The outlook for the US and global shipping capital markets at the start of 2022 was optimism. The strong rate environment in the container and the dry bulk sectors that began the prior year was continuing and the fundamentals were in place for the recovery in the tanker sector that began during the first quarter. The strong earnings results fueled by this rate environment resulted in stock prices across many sectors not seen in recent years, typically a key indicator of opportunities in the equity capital markets. Equally important, the most extreme and uncertain impacts of the Covid-19 pandemic, which had dominated global economic outlook since early 2020, were finally receding. Despite these favorable conditions, or in some cases because of them, 2022 did not meet the expectations established early in the year.
One contributing factor to the relatively low level of capital market activity was the strength of the shipping sector itself. The strong balance sheets of many container and dry bulk operators going into 2022 meant that they simply did not need additional capital, and the use of those balance sheets to de-lever was a popular strategy in 2022. Additionally, the disciplined orderbook across all sectors, driven in part by a reluctance to invest in new tonnage until there was greater consensus on the next generation of propulsion and other decarbonization technologies, reduced the immediate need for capital.
Macro-economic forces also posed considerable headwinds to shipping and non-shipping markets alike in 2022. As the economic uncertainty of the global pandemic was waning early in the year, it was quickly replaced by the impacts of the tragic events occurring in Ukraine. This continuing conflict, together with increasing fears of a pending global recession and stubborn inflation, contributed to a persistent market volatility that is not conducive to investor confidence, and, as a result, robust capital market activity. While the significant decline in new SPACs may account for a large portion of reduced IPO activity in the US, global capital market transactions by value were down more than 60% from the prior year.
The shipping capital markets were not entirely closed during 2022. Small cap companies did conduct several small follow-on offerings and a number of public company’s raised capital pursuant to new or existing “at the market” offerings. Additionally, although not resulting in new capital formation, “spin-off” transactions resulted in two new public companies coming to market in the final weeks of 2021 and 2022, with a third one now being delayed until early 2023. Equally important, 2022 saw renewed institutional interest in shipping, boding well for the eventual recovery of new capital market activity.
Existing US public companies also saw the prospect of a number of proposed regulatory initiatives in 2022. Many of these related to ESG initiatives, including a significant SEC proposal related to mandatory climate related disclosure, cybersecurity risk management and incident disclosures and since adopted executive pay vs performance disclosures. Additionally, certain stock exchanges implemented board diversity disclosure requirements impacting listed companies. Many of these initiatives, in particular climate-related disclosures, face significant political and industry opposition, and the prospects of these initiatives being approved as proposed remain uncertain.
Despite the relative decline in 2022 capital market activity in the shipping and offshore energy sectors, the fundamentals of the industry remain strong. Seward & Kissel continued to be involved in the majority of transactions that occurred during the year, and remains ready to advise all of its public company shipping clients in all aspects of the US regulatory environment and new capital market transactions when the recovery in the shipping capital markets comes, as it always does.