Links
Believe the Story or Bet on the Come
Yesterday, Jefferies held its Annual Shipping Conference and, according to Hamish Norton it was a record turnout with over 400 delegates and 40 companies represented. When we were queried about the mood, we hard pressed to provide an answer. There was neither excitement nor was their panic. The closest comparison we could come up with was window shopping. The presentations for the most part were excellent, but the audience appeared detached. Had they seen it all before or was the action taking place behind the scenes in the break outs and one-on-ones? Nonetheless, in line with our thesis, the tanker presentations seemed the most crowded. Genmar, for example, was sold out while the non-U.S. listed companies and service industries garnered the least attention. But then again this was a NY shipping crowd.
The state of the sectors was irrelevant, as all presenters found reason for optimism, well placed or not. Dry has clearly been on the rise, with speakers touting 40% non-deliveries and record scrapping. While on the wet side, consensus suggests 2012 will also be difficult, but the glass is half full with opportunities expected to arise as a result. Lastly, the container ship lessors seem to have blinders on banking on the liners’ liquidity and ability to access capital as losses compound even as they try to get rate increases.
We provide some of our favorite vignettes below.
Fall Outlook – Somber
Like the cycles it lives with, shipping constantly re-cycles itself. When the shipping markets are good, equity investors are all over it and when they turn bad, the opportunists come out. Despite their different perspectives, both somehow make money. It is the nature of the beast. But the current state of shipping cannot be solely attributed to the shipping markets themselves, there is another culprit.
This week, Jefferies is holding its 2011 Global Shipping Conference. Unlike last year, the greater demand for this hot ticket, we understand, is coming from their credit clients rather than the equity side as in years past. Many may believe the vultures are circling carrion but they lack understanding of the resilience of this industry. Shipping has historically survived bad markets but, in this instance, it has to overcome the hangover of the virtually free and easy capital which contributed to unprecedented supply growth. Easy money is hopefully no more, but cheap money remains, as the world’s bankers continue to fight recession with monetary policy. And it is this cheap money which is singlehandedly keeping the industry afloat.
“Solid Financial Condition”? – Time Will Tell
Yesterday, TBS International announced that they had reached agreement with its lenders to forego making its principal payments due in the 4th quarter. The lenders have agreed to forebear from exercising their rights and remedies with respect to the defaults, both payment and covenant, under the loan agreements. During this period, the parties hope to restructure the existing facilities and cure the defaults. Interest will continue to be paid currently with default interest accrued and added to the balance due.
A Little Housecleaning – DHT Files Shelf
On September 2, DHT Holdings Inc. filed a shelf registration on to issue up to $300 million in new securities including common stock, preferred stock or debt securities. With the previous shelf partly consumed in its equity follow-on offering earlier this year, the company felt it was prudent to have a relevant shelf in place. It pays to always be prepared.
Archer Finances Great White Energy Services Acquisition
Last month, Archer Limited agreed to acquire Great White Energy Services (“GWES”), a company which provides horizontal and directional drilling services, pressure control and pressure pumping for $742 million. The acquisition gives Archer an entry point into the rapidly expanding “frac” market in the US as well as effectively doubling Archer’s US coil tubing and directional drilling capacity.
Soon thereafter, the financial markets collapsed and the company renegotiated the purchase price with the seller obtaining a price reduction of $112 million to $630 million. Initially, the company planned to issue 12.7 million new shares at a price of NOK 35 in a private placement directed towards its two largest shareholders, Seadrill Limited and Lime Rock Partners V.L.P to partially finance the purchase. The offering would have raised $82 million in proceeds to Archer. In fact, due to increased demand the offering was oversubscribed with the company issuing 30 million shares at NOK 30 raising gross proceeds of NOK 900 million. Allocated 14.5 million shares, Seadrill will own approximately 145.8 million shares corresponding to a 39.81% of the issued and outstanding shares.
Finding Pockets of Opportunity – Concordia as Latest Interloper
Historically, vegoils and chemicals have practically been inseparable, with the former being a favorite backhaul of the chemical shippers. With their IMO I and II coatings, including stainless steel, and individual pumps, cleaning the tanks on chemical carriers was an easy task allowing the safe carriage of vegoils with the prior cargo being of minimal concern in the majority of cases. Subsequently, product carriers entered the trade having been constructed to carry both IMO II and III cargos, mainly simple chemicals and vegoils.
So, we found it interesting that in its latest quarterly report that Concordia Maritime, a company focused primarily on refined product movements, announced it intention to enter into this trade by upgrading the Stena Performance and Stena Premium, both P-Max product carriers of 65,200 DWT, to IMO III tankers. This means that the vessels are now also able to transport vegetable oils, in addition to refined petroleum products and crude oil. But more generally, this upgrade means that the vessels’ flexibility in the market increases and more days laden than in ballast can be achieved, which in turn should improve earnings.
What Are We Missing? – Horizon Lines’ Recapitalization
Without a doubt, Horizon Lines was in difficult straits. With refinancing risk related to the $330 million of its 4.25% convertible senior notes (“Convertible Notes”) and bank debt, both due in 2012, poor financial performance, anti-trust issues and potential de-listing, the company was fighting fires on all fronts. But after much travail, the company announced that it had reached an agreement with the Convertible Note holders for a complete refinancing of the company’s entire capital structure, eliminating the re-financing risk, while hopefully putting the company on sounder footing going forward.
As of the end of the 2nd quarter, the company had total debt of $600.4 million the bulk of which is classified as current due to non-compliance with covenants. The debt consists mainly of 319.2 million of the Convertible Notes and $272.9 million of bank debt split between a term loan ($84.4 million) and a revolver ($188.5 million), against $1.5 million of total equity.
De-Leveraging – Saga Sells VLCC
Saga Tankers ASA announced Monday that it had entered into an agreement for the outright sale of its 1995-built VLCC, Saga Chelsea for $25 million net, plus the value of bunkers and lubes. While the inclusion of the latter is standard, today they have material value and are worth noting. Proceeds will be used to deleverage the company through the repayment of the related debt with any excess available to improve liquidity. The vessel will be delivered to its Buyers during September 2011. For perspective, the original prospectus valued the vessel, which was acquired a year ago, for $49 million. From another viewpoint, Pareto, in its latest comment suggests that investors may view this sale as market bottom. Despite a nine-year remaining life, the sale price is only $2-4 million above today’s estimated scrap value of a VLCC.
For Whom the Bells Toll…Sooner than you think
In case you missed it, there was an earthquake on Tuesday, a rare event here on the US East coast. While such events are not part of our normal purview, the medium through which news is disseminated is of interest these days.
We write a newsletter and a magazine which we hope our readers find both useful and timely. That is however part of the “old news” world as we discovered this week. We are surrounded by social media hype and for the most part, although we remain curious, we have chosen to ignore it. But as a wise man once said you ignore such things at your own peril.
Of Two Minds – GOGL Reports
Today, Golden Ocean Group Limited reported Q2 2011 results, which we will leave for the analysts to dissect. On the other hand, we were intrigued by certain aspects of the announcement. The company has one of the strongest balance sheets of its peers with cash of $122.7 million and a reasonable debt to equity ratio of 1.09 to 1. But it is feeling the effects of the market. The time charter on the Golden Beijing has been negotiated downward from $38,250 to $23,000 per day with profit sharing, while the Empress and Eminence which were on charter to Korea Line were re-delivered and are currently trading spot. Moreover, with the decline in asset values, the company was forced to pre-pay $5.5 million to insure compliance with its minimum value clause. Interestingly, there was no corresponding mark to market charge taken.
The Official Guide To Marine Finance Providers
Shipping Index
