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Working with European Banks
By Dr. Klaus Stoltenberg, Global Head Ship & Aircraft Finance, NORD/LB
Challenges for a European Shipping Bank
The financial crisis and the unheard of downturn in the shipping markets have brought a lot of issues to the table. European banks have traditionally been a major source of financing for the maritime industry. Now that they are heavily affected by the crisis and are confronted with a rapidly changing regulatory environment, it seems unlikely that things will come back to normal any time soon.
We see several Shipping banks pulling out of business, but we believe the reasons are not exclusively or primarily shipping driven. There seem to be two major drivers: (1) the increased cost of capital and (2) the increased cost of funding.
Resurrected – TBS Deleverages
On Wednesday, TBS International plc announced agreements with its bank lenders on terms to reduce its leverage. TBS and its main bank syndicates led by Bank of America and DVB Group Merchant Bank have agreed to exchange the current outstanding senior debt for new senior debt and equity. The terms provide for the full repayment of the amounts owed to the syndicates over a significantly extended maturity period, while keeping current management in place. TBS’ other lenders Credit Suisse and AIG have agreed on similar terms. The transaction led by The Royal Bank of Scotland was concluded with the bank agreeing to accept redelivery of the six collateral vessels in exchange for a full release of all amounts owed to that syndicate. Unfortunately, the terms of these agreements do not provide for any residual value in the common and preferred equity. We suppose you can call this a negotiated pre-packaged bankruptcy without the courts and the expense.
Separating the Wheat from the Chaff
Having worked in the sector, we are clearly prejudiced. However, it is obvious to us that investor interest in the container leasing sector has grown. Within the last year (i) one company has gone public (SeaCube); (ii) two companies have been sold to private equity funds (Cronos, Triton); and (iii) the stock prices of the two established public companies (TAL, Textainer) rose almost 50% before retreating in the recent market downturn. The interest of the private equity funds is not surprising. Unlike strategic buyers whose sole interest is in the assets, private equity offers going concern valuations taking into account the essential infrastructure which forms the backbone of the business, but which is extraneous to the strategic buyer. Adding further credence to the sector is the fact that two shipping analysts, Greg Lewis of Credit Suisse and Justin Yagerman of Deutsche Bank, follow the public companies engaged in the sector.
Happy Year of the Rabbit
By Robert Kunkel
The world is still facing some dangerous times as we enter 2011: civil unrest in Egypt, war in Afghanistan, changes within the governments of Yemen and Jordan, continued recession in the United States, floods and cyclones in Australia. The list continues to grow and no doubt they have affected all the shipping markets. Dry bulk is waiting for a correction to Australia’s weather; Egypt’s turmoil has driven bunker prices well above 2008 levels and box operators are looking away from the U.S. consumer towards Europe for growth.
Name Change Needed – DRYS Goes Wet
It should come as no surprise that George Economou’s DryShips was in the news. First, there was the announcement that the private placement of shares in Ocean Rig UDW was successfully closed with total gross proceeds of $500 million raised. Not only was it a success from the perspective of the capital raise, the company achieved a superior market valuation, both in terms of the rigs themselves as well as in relation to its peers, according to Scott Burk of Oppenheimer. But perhaps more importantly, the company now has a balance sheet which is self-sustaining.
This news was immediately followed by the company’s announcement that the Board of Directors had approved a share purchase program for up to $25 million of common stock of Ocean Rig for the first quarter of 2011. The maximum share purchase price is capped at $17.50, the offering price of the shares.
But why stop there? In furtherance of its diversification strategy, the company announced that it had entered into agreements with Samsung to purchase twelve high specification newbuilding tankers at a cost of $770 million. The order consists of six Aframax tankers, of which four will deliver in 2011 and two in 2012, and six Suezmax tankers, of which one will deliver in 2011, two in 2012 and three in 2013. Given the delivery dates involved, the majority of these were clearly re-sales, which is further affirmed by the favorable payment terms of approximately 70% of the contract price per vessel due at delivery. On the other hand, as Erik Nikolai Stavseth of Arctic Securities points out Samsung is involved in the construction of its drillships and the tanker order must be viewed in the context of the total relationship with the shipyard. The company has paid in $120 million from its cash as the down payment on the tankers and intends to finance the balance from cash on hand and bank debt. Ultimately, the intention is to position the company for a spin-off or IPO.
The deal has engendered much discussion among the analysts, particularly with respect to the price paid and the original contracting party. DryShips tried to head off discussion of the former by describing the vessels as having high specification and over $3 million in extras per vessel. Nevertheless, Pareto, Oppenheimer and Morgan Stanley suggest that the company paid a premium of $11 million, $38 million and $50 million respectively for the entire package based upon their analyses. The bigger question arose when the observant analysts noted that Mr. Economou’s private company, Cardiff Marine, had a similar order in place, raising the question as to whether the vessels were in fact purchased from Cardiff or were purchased directly from Samsung. Management made it clear that the transaction was done directly with the shipyard.
