Hapag-Lloyd Ponders Its Future

As questions about Hapag-Lloyd’s future continue to circulate, we thought it worth a refreshed look at how the deal came about and where it might be going. Hapag-Lloyd parent TUI’s interests have long been split between its core tourism business and a fairly substantial container shipping business, representing EUR 449 million and EUR 197 million respectively in 2007 underlying EBITDA. TUI bolstered the shipping side of its business with the $2.3 billion acquisition of CP Ships in late 2005 that was also the catalyst for a $1.8 billion bank refinancing, handled by HVB, Deutsche Bank and Citi, and a EUR $1.75 billion bond issue handled by HVB, HSH, Citi and RBS.
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“Don’t Give Up the Ship” – Marathon Acquisition Restructures Deal

This morning Marathon Acquisition Corp. (“MAQ”) announced amendments to its Agreement and Plan for Merger for its previously announced merger with Global Ship Lease Inc. (“GSL”), a subsidiary of CMA CGM.  In order to allow enough time for the shareholders to consider these changes, the special meeting of the shareholders has been deferred to August 12th.  As one might expect, the sponsor and GSL have taken haircuts in order to increase the returns to the prospective shareholders clearly reading the messages from the Street over the past couple of weeks.  Or, as our esteemed President was explaining to me the other day they have picked up the tab for the dilution created by the carried interest.
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Jefferies High Yield Confab

Last Friday, we had the good fortune to be invited to Jefferies High Yield Research 3rd Quarter Sector Outlook Presentation. We opted for the second session, which was held at the beautiful l’Escale Restaurant in Greenwich on a beautiful sunny day. A wealth of material was provided, including industry outlooks as well as investing opportunities, including interesting paired trades, a new concept for us. More importantly, it is always interesting to get the credit perspective, which was given to a packed room.

For us in shipping, our primary focus was on John Parker’s presentation on maritime transport, Evan Templeton’s on the oil sector and Brett Levy’s on metals and mining. Naturally, these all contained good news. Unfortunately, good news for these sectors equated to bad news for the Industrial, Restaurant, Food & Consumer, and Automotive sectors that also presented. Some of the key takeaways for us are included herein.

For Brett Levy, it’s “nothing but net” for the Metals Sector. All his graphs point in one direction – up – and prospects continue to be excellent. Of key interest was his note on scrap, the price of which has now increased to $520 per ton, representing up to 75% of mini-mills COGS. And with prospects remaining strong in the shipping sector, scrapping does not appear on the horizon just yet. Our guess is that the analogous situation is jet fuel to the airline industry. With the outlook bullish, Brett spent most of his allotted time on trading ideas.

We are certainly not envious of Evan Templeton, who covers the energy sector. As he pointed out with the industry running at 99% capacity anything can happen on a normal day, no less with sabers rattling in the background. Prices are up and inventories are down and although demand may be slackening here it is more than offset by growing demand in Asia. In a series of graphs, Evan reminded us that prices are not solely demand driven as the costs of equipment rentals are ballooning too. The good news is that oil field activity is increasing as the search for new supply continues. We forgot that in the bond markets positive news translates to less perceived risk and hence a tightening of spreads.

John Parker spoke to our favorite subject and noted that both the dry and wet markets remain strong, although the latter will begin to feel the pressure of supply growth in 2009. Orderbooks for both are at record levels, although the dry side has exhibited near exponential growth with 1,773 vessels ordered in 2007 up from 618 in 2006. Year to date orders show some slowing at 454 vessels. Financing is the critical path these days and John showed a graph from Dealogic, which showed a sharp decline in deal value and number of deals in the 1st quarter. In both categories, these were the lowest levels since the 4th quarter 2004. As a good credit person, John focused on companies with strong balance sheets and conservative charter policies and included as his picks Ship Finance and Navios Maritime.

Both minds and bodies were well fed. Our thanks to the Jefferies High Yield Team.

Energy Infrastructure Shareholders to Opine on Vanship

Following quickly on the heels of Seanergy’s proposed special meeting to vote on its acquisition, Energy Infrastructure Acquisition Corp. (“EII”), another blank check company, set July 17 for its special shareholder meeting. As was done last week in the case of Seanergy, we will take a close look at what the shareholders are being asked to approve.

In July 2006, EII consummated its initial public offering of 20.25 million units, each unit consisting of one share of common stock and one warrant, raising $209.25 million in net proceeds (including a portion of the green shoe). Prior to the offering, George Sagredos, the President and COO, purchased through Energy Corporation 825,398 units at the offering price resulting in gross proceeds of approximately $8.25 million.
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The Week in Review

While there are rumors of a number of IPOs in the works, volatility and uncertainty has all but brought the US equity markets to a stop, and we don’t expect to see much more done over the summer. Bank debt has not proved as much of a problem for shipping. Most recently this week Deutsche Bank and HSH Nordbank acted as MLAs on a $753.1 million loan for E. R. Schiffhart GmbH & Cie KG to finance ten capesize bulkers currently under construction in Korea by the Hyundai Group with delivery expected throughout 2010. BNP Paribas, Commerzbank and Dresdner Kleinwort joined DB and HSH as arrangers while Deutsche Schiffsbank came in as a co-arranger for the deal, which finances 71% of the $1,056 million project cost and covers both pre and post-delivery financing. Notably Ralph Bedranowsky of Deutsche Bank and Harald Kuznik of HSH both hailed the deal as an example of “the global shipping market…returning to reasonable, market-consistent valuations…”
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Clarification

Last week in our article on D/S Torm we were guilty of a number of errors, which are clarified below:

We misstated the differential in MR earnings between East and West. In fact, on a yearly basis the differential between the two basins is $2.7 million.

