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Norwegian Bond Update
Nordea’s Monthly High Yield Report for March came in this week and to no one’s surprise nothing much as changed. A quiet primary market, ratings changes, a default and increasing spreads are all highlighted in the report.
Two oil service companies, MPU Offshore Lift and Ziebel, issued convertible bonds. MPU Offshore’s offering was for a 5-year $110 million fixed rate convertible paying 8%. The conversion price was set at $1.36 per share through a book-building process. When combined with the established EUR21 5 million facility, there are sufficient monies to complete the MPU Heavy Lifter 1. In a smaller deal, Ziebel completed a 3-year NOK 125 million subordinated convertible bond issue with a 9% coupon. The conversion price was set at $8.00.
TBS Increases Liquidity through Bank of America Facility Amendment.
TBS International this week amended and restated its existing Bank of America facility dating back to the summer of 2006. They increased the deal from $140 million (of which $65m was revolving and $75m was in a term loan) to $267.5 million (of which $125m is revolving and $142.5m is a term loan). TBS will initially draw down the full $142.5 million available under the term facility to pay outstanding principal and interest due on its existing facility, pay closing costs and for general corporate purposes.
Transaction Report
A significant portion of loan volume for the past years, up through 1H07, was driven by refinancing. An $850 million facility could give way to a $1.1 billion facility with a lower pricing and, oftentimes, a different bank. These days things are a bit different. A company can’t simply shop around to get terms that will allow for more ambitious expansion and modernization strategies. They can, however, work with their banks to create facilities that may allow for more opportunities. TBS International and Omega Navigation have both in the past week announced restructurings of their existing credit facilities that accomplish this.
On the topic of the bank debt market, before going further, we’d like to ask all of our banker readers to take a few minutes and answer our 2008 Shipping Banker Survey at http://shmyl.com/zrtpson. The questions are primarily multiple choice and answers are completely anonymous. Of course if you have any additional thoughts or comments, we encourage you to share those as well. In 2007, while statistical reads on the market remained robustly healthy, it was your comments that foreshadowed the credit crisis that would rock the banking markets in the summer and leave them permanently changed. This year we are again looking to you to tell us the real state of the market and what you think might be next.
THE RISE OF ASIAN SHIPPING GIANTS
It was only a decade ago when an unexpected financial crisis gripped Asia and pushed the region into recession. Since then, the Asian economies have resumed strong economic growth with the renaissance of China and India. Companies are once again expanding, and stock markets in the region are skyrocketing driven by the influx of foreign capital and optimism over Asia’s future.
While the current sub-prime crisis does pose a downside risk to global economic growth, underlying fundamentals of the Asian economies remain robust and sound. In its latest Global Economic Prospects report, the World Bank estimates the Asia-Pacific region to have grown about 10 percent in 2007, the strongest performance since 1994. Continue Reading
Life on the Road
Following on the heels of a conference-filled week, public shipping company management eams such as those at StealthGas and TEN continued to develop their profiles and build their relationships with analysts and investors. Harry Vafias and Andrew Simmons of StealthGas opened the Nasdaq on Wednesday morning. Isabella Schidrich and her team at the Nasdaq celebrated StealthGas’ incredible growth story and presented Mr. Vafias with a special crystal for being the youngest CEO of a public shipping company in the world – and a successful company at that.
World Scales Gone Missing?
We were privileged to have had the opportunity to attend the Tanker Derivatives Forum put together by The Baltic Exchange in New York a few weeks ago. Through regular attendance at these events, we hope that one day we will better understand the paper market. To that end, Mr. Duncan Dunn of SSY provided new users with an excellent introduction to FFAs, which provided in-depth background and illustrated how they might be used. Based upon attendance at the event, it is evident that the paper markets are not only here to stay but will continue to play a significant role for shipowners, cargo interests, traders and financiers into the future. Who would have thought that in talking about the markets one now has to distinguish between the physical and paper?
TMI?
What a week for investors! Starting with CMA’s annual event, continuing with JPMorgan’s Conference and concluding with the Capital Link Forum, it is conceivable that even the most interested observer of the industry may have suffered from information overload. Thankfully, with Good Friday, many of us had the opportunity to recover with a long-weekend.
Despite the early start, the Capital Link Forum played to a full house. There were company presentations galore interspersed with lively and informative panel discussions. With far too much information to distill, here is a highly selected compendium of our outtakes.