While speculation on such a move initially centered on containers, DryShips’ need to resolve Ocean Rig’s financing and the speedy recovery in the container space foreclosed that opportunity. While near-term prospects for tankers do not look bright, most analysts believe, as does Mr. Economou, in an improving medium and long-term outlook. In the interim, DryShips is a diversified holding company with interests in dry bulk, crude oil tankers and offshore drilling.
Sevan Gets an Early Start on the Holiday Season
Last Friday, Sevan Marine ASA successfully sold NOK 700 million of its 14% senior unsecured bonds due in 2014. This was the high end of the expected range (NOK 500 to 700) and reflects healthy investor appetite for the issue. Proceeds will be used for general corporate purposes. The joint lead managers of the transaction were First Securities and Pareto Securities with Arctic Securities, Fearnley Fonds and ING serving as co-managers. Further details of the transaction are shown below in the Guts of the Deal.
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SC to BOX – Seacube’s 2nd Attempt
Back in April, we wrote the following:
“Stripping off the baggage of its container ships and chassis, both unattractive businesses today, Seacastle Inc. has offered the public the opportunity to invest this time in its container leasing subsidiary through an initial public offering of that business, which they have named SeaCube Container Leasing Ltd. This is another example of a part that might be worth more than a whole as management recognized the recent outperformance of the publicly traded container leasing companies, Textainer and TAL International due to operating leverage. Trade has begun to resume which equates to more boxes coming on line, higher utilization and hence more revenue, with little incremental cost. In addition, given the financial constraints of the liner companies due to a very difficult 2009, it is likely that the lines will increase the portion of leased rather than owned containers in their fleet. From that standpoint, timing could not be better.”
Shipping As We Think About It
By George Weltman
As publisher I have the final word and I can state categorically that what follows is all Bob Kunkel’s fault. Being a great multi-tasker, Bob has been helping us lately with the publications and the conferences between advising his clients and writing a novel. However, it is his presence in the office, which brought the level of dialogue here to a higher plane, albeit louder according to complaints received from the ladies here. When it comes to shipping, from a technical and operational viewpoint, Bob knows what he is talking about. And while we, as a publication, are primarily focused on the financial side of shipping, there is no escaping the fact that there are many facets and a tremendous level of complexity underlying our very simple business. Yes, anyone can make money betting on an index but if you are a lender or a long-term investor, if such an animal exists, you need to understand the fundamentals of working a ship, the environment it operates in and all the decisions an owner must make. Charter hire just doesn’t fly in the door.
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Equal Opportunity
Just when you thought it was safe for the banks to come out of hiding and begin lending again, the Financial Accounting Standards Board (“FASB”) has proposed, in the interests of transparency, that financial statements incorporate both amortized cost and fair value information about financial instruments held for collection or payment of cash flows. In other words, banks may be required to use market values for loans on their books and join the rest of the world in an annual valuation exercise and give up the longstanding practice of using original adjusted cost.
The issue with fair value accounting is that adjustments to the asset values would result in revisions to shareholders’ equity, which could be substantial. Critics have claimed that the application of fair value accounting deepened the financial crisis by forcing firms to take losses on assets that declined in value when market conditions temporarily worsened.
Taking a less strict stance than the FASB, the International Accounting Standards Board proposed that non-U.S. companies carry their loans at amortized cost, as long as their business model is to hold onto their loans until maturity rather than selling them. This reasoning is the one often used by the banks to avoid fair value treatment.
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Fairly Chastised
We were chastened for our most recent article on DHT Holdings due to its focus, which was intentional, on the MMI situation. In logical but unfortunately lemming-like fashion, we attributed the change of management, the expansion of the board and restoration of the dividend (but not the restructuring which would have been beyond them and of less concern) to MMI rather than giving credit to management, which had been focused on these issues since the end of 2009. While we agree to disagree about the timing and amount of the dividend, management makes the extremely important point that given its balance sheet and cash position it would be difficult to explain to the investors where that money could have been more prudently allocated. And, as the shareholders have been patient and a share buyback rejected, the only fair course was the restoration of the dividend. As we were reminded, the dividend is not fixed and will be re-evaluated each quarter. While we applaud the intention of this quarterly exercise and agree it is the only proper way to deal with dividends, which should only be paid out of net income (otherwise it is a return of capital), there remains the inordinate expectation by shareholders that they continue ad infinitum. There is pressure, acknowledged or not, to avoid turning the spigot on and off.
Finally, we would like to correct any misperception that the company is not well positioned to withstand a downturn, which it is. But perhaps as important, it is positioned to grow as well.
Our apologies.
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