We deeply regret our statement that product carriers could not be built in China at this time. What was meant was that the new shipyards coming on stream in China will mainly build dry cargo vessels initially as tankers are too sophisticated to start-up with. There are a number of yards in China building product tankers.

With respect to dry cargo, Torm does intend to grow the model but to change and grow it in the present environment would be suicidal.

We deeply apologize for our errors.

Dresdner Loans

The German bank market was quiet for awhile as rumors suggested strained credit access was making both the economics and the execution challenging in the KG market. One by one banks have been signaling to the market that they are in full business. This week Dresdner Kleinwort announced that it had closed a $132 million financing for a Dr. Peters special purpose vehicle, Dr. Peters Younara Glory VLCC. Dresdner acted as mandated lead arranger on the 11- year loan while KfW IPEX-Bank, Dekabank and M.M. Warburg & CO all participated in the post-delivery and equity bridge financing for the VLCC Younara Glory.

Dresdner and Dekabank also recently closed an $84 million financing for MS Hellespont Trustful GmbH & Co. KG. The term loan financed the suezmax tanker Hellespont Trust.

DWT Goes Public

Someone had to grab this great ticker symbol and it was no other than Britannia Bulk Holdings Inc. With the assistance of Goldman Sachs and Banc of America Securities, as joint bookrunners, Britannia announced today that it was commencing an initial public offering of 8,333,333 shares of its common stock at a proposed offering price of $17 to $19 per share. At the midpoint, the gross proceeds would be $150 million. Certain principals have granted the underwriters the right to purchase up to 1.25 million shares in the aggregate at the initial public offering price to cover over-allotments.

Net proceeds from this offering, together with amounts held in its vessel acquisition account and borrowings under its new secured term loan facility, will be used for the repayment of its existing senior secured notes and secured bridge facilities and for general corporate purposes.

This is quite the turnaround in the company’s fortunes. The timing of its first foray in the public markets for the issuance of the senior notes was less than fortuitous, although with the assistance of Jefferies the deal was successfully concluded.

Dahlman Rose and Oppenheimer are acting as co-managers for the offering.

GulfMark Offshore Makes the “First Call”

Last week, in what GulfMark’s Chairman David Butters termed a “transformational event”, GulfMark announced the acquisition of Rigdon Marine Corporation (“RMC”), a major operator of technologically advanced offshore supply vessels in the Gulf of Mexico. The RMC fleet of 28 vessels (21 on the water) includes next generation deepwater supply vessels, ultra modern crew and fast supply vessels. The combination will create an organization of over 2,000 employees and 90 vessels, capable of working in virtually all OSV markets, with an additional 16 vessels of several different designs scheduled for delivery through 2010.

Under the terms of the purchase agreement, GulfMark will acquire 100% of the outstanding equity interest of RMC for consideration comprising $150 million in cash and approximately 2.1 million shares of GulfMark stock ($63.56 per share on the date of the announcement), plus assumption of approximately $268 million in debt and approximately $19 million in expenditures to complete the vessels under construction. The cash portion will be financed with cash on hand, and borrowings under its current $175 million revolver.

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On Location – Posidonia

The scale of the shipping community that descended upon Athens this week is hard to describe. The taxi drivers tell locals “traffic will be better next week once Posidonia is over”. Your correspondent upon getting into a taxi and trying to speak to the driver in English was answered with the simple question “Astir?”, referring to the hotel around which most of the Posidonia-related events are centered. As it happens I was headed elsewhere, but it was certainly a good guess.

One estimate put the number of tanker people in town at 15,000. That’s just tankers. Dry cargo, containerships, bankers, lawyers, ship managers, service providers and, these days, investment managers must easily have numbered in the tens of thousands. They filed into workshops, press conferences, exhibition halls – but especially dinners and parties. The lucky emissaries to attend on behalf of their companies were tasked with forgoing sleep for a week in order to celebrate the phenomenal success the shipping industry has seen over the past few years and the camaraderie that has long been a hallmark of the business. The festive atmosphere made business contacts, old and new, feel more like friends. Beyond that, it is truly fascinating to have such a large proportion of the globally dispersed shipping industry in one city. The result was a tangible sense of being at the heart of the market, which beat this week to the unmistakable rhythm of Athens.

As for the market, finance certainly slowed until Britannia Bulk’s IPO was announced today. It’s hardly surprising considering the presence in Athens of the heads of most banks’ shipping departments, and while Greece may be good for client development we don’t get the sense that it’s the ideal place for a roadshow. Freshly Minted is looking for an explosion of new deals next week. Quite a lot of people were watching Polys Hadjioannou’s Safe Bulkers go public last week, and the fact that it got done as an essentially standard “Greek” deal without any special gimmicks has encouraged those waiting in the wings to move forward. Quite a large number of new deals sound to be in the works, and several should surface in the coming weeks. Debt finance, apparently, has not been a major problem for most of the owners with which we spoke, and banks like Nordea whose liquidity base lies in deposits continue to be able to do large and small deals alike. Brokers are keeping busy with sale and purchase and time charter deals, while even some owners who had eschewed purchasing vessels at inflated values have begun to consider investment, wondering if the market will continue to defy gravity for years. As for the $151 million capesize, many will argue it’s one of the better deals out there, with charter rates high enough to pay back half that value in only a few years. What’s more, many are flush with cash and looking to spend or invest it in some way.

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