The Great Re-capitalization

“Equity is the new debt,” I told an investor luncheon in New York yesterday when asked to describe the current conditions in the ship financing markets.

The comment was intentionally naïve, especially when you consider that many shipping companies have negative net worth on a charter-free basis and are facing a grim outlook of systemically shrinking demand and steadily swelling supply in virtually every asset class (except reefers!).

But my point was with the debt markets dead and owners in need of recapitalization to satisfy loan covenants and maintain adequate working capital, one way or another the majority of cash needed by the industry is going to come from some type of equity market – and this will be either very dilutive, or a complete cramdown, of today’s common shareholders.

Deleveraging

With the assistance of ABG Sundal Collier Norge, Fairstar Heavy Transport this week successfully launched an underwritten equity issue of up to NOK 75 million, which will be used to retire the company’s secured bond issue.

The transaction structure combines a share capital increase in the form of a rights issue of up to 10 million new shares, with pre-emption rights for shareholders (i.e. approx. 0.3 new shares per ordinary share) at a subscription price of NOK 5.0 (“Tranche A”) and a share issue of up to 4,166,667 new shares directed towards the Bondholders of the Fairstar Heavy Transport Secured Bond Issue 2008/2009 (the “Bond Loan”) at a subscription price of NOK 6.0 (“Tranche B”) (collectively the “Offering”).

A syndicate of the Company’s current shareholders has underwritten 5.3 million new shares in Tranche A and a syndicate of the Company’s current Bondholders has underwritten 3.8 million new shares in Tranche B. NOK 51 million of the Offering is fully underwritten.

The proceeds from the Offering together with the cash flows generated from current contracts and the Company’s banking facilities, provide Fairstar with sufficient liquidity to redeem all of its outstanding Bonds no later than October 11, 2009, the Bond Loan redemption date.

Commenting on the transaction, Philip Adkins, CEO of Fairstar noted: “Capital markets today are extremely unstable. Access to liquidity is key to corporate survival. As long as there is reason to believe Fairstar will not be able to redeem its outstanding bond obligation it is extremely difficult to demonstrate to the market the true value of our Company…. By issuing equity and redeeming our outstanding bonds, Fairstar will be able to direct this future cash flow away from debt service and back to our shareholders, resulting in a more accurate valuation of our Company’s shares by the market.”

Even in times of crisis, valuation is not forgotten. Certainly, a sound balance sheet is a factor in that calculation.

What Do DryShips And The U.S. Government Have In Common?

The answer is they both seem to be issuing lots of paper. Last week, DryShips announced two transactions designed to reduce their future financial commitments. In the first instance, it transferred its interest in three Capesize newbuildings to an unaffiliated entity generating savings of $364 million in exchange for total consideration of $116.4 million. The latter consists of $36.4 million in previously paid deposits, $30 million paid to the purchaser and two additional tranches of $25 million payable to the purchaser within 30 and 60 days respectively. The last two tranches are payable either in cash or, at the option of the company, by issuing 2.6 million shares of common stock for each tranche.

Not surprisingly, the company also unwound the previously announced acquisition of 9 Capesize bulkcarriers from affiliates of Cardiff Marine, George Economou and third parties for $1.17 billion, which was to be paid for with 19.4 million shares of the company’s common shares and the assumption of $478.3 million in debt and future commitments. The consideration to cancel this transaction will consist of the issuance of 6.5 million shares to the unaffiliated entities, subject to a six-month lock-up. The affiliated entities will receive 3.5 million warrants that give the holders the right to purchase one share of DryShips stock.  The warrants will be priced at $0.01 and will have strike prices, depending on the relevant tranches of between $20 and $30 per share. Vesting will be over 18 months with an expiry of 5 years.
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A Better Idea

Last week we described how BW Gas’ decision to withdraw from the Norwegian tax system and today’s declining asset values had stressed its balance sheet requiring a substantial equity infusion in order to avoid breaching its covenants.

