A Tax Reversal

Our friends at Seward & Kissel have brought to our attention a proposed devastating change in the tax law that de facto would treat all foreign shipping companies operating out of the U.S. as U.S. taxpayers. The proposal, introduced by Senator Levin, appears in the bill entitled “Stop Tax Haven Abuse Act” (S. 506). Historically,  companies have been taxed as domestic or foreign  based upon where the company was formed. With this proposal, we would revert to the British system of taxation based upon where the company is managed and controlled.

“Section 103 of the Levin Bill (“Section 103″) would tax foreign corporations as though they were United States domestic corporations if:

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And You Thought Sarbox Was Tough…

Back in April of last year, TORM announced the sale of the 1997 built Panamax bulkcarrier, TORM Marlene, for total consideration of $70 million with the deal expected to close the following month. With the sale, TORM also adjusted its guidance for 2008..

Apparently, the Danish Financial Supervisory Authority (“DFSA”) has had discussions with the company as to whether TORM made a timely disclosure pursuant to Section 27 of the Danish Securities Trading Act (“Act’). Although the company believes it is in compliance with its obligations the DFSA has referred the matter to the Danish Securities Council who has decided to refer the matter of whether TORM has violated Section 27(1) of the Act to the public prosecutor for further investigation.
Understandably, the company does not intend to make comments while this matter is pending.

Nor is Danaos Immune

In today’s earning’s release, Danaos reported generally satisfactory results but also began to show the effects of the economy and has consequently begun the process of shoring itself up for the future.

The extraordinary drop in vessel values combined with lower interest rates, which resulted in a negative valuation of its interest rate swaps, has resulted in the company’s breach of certain financial covenants, including the expected LTV as well as the equity covenant as non-cash charges have been taken against equity. Danaos has or is in the process of obtaining waivers for 2008 and 2009 under their various credit facilities.

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CSAV Spells It Out

Last week CSAV, in a press release, gave a state of the industry report and it was not pleasant reading as you might expect. The company notes that for the first time in 29 years, after many years of double-digit growth, a drop in global container demand is expected this year. This is compounded, of course, by supply, which is growing at a very high rate given an excess of vessels ordered in prior years when the economy looked much brighter. To face the challenge, the industry has taken a number of aggressive initiatives. Operators and owners have laid up over 400 containerships throughout the world. In addition, many ocean carriers are negotiating with the shipyards to delay delivery of the vessels ordered before the crisis. Both actions will helpfullybegin the process of restoring the balance between supply and demand.

On its own behalf, CSAV is focusing on costs. It is suspending one of its Asian Northern Europe services. The company is also renegotiating with all of its vendors while optimizing and rationalizing bunker consumption, the container fleet and intermodal moves. Finally, it is implementing cost reductions in its administrative expenses.

But from our perspective, the most interesting aspect was the Board’s approval of an equity infusion by its shareholders of $200 million to strengthen the company’s capital base. That is how you stay in business for 136 years.

Unwitting Leverage

Lying under the accountant’s Damocles sword, TBS International announced yesterday that it was delaying its earnings release for the fourth quarter and year-end 2008 as it sought to complete negotiations of waivers of certain financial covenants with respect to its credit facilities. Without the waivers, the debt, under accounting rules, is no longer a long-term liability and instead becomes a current liability due and payable within the year. No one has an interest in that happening. But the fact that negotiations have been cut so close to the announcement suggests they haven’t been easy.

Spring Has Arrived

Like the bulbs just breaking through the earth as it warms, the Norwegian bond market has also staged a revival of sorts. Today, I.M Skaugen SE (“Skaugen”) completed two new note issues, one USD denominated issue in an amount of $13 million and one NOK denominated issue in an amount of NOK 120 million. Maturing in April 2010, the new issues are floating rate notes with a coupon margin of 6% over 3-month LIBOR/NIBOR. The notes are unsecured and contain similar covenants to the company’s previous bond issues. The company intends to swap the NOK repayment obligation to U.S. dollars and list the issues on the Oslo Stock Exchange’s ABM. Fearnley Fonds acted as manager for the note issues.

Banker Survey

By any measure, your initial response was unprecedented. We have clearly struck a chord. However, responses have begun to thin out and we would welcome a larger sample. Please take a few minutes, if you have already not done so to take our Bankers (Lender’s) survey using the link below. Thank you very much.

http://www.surveymonkey.com/s.aspx?sm=UkAlQVC4R0yAlT7zUbj3ZQ_3d_3d

5th Annual Marine Money Gulf Ship Finance Conference, Dubai, 4th March 2009

In a week when stock markets steeply declined and then recovered, when Sri Lankan cricketers were attacked in Pakistan and the world continued it’s crazy momentum, Marine Money with Anchor Sponsor Tufton Oceanic (Middle East) Limited hosted its 5th Annual Marine Money Gulf Ship Finance Conference in the luxury of the Grand Hyatt, Dubai.

Forewarned that things were pretty bad in Dubai and that it would be a struggle to get people to attend, we proudly welcomed 152 speakers and delegates. And it is also significant that half of today’s participants attended our conference in Dubai for the first time. That is a lot of new networking opportunities and it demonstrates that shipping continue to develop in Dubai and the Gulf region.

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On the Bright Side…

This week, Deutsche Bank’s shipping business, Deutsche Shipping reported results for 2008, which exceeded the prior year’s. Profits increased by € 18.3 million, or 44.5%, to € 59.5 million. The profit before provision for loan losses of € 61.8 million reflected an increase of € 20.3 million, or 49 percent, over the previous year. Net interest income and commission revenues went up by 26.2 percent to € 85.9 million.

In 2008, the bank’s volume of outstandings grew 22.8% to € 2.636 billion from € 2.146 billion in 2007. With 60% of the portfolio comprised of investment grade borrowers and overall good performance by borrowers, there were no specific loan loss provisions in 2008.

Certainly Deutsche Shipping is well positioned to handle the current headwinds.

“Is It Safe?”

This oft spoken query by Sir Lawrence Olivier in the film Marathon Man is the question of the moment when it comes to vessel chartering. Having settled with Bocimar, Fortesscue updated the market with respect to the eight remaining long term COA and consecutive voyage contracts under dispute.  According to the company, the remaining eight contracts were for original terms ranging from three to six years with an average duration of five years. Currently, the total amount of these arbitration claims for the suspended contracts is approximately $30 million, which is expected to increase until the suspension is lifted or a resolution is achieved legally or commercially.

“Notwithstanding the inherent uncertainty in quantifying potential exposure relating to the out of the money shipping contracts, Fortescue has calculated a potential damages estimate to the company of $171 million. This covers all of the unresolved suspended and terminated contracts and a number of existing time charter agreements that remain active. While this is management’s best assessment based on currently available information, the company has used the now settled Bocimar negotiation as a benchmark together with consideration of the current spot rate of around US$10.50/tn relative to the average contracted rate of $15.78/tn.”

On a less conflicted basis, Top Ships agreed with Armada Singapore, time charterers of the M/V Astrale, to reduce the time charter rate from $72,000 to $40,000 for the three remaining hire payments until the scheduled termination of the charter and redelivery. Total cost from loss of hire is approximately $1.5 million. There is no mention of any concession received.

We don’t know the answer to the question posed in our title but assume a willingness to openly come to the table to negotiate will manage the risk, which unfortunately increases daily as the market stays weak and liquidity dries up.