Tinker to Evers to Chance
Spring is here and with it is the beginning of the baseball season. So please forgive our title which refers to the most famous double play combination in baseball history. The idea of two outs in a single play somehow seems analogous to the latest transaction done by Pacific Basin Shipping Limited (“Pac Basin”).
CMA-CGM Finds Public Buyers in Marathon
Private equity funds have long had a glamorous reputation as the real movers and shakers in the financial world, buying and selling companies at will and making tremendous returns for their partners and investors. While they are under some pressure now as the easy access to capital they rely upon has been hampered, this was not so in 2006. And it is the 2006 crop of SPACs that is just now coming to maturity, driving the volume of acquisitions by SPACs to $3.9 billion so far this year, more than six times the comparable period in 2007, according to Dealogic.
It was in just this time period, in August 2006 to be precise, that Marathon Acquisition Corp came to the public markets, backed by Michael Gross, a founding partner of private equity powerhouse Apollo. Fast forward to February 2008, however, and Mr. Gross’s SPAC was quickly closing in on its deadline to announce an acquisition target or risk being liquidated. Continue Reading
2008 Dahlman Rose Energy Supply Chain Conference
Last week’s conference showcased Dahlman Rose’s prowess in their chosen franchise -the energy supply chain. In a two day New York and Boston road show, they presented 29 companies covering the full range of the supply chain including offshore, exploration and production, drilling, offshore construction and shipping to a myriad group of investors. And as much as we appreciated the formal presentations, we really enjoyed the opportunity to sit and talk with the principals who presented their companies, a rare opportunity for us, in the casual atmosphere of the breakout room. The participants could not have been more generous in sharing their time to teach us about their companies and their industry.
The morning began with a keynote address by Mr. Simon Rose. We strongly suggest you beg, borrow or steal a copy of the presentation that distills the energy crisis in a mere 10 slides. The quick answer is that is all about motorization.
Rather than try to cover the conference, which is impossibility, given the breadth and depth, we have chosen instead to highlight discussions we had with Northern Offshore and Omega Navigation.
“Who Are Those Guys?”
Marion Woolie, the President and CEO, of Northern Offshore Ltd. began his short and picture filled presentation with the above referenced quote from the movie, “Butch Cassidy and the Sundance Kid.” For him, it reflected the company’s lack of recognition, which was one of the key issues that he encountered when he joined the company last year. But even in this short period of time, he has put his stamp on the company and the market now knows who they are.
Throwing off the shackles of the corporate world, Mr. Woolie has found his dream job, building a company from scratch. And although he is having fun doing it, it is quite a challenge. After emerging from a re-structuring with three older rigs, with an average age of 30 years, the company entered into an agreement last June with Maersk to purchase and leaseback three North Sea Jack-ups bringing the fleet to six and the average age down to 28. The company was then listed on the Oslo Bors in September 2007. And by the time the fourth quarter arrived, Mr. Woolie’s greatest challenge was to pull together a management team. He reached out to his network and brought together solid managers with whom he worked with for 15 to 20 years and who together have a combined 200 years of experience. And, they, too, are apparently having fun.
Flipping through rig pictures, Mr. Woolie described the employment picture of the fleet. The Energy Driller, a first generation semi-submersible is on a three-year charter to ONGC at $230,000 and operates in a water depth of 600-1,000 feet. The Energy Searcher, a drill ship, is working short-term in Southeast Asia for Total. The Energy Producer is working in the North Sea earning a tariff rather than a day rate. It is paid according to the volumes produced and the price of oil. These are the cash cows. Then there are the Maersk rigs, which are all operating in international waters. The rigs are earning $170,000 per day with two of them off contract in 2008 and the last in September 2009. The good news is that the Maersk Exerter, coming off the contract in May, has found follow-on work for 6 months at $250,000 per day. Given Northern’s past history, this deal was structured to minimize risk for the charterer by requiring a secured performance bond and a cash collateral account and an accelerated debt repayment schedule for the benefit of the bank. Specifically, the new rig debt has to be paid down to 0 in 2010 requiring principal payments of $100 million per year.
The best illustration of where the company was and how it has been transformed was shown in a calculation of uncontracted rig months, which Mr. Woolie describes as a health gauge. As of the fourth quarter 2007, 62% of the total available months were available. With market focus and execution, the new management team brought that figure down to 12.5% in the first quarter 2008. The total current backlog is $616 million, which compares to a market cap of $600 to $700 million indicating that the stock is cheap in management’s view.
