Mirror Mirror On the Wall, Who’s the Most Creative of Them All? – Bank Debt Award

By George Weltman

Surely, these are difficult times in the capital and credit markets. The credit crisis has squeezed liquidity, which is clearly borne out in the dearth of activity in the capital markets. In the bank market, the situation is not so clearly evident but activity has certainly slowed, with banks reiterating that the right clients with the right assets will have ready access to funding. Of course, pricing and conditions of the loans have reverted to the more normal terms of the recent past, including higher spreads, lower advances, amortization and covenants. But despite the increased cost and tightening, bank debt remains the cheapest capital available. And as evidenced by the multitude of nominees, deals are getting done. The syndication market is working even with the imposition of market flex. In short, it is no longer the age of being young and single, far better to be old and stable.

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May You Live in Interesting Times

By George Weltman & Jim Lawrence

On Tuesday September 16, 2008, the US government blinked after the private sector failed to come up with the necessary funding for AIG given the lack of transparency and inability to get around the risk. By the weekend they’d thrown up their hands entirely. Following on the heels of Lehman Brothers’ bankruptcy, Merrill Lynch’s sale to Bank of America and the very real spectre last Thursday that the financial markets were tottering on the brink of disaster, the US government had only one choice left a complete bailout of the finance business in an effort to cleanse the balance sheets of institutions, which had frittered away some trillion dollars of value over the past decade.

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The Tortoise Or the Hare?

By George Weltman

The beginning of the year is always an exciting time for us here at Marine Money. We get to look back and praise the successes of the industry, a favorite pastime, in particular, of the industry’s number one and two fans, our Chairman and President. First, we award the deal doers in our February/March issue and then we rank the shipping companies in the spring. Of course, our enjoyment is somewhat tempered by the volumes of work with which we are faced. Given the theme of this issue we thought it would be appropriate to look at our rankings data as one of the objective measures of achievement as opposed to crass cash accumulation. To a small degree, our rankings methodology has been questioned in some quarters, particularly recently, in that the new entrants have so quickly outshone the long-term players. So taking nothing away from our recent winners, we wanted to take a longer-term perspective of how to measure success. We termed 2005 the “Year of the IPO” in our 20th Anniversary issue, and that year also becomes the dividing point between what we term before and after capital markets or the divider between old and new companies. The 2006 Rankings were the transformational point as the Class of 2005, which totaled 16, entered the competitive ranks. These new entrants represented almost 20% of the entire data set. To get a picture of how the rankings have evolved along with the capital markets we have included Figure 1, which shows the annual additions to the ranking database. Continue Reading

Interesting Data Points or Fun with Numbers

By George Weltman

This year we decided to take a birds-eye view of the numbers to determine if there was any significance to them, inferences to be drawn or perhaps even trends apparent. In the chart contained herein we looked at our universe of 86 shipping companies and toted up the numbers for perspective. In addition, we calculated an average EV/EBITDA in order for our readers to have a perspective when looking at this category.

Looking at the numbers themselves, we were most impressed by the group’s market capitalization of $202 billion as well as the total cash and cash equivalents of $17.8 billion, and the latter does not even include short-investments which would have significantly ballooned this number. Continue Reading

Through the Looking Glass

By George Weltman

As the black box generated the results, we here at Marine Money breathed a sigh of relief balanced with a tinge of regret. We did not have to create a new category of best shipping company based outside of South Africa as we feared might be necessary. Nor would we be accused of fixing the results, despite the entreaties of Grindrod’s greatest fan here in our office. After a string of two consecutive wins, Grindrod did not repeat, but came awfully close, finishing in the number six spot overall after another excellent performance, but more on them later.

But that is history. This year’s winner, from the class of 2005, is American Commercial Lines Inc. (”ACL”), which also happens to be one of five members from that freshman class to occupy spots in this year’s top ten. In fact, it also happened to lead the freshmen in total return to shareholders last year. Could this be the beginning of a new streak? Continue Reading

“Secured Equity?”

By George Weltman

Although no longer as major a factor as it once was in ship finance in the US capital markets, where equity reigns, high yield debt remains a major force in Norway as discussed in this issue. In fact we noticed that the recent Norwegian bonds are highly structured and when secured use 2nd and even 3rd priority mortgages. So, although not au courant, we thought that with the future always uncertain, it might be useful to review this financing structure that bridges the gap between equity and debt. As the source of information for this article we utilized a Latham & Watkins presentation entitled, “Everything You Always Wanted To Know About Second Lien Financings.” We found it extremely enlightening and hope we did it justice. Continue Reading

Norwegian High Yield – A Cheap Bridge

By George Weltman

As of late, reports on the Norwegian High Yield Bond market have filled the pages of our publications. This is only natural as this market provides capital with flexible terms at competitive rates. It has become the market of choice for the Scandinavian offshore industry, particularly for newer ventures. And shipowners, including one foreign issuer, have also seen the opportunity. Looking at the tenors and the bullet amortizations of these transactions, it appears that borrowers are using them mainly as bridge financing or, alternatively, as a way of playing the yield curve. On the buy side, European hedge funds have been major purchasers attracted by the yields as well as the possibilities offered by the carry trade. Fortunately, Nordea Markets prepared an excellent presentation on the current state of the market from which the following is derived. We have largely used the data and information supplied by Nordea and inserted some of our own thoughts and opinions that naturally are solely ours.

