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Defensive Maneuver?
While some companies issue new debt, others refinance. OSG announced on Tuesday that it would redeem all $176.11 5 million outstanding of its 8.25% senior notes due 2013 at a price of 104.125%. We expect that the lower interest rate will offset the premium paid.
The timing of this buy-back is interesting in light of Frontline’s recent share purchase. The resulting increase in share price presumably makes the share buy-back program less attractive. And, assuming that the redemption is funded partially by OSG’s cash on hand, does the reduction in cash make a potential acquisition more costly for the acquirer who would have had access to that cash in order to fund the purchase? On the other hand, one can counter this argument by saying the removal of this expensive debt makes the company more attractive on an overall basis. All we can do is sit by the sidelines and watch these grandmasters’ next moves in this exciting game of chess.
Lauritzen Kosan and Tailwind in JV
With loan to value ratios falling substantially faster than vessel prices, it’s more important than ever for owners with ships on order to come up with creative ways to source additional equity. Lauritzen Kosan has been successful in doing just this with five of the 15 newbuildings it has on order. It was reported this week that the company has formed a 50/50 joint venture with Bergen-based lessor Tailwind. The joint venture company, LKT Gas Carriers, took delivery of its first vessel this year. By 2010 it is to take delivery of a total of five ethylene/LPG carrier newbuildings ranging from 8,000 to 9,000 cbm. The ships will be flagged in Singapore and commercially operated by Lauritzen Kosan.
Spring Awakening (with apologies to the Broadway show)
After being in hibernation or at least in the doldrums, the finance markets are showing signs of activity this week. First out of the blocks, Seaspan gave a double barrel blast. Last Friday, Seaspan announced it had entered into a new term loan facility in the amount of $235.3 million to finance the acquisition of two of its previously acquired 13,100 TEU vessels. The facility was fully underwritten by Sumitomo Mitsui Banking Corporation at a weighted average rate of 0.70% over LIBOR. It is important to emphasize the fact that it was fully underwritten and that the rate, albeit low, was above their historic average weighted cost of below 0.60%. Moreover, Seaspan notes that they now have sufficient credit agreements, with locked-in attractive rates, to fully fund the company’s debt requirements for the entire contracted fleet of 68 vessels while leaving an incremental $550 million in immediate liquidity to capitalize on acquisition opportunities.
“Gimme Shelter”
These lyrics from the Rolling Stones may in fact be a forewarning of a storm brewing closer to home. At least for the moment, the shipping industry has been sheltered from the worldwide storm created by the credit crisis and the drying up of liquidity in the bank and public markets that began last August and culminated with the recent fire sale of Bear Stearns. Nonetheless, it is hard to fathom how shipping has apparently escaped this turmoil.
A simple explanation, according to industry pundits, may be that charter rates and asset values are at historic highs and, instead of the normal cyclical nature of the business, we have entered into a period of super cycles driven by a commodity boom, which, in turn, is the result of the insatiable demand for commodities in China and India among others. With risk thus pushed out, an ever-increasing demand seemingly overwhelms any oversupply risk, lending and investment become easier. Continue Reading
Calling All Shipping Bankers
If you haven’t already done so, please take a few minutes to fill out our annual shipping banker survey at http://shmyl.com/zrtpson. The results will be published in the May issue of Marine Money magazine and will also be made available to survey respondents who register to receive them. Please let your (anonymous) voice be heard and take part in this survey of the market.
Doing Business After the Credit Catharsis
Bank debt has long formed the sturdy foundation of the shipping capital markets. Exotic instruments come and go, but the ship mortgage and the syndicated bank loan remain and thrive. Typically banks fulfill their role quietly, helping clients to grow and modernize their companies without fanfare. At times, perhaps, they help a little too much. Continue Reading
Win Win
On Monday, Omega Navigation Enterprises, Inc. (“Omega”) announced the re-structuring of its Senior Debt Facility with HSH Nordbank into two pieces. The senior facility, which is secured by first mortgages on the company’s fleet, was reduced from $284.2 million to $242.7 million. The pay down gets the senior lenders to where they would have been in 2011 when a bullet payment in this amount would have been due. The loan will be non-amortizing and will mature in three years. Pricing is based upon a grid with margins ranging between 0.9% and 1.1% above LIBOR based upon loan to value. The current rate is calculated at 0.9%.
The proceeds of a Junior Facility in the amount of $42.5 million provided by NIBC Bank N.V. and Bank of Tokyo-Mitsubishi UFJ Ltd. will be used to partially re-pay the senior facility together with associated fees. This facility will also be non-amortizing and will be coterminous with the senior facility. Pricing will also be on a grid ranging from 2.25% to 3.00% over LIBOR based on the loan to value of the combined facilities. Presently the rate is calculated at 2.5% above LIBOR but will be fixed through the 3-year period using a swap rate of 2.96%. As the sole security is the second mortgage, the rate is believed to be competitive.
Although the overall debt level of the company remains about 55%, a level at which both the banks and the company are comfortable, the re-structuring increases the company’s financial flexibility while lowering its overall cost of borrowing. The non-amortizing facilities, which will free-up $15 million in cash flow in 2008 and $41 million in total through the 3-year period, will allow the company to reserve more cash for acquisitions. In addition, the low gearing potentially allows more room to take on additional acquisitions without over levering themselves. As part of the restructuring, the company was also able to negotiate covenants that are more in line with industry standards. Finally, Omega believes that the re-financing risk is mitigated by the young age of the fleet as well as the relatively low advance rate. Moreover when it comes time to refinance they will have an additional five ships on the water.
All this goes to show that credit crisis or not a carefully structured deal that meets the needs of both parties can get done. The bankers, given the quality of the collateral, employment and the short maturity, were willing to trade off rate, amortization and covenants.
From the Dark Side
One of the more interesting aspects of the analytic exercise is the separation of church and state. Without assigning categories, the stock analysts look at valuing a company whether through peer comparisons of multiples or discounted cash flows. The credit folks on the other hand are looking to see whether the company can pay its bills. Both are selling but from highly divergent viewpoints. We struggle with the question of whether these are, in fact, mutually exclusive.
What Carrot?
The Norwegian tax issue never ceases to amaze us. After being hit by the “stick” of a retroactive change to the shipping tax regime, owners took some solace in the fact that the government provided a “carrot” by allowing one third of the profit to be subject to conditional tax exemption provided that the tax due on the profit is used for environmental measures. The proposed period allowed for implementation of these measures was identical to the repayment period of the tax or 10 years. So instead of going into government coffers, the tax would be redirected to the benefit of the environment.
ETA-Ascon Star Group in $88 million
Tom Kane-led SSY Capital continues to prove that natural synergies do in fact exist between shipbrokers and finance houses with as it announces the structuring of an $87.8 million financing for ETA-Ascon Star Group. The purchase and bareboat charter deal provides ETA-Ascon Star with 100% financing for the purchase of four handysize bulk carriers. ETA-Ascon Star is one of the largest Dubai- based shipowning groups with a fleet of more than 60 bulk carriers and tankers including newbuildings.
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