To add some cushion to today’s equity value in order to prevent the potential breach of its equity covenants as well as to deal with the continued turbulence in the financial and shipping markets, BW Gas has entered into an agreement to purchase Bergesen LNG from the company’s main shareholder, World Nordic SE. The total consideration to be paid for the shares of Bergesen LNG, which owns four LNG vessels, is $720 million, which will be paid through the issuance of 273.6 million new shares to the seller at a price of NOK 18.5 per share. The four modern vessels, built between 2006 and 2008, are on time charters for a remaining term of 20.5 years to Nigeria LNG. The vessels will be transferred debt free further bolstering the company’s balance sheet.
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Genco Does the Deed

On Monday, Genco Shipping & Trading announced that it had amended its ten-year $1.4 billion credit facility led by DnB NOR and Bank of Scotland. Under the terms of the agreement, the collateral maintenance requirement will be waived until such time that Genco is in a position to satisfy the covenant and is in compliance with all of its financial covenants. Genco will continue to be able to borrow the undrawn portion of the facility during the waiver period and expects to use this capacity to partially fund the three remaining Capesize vessels, which are expected to be delivered this year, with the balance coming from internally generated cash flow.

The quid pro quo for the concession involves increased pricing and, not unsurprisingly, accelerated repayment. Amounts borrowed under the amended credit facility begin to reduce on March 31, 2009 at $12.5 million per quarter, which will increase to 3.5% of the amount outstanding for each quarter after March 31, 2012 until repaid in full at maturity. The loan will bear interest LIBOR + 2%, an increased spread of 1.2%. There is also an increase in the commitment commission payable to each lender from 0.20% to 0.70% per annum of the daily average unutilized commitment of such lender.

In addition to the increased pricing, Genco has agreed to suspend dividends and its stock buyback program immediately. Both can be reinstated once Genco can represent that it is in a position to again satisfy the collateral maintenance agreement and is able to meet the criteria outlined in the credit facility to engage in these two activities. There are no further restrictions on cash.

It is all about preserving cash.

And the Truth Will Set You Free

Transparency often involves more than simple clarity and disclosure. The information may be there but one may be hard pressed to find it. Unlike some of its peers, Bank of Ireland (“BOI”) has taken a direct approach in communicating with the marketplace and its clients with respect to its current situation. For them, it was important to get the word out.

Last week, BOI publicly announced that as a result of the Irish government’s recapitalization plan, through a Euro 2 billion investment including a 25% voting share, the bank would curtail some of its activities. Included among these is ship lending. Nevertheless, a slimmed down ship lending team will remain in place to support its current activities as well as its future commitments, which run through 2012. The bank is not pulling out of the business but it will not be taking on new clients for the foreseeable future. In between client meetings and conference calls, Paul Packard, Head of Maritime Industries, expressed his hope to us that the bank might be in a position to resume its ship lending activities in a year or so presuming the overall financial situation shows some improvement. As BOI is a key lender to the industry, we share his hopes.

Let the Experts Speak

Reading many of the high quality analyst and broker reports, it is not difficult to suffer from information overload these days but the recent report produced by analysts Henrik With and Glenn Lodden from DnB NOR Markets has certainly caught our attention. In addition to the overviews of the various shipping market segments, the duo also provided estimates of the financing needs that many of the globally listed shipping companies would require over the next three years. Some of the more interesting takeaways, grouped by sectors, included the following: Continue Reading

Pacific Basin Sells Three

Pacific Basin this month publicly disclosed the sale of three handysize vessels built in 2000-2001 for between US$18-19 million per vessel. The aggregate consideration of US$55.6 million was paid entirely in cash. The company notes in a release that the amount was determined with reference to intelligence gathered from shipbrokers in addition to its own analysis of recently concluded sale and purchase transactions of vessels of comparable size and year of build in the market. Continue Reading

Dong Fang in DVB Financed Container Sale

A transaction from last month was announced this week whereby a syndicate of lenders led by DVB Bank financed the “sale and manage-back” of certain containers between the DCM Deutsche Capital Management AG group and Dong Fang International Investment Limited. Continue Reading

Another Dividend Reduced, Another Reasonable Decision Made

In our view, the elimination or reduction of a dividend by a high yield shipping company, although unfortunate, makes perfect sense for the long-term preservation of shareholder value.

At a time when shipping companies are having a very hard time raising equity, and are at the same time pushing close to loan to value covenants on existing and to-be-delivered tonnage, it makes little sense to continue distributing excess cash to shareholders. Lest anyone forget, investing in shipping is, at its essence, like investing in call options; the more years that a ship has to trade, or a company’s equity remains in the hands of its original shareholders, the more cash it will earn and the more likely its assets will find themselves in a strong market. If there was ever a time to play short-term defense in order to retain the liquidity needed to preserve long term returns, then we think that time is now.

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