Morten Heiner Pedersen, writing on the credit markets, saw that, during this period, demand for credit remained intact despite the repercussions from the sub-prime concerns here in the United States. It is a very strange market with some issuers giving concessions on spreads while others were renegotiating lower spreads due to strong demand for leveraged loans and others were issuing “cov lite” loans. Nevertheless the correction was much smaller than occurred with the GM downgrade in May 2005 and high yield has surprised positively with the CCC segment relatively unaffected. Although there were only minor changes in the curves steepness, indicating a longer term view of credit spreads remaining unchanged, Mr. Pedersen believes the crisis in the US housing market will continue to affect markets by prolonging the housing downturn. Continue Reading

Going the Way of Dinosaurs?

By George Weltman

This clearly is an exaggeration; however the juxtaposition of recent news raises interesting questions about the role of lending these days and where it may be going. Please bear with us as we go through the litany of reports that hopefully will provide some clues.

First, Deutsche Bank’s maritime division reported net income of EUR 51 million, a decline of EUR 2 million from that reported last year. It was the first time in a long while that the bank reported a profit decline in shipping. The reduction in profitability was attributed to pricing pressures resulting from intense competition as well as the bank’s strategy to focus on top tier owners who require razor thin pricing. Nevertheless even with the reduced nominal profit, the ship lending activity met the bank’s minimum pre-tax ROE target of 25%.

Reflecting this evolving market, the company’s executives downplayed the performance in light of the bank’s strategy to crosssell other more profitable products to shipowners beyond mortgages, which get the client in the door. Although the associated revenue may not appear in the shipping division’s books it benefits the bank as a whole and is clearly identifiable with the lending activity. There is nothing new in this trend, which was not a well kept secret, but simply unspoken. Nor had it ever been an avowed strategy. Continue Reading

Bottom of the Barrel – The Bunker Business

In the interests of expanding our knowledge of the industry, we thought we would take a closer look into the bottom of the barrel to understand the bunker business by providing some background, courtesy of Beth Wilson-Jordan and an invaluable text, Neil Cockett on Bunkers, and then put these abstractions into context by viewing Aegean Marine Petroleum Network Inc. (”AMP”) as an investment opportunity.

Bunkers 101 Bunkers – The What?

Produced from oil fields, petroleum crude oil is processed in a refinery that manufactures oil products, any one of which is referred to generically as an oil fuel. The two main oil fuels that the bunker industry utilizes are residual fuel oils, which as the name suggests are residues of the crude oil refining process, and distillates. The former accounts for roughly 85% of the total bunker fuel off take while the latter, which is more specifically categorized as marine gas oil or marine diesel oil, makes up the balance. As the latter are used to power the main engines of small vessels, our primary focus will be on residual oil, which has been the principal source of power at sea for 50 years.

Residual oil is the heaviest viscosity oil fraction of a refinery. Viscosity is a measure of a liquid’s internal resistance to flow at 50 degrees Celsius and is measured in centistokes or cSt. Its viscosity will depend on the refiner and the grade of oil being processed and may vary depending on the refinery, the port and time. Residual oil can be used as is, in which case it is known as “bunker C” and is often referred to as heavy fuel oil or No. 6 oil. Alternatively, the fuel oil can be blended to the viscosity needed by “cutting back” with distillate oils or cutter stock. Blended fuels are known as intermediate fuel oils. The majority of commercial marine vessels use marine fuel oil (IFO) with viscosity ranging between 180 cSt, 380 cSt and 500 cSt with the most common being 380 cSt. Continue Reading

Clueless about Valuation

By George Weltman

For the uninitiated, the concept of valuation is fraught with mystery and magic. However, in definitional terms it is fairly straightforward. The American Heritage Dictionary defines valuation as “(t)he act or process of assessing value or price; an appraisal.”So what does this term of art mean to its various consumers, which include practitioners of mergers and acquisitions as well as research analysts?

My journey of discovery into the meaning of this concept started with a discussion with Mr. Einar Kilde Evensen of DnB NOR Markets who provided a framework for the subject as well as referred me to an excellent website (www.damodaran.com) on valuation created by Professor Aswath Damadoran of NYU’s Stern School of Business. Continue Reading