The next task this management team faces is how to grow the company. Mr. Woolie doesn’t pull any punches. Organic growth through the placement of new rig orders is unlikely. Rig prices are too high and deliveries, now scheduled for 2011, are too slow. He is targeting existing rigs whether used or newbuildings under construction. It is the latter group that is of particular interest. He does not expect that all of the 150 rigs on order for delivery in 2008 and 2009 will be delivered on time, on budget and with a term contract and therein lies the opportunity. Finally when asked if he is going into deepwater or the jack-up market, his simple response is that it doesn’t matter as long as it adds value.
With respect to oil prices, his views remain traditional. He joked that oil prices are changing so quickly oil companies cannot keep up. He acknowledges a fundamental change but argues prices will remain cyclical. The trading range is certainly higher with lots of volatility. To Mr. Woolie, it is not the price but the direction. All of which is clouded for the moment by lots of emotion.
So, if anyone comes up to you and asks you “who are those guys,” the correct response is Northern Offshore’s posse. Watch your back!
Deferred Equity and Other Interesting Insights
We were also intrigued by a number of points in Omega Navigation Enterprises, Inc.’s (“Omega”) presentation including, in particular, the structuring of its yard financing.
Timing and creativity are crucial aspects of financing in general and we found both of these evident in Omega’s newbuilding financing. Omega had signed shipbuilding contracts, in 2007 with Hyundai Mipo, to construct five 37,000 DWT product/chemical IMO II/III tankers for $44.2 million each for a total cost of $221 million. The vessels are scheduled for delivery between March 2010 and February 2011.
Currently the shipyard is quoting the identical vessel for $47.5 million with delivery in 2011. However, market sources indicate the current value of the vessels is closer to $50 million particularly the earlier deliveries.
Financing for both the progress payments and post delivery is in place. Our focus, however, is on the former, which minimizes the use of Omega’s cash flow while allowing the payment of dividends. To accomplish this, the progress payments are highly levered in the beginning with increasing amounts of equity required, as subsequent installments are due as follows:
The benefits of this structure are best illustrated in the chart that shows the sources of the progress payments through 2009.
Ultimately, as the process is reversed and more equity is injected and the capitalized interest is paid, the overall financing at delivery is 75%. The post-delivery financing benefited from being negotiated just before the credit crisis and is extremely competitive at a rumored LIBOR + 80 bps. All of this was made possible by the timely placement of the orders as well as the quality of the vessels and the shipyard and the company’s employment strategy.
Among other interesting insights provided at the presentation was Omega’s employment strategy. When it comes to time charters, they believe that 3 years is ideal as anything beyond that is steeply discounted. When feasible, upside protection is obtained through profit sharing agreements. Currently, 6 of their 8 vessels have such arrangements. Their fleet is currently time chartered to Norden, Torm and with Glencore. In the case of Norden and Torm, the vessels are operated in pools. Although all three are first-class, they find that Glencore is more creative and flexible as a consequence of their trading mentality.
On the other hand, Omega faces challenges. The company is frustrated by the fact that asset values and charter rates are disjointed making it difficult to do an accretive acquisition. And investors are concerned about the lack of liquidity of the company’s shares. Float is small with only 12 million shares trading making it difficult for an investor to take a position.
And, finally, financing of growth may be somewhat more difficult as it is already moderately leveraged with a net debt to capital of 63% and its shares carry a low valuation. Some relief will come from its re-structured debt facility, which is expected to close in Q1 2008. Both junior and senior facilities will be non-amortizing until the final repayment date in April 2011.
Despite these issues, the company is extremely well positioned to take advantage of evolving worldwide trading patterns resulting from roughly 5 million barrels per day of new refining capacity in the Middle East and India starting up by the end of the decade. These trades will involve longer hauls and therefore increased demand. To service this trade, Omega will have one of the youngest fleets with an average age of less than 2 years, which will be almost equally divided between the MR and LR1 sizes upon delivery of the newbuildings.
This pure play product company may just have gotten it right. With an established market position, fixed employment and carefully structured debt, the company’s dividend is protected in the interim while waiting for the market to catch-up.
In the interest of full disclosure and perhaps as an indication of the quality of the conference, we must confess that we were sufficiently intrigued by a number of presentations to buy shares in two companies, but not in the shipping sector, of course. We are certain that our investment was not quite what Mr. Rose hoped for but we expect that others, with more meaningful dollars to deploy, either took new positions or increased their holdings.
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