InsuranceAUM.com podcast.
PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. NOTHING HEREIN SHOULD BE CONSTRUED AS AN OFFER, SOLICITATION OR RECOMMENDATION BY ENTRUST GLOBAL TO BUY OR SELL ANY FINANCIAL INSTRUMENT OR ENGAGE IN ANY OTHER TRANSACTION. An investment in the maritime strategy is highly speculative and is intended only for sophisticated investors. Investing in this strategy, may be highly concentrated and can lead to a loss, even of the entire investment amount. Statements regarding current conditions, trends or expectations in connection with the financial markets or the global economy are based on subjective viewpoints and may be incorrect.