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Rickmers Maritime – A Fresh Beginning Awaits
Over 12 months of negotiations and uncertainty, Rickmers Maritime has finally reached an agreement with its lenders and sponsor, Rickmers Group. Who would have thought that the decision to acquire ships with long-term charters from the major liners during the good days could exert such a severe impact on the trust’s performance? After all, investors wanted not only yield but also growth during the boom, which led to the challenges shipping trusts face today in the form of deflated asset values and lease rates.
But the outlook has certainly grown rosier for Rickmers Maritime, a shipping trust that was listed in May 2007 to own and operate containerships under long term, fixed rate time charters to leading container liner companies. Efforts in re-positioning the trust are paying off. Its lenders Citibank, DBS and HSH Nordbank, have extended and converted an outstanding USD 130 million top-up facility into a five-year amortising loan, and its sponsor, Rickmers Group, has agreed to discharge the trust from its obligations to acquire 7 vessels with total contract value of USD 918.7 million. The container trade, arguably the hardest hit by the global financial crisis, is also on track to recovery, and the improving environment has eased cash flow pressure suffered by many of its clients. Today, its customers are among the top 11 container shipping liners in the world, including CMA CGM, CSAV, Italia Marittima, Hanjin Shipping and Mitsui O.S.K. Lines.
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First Ship Lease: Demonstrating Strength through Diversification
With a fleet of 9 product tankers, 3 chemical tankers, 2 dry bulk carriers, 2 crude oil tankers and 7 containerships, FSL Trust has the most diversified asset portfolio among the three shipping trusts. The key risk in shipping trusts is the credit risk associated with counterparty default, and FSL Trust seeks to mitigate this through the diversification of lessee base and subsector exposure, and strong risk management. It is also the only trust with a risk management department that mirrors a bank credit department.
Apart from asset diversification, FSL Trust has also been actively seeking alternative funding sources. In October 2008, it became the first Singapore entity to have its American Depositary Receipts (“ADRs”) trading on the PrimeQX tier of International OTCQX in an attempt to reach out to more high quality investors in the United States. And, in 2009, a plan to issue up to USD 200 million senior notes was also put into place, but unfortunately was aborted due to the Dubai World credit crisis.
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Pacific Shipping Trust: Practising Prudency
Pacific Shipping Trust is the first shipping trust listed on the Mainboard of Singapore Exchange in May 2006. Its sponsor Pacific International Lines is one of Asia’s largest shipowners and Singapore’s second largest container shipping company. PST has a young fleet of 14 ships with an average age of 5 years. With long-term leases stretching into 2021, the shipping trust is set to enjoy a stable income of close to USD 500 million over the next 10 years. Its charterers include Pacific International Lines, CSAV and Shagang Group.
Most investors look out for yield and growth in assessing potential investments. But one important feature in PST that investors may have overlooked is its prudent long-term liability and risk management policies. Since its IPO, PST has adopted a very conservative loan repayment schedule that substantially matches the term charters of its vessels. This policy of actively paying down debt against depreciation effectively addresses investor’s concerns over asset erosion, and will allow the trust to own the vessels substantially unencumbered at the end of the loans. Over time, this will lead to higher distributable income for the unitholders.
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The Rankings Methodology
We keep our methodology as consistent as possible from year to year so that it is possible to create a time series of data, or to just compare one year’s winner to another. Even with this in mind, though, it is important to update the methodologies and improve them over time. We constantly examine our financial ratios in order to better measure companies’ performance, but in this instance have stuck with the measures developed for the 2004 Rankings.
As a review, we define financial performance as companies’ ability to improve operating efficiency and to create shareholder value. Based on this understanding, we distinguish between performance ratios and financial strength ratios. The performance ratios focus on evaluating the operating efficiency and the ability to create value; while the financial strength ratios emphasize companies’ financial safety and health. While we do not believe that financial strength necessarily has direct impact on or is a direct indicator of companies’ performance levels, it provides a good benchmark from a creditor’s standpoint and ensures the sustainability of company operations, and we therefore believe it is a metric very worth calculating and considering, but also one that should be separated from overall financial performance.
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2nd Annual Offshore Rankings – A Look Back at 2009
By George Weltman
Background
Tell us the price of oil and we can, generally, gauge the performance of the offshore players. The relationship is not unexpected and the correlation high. Generally speaking, with higher oil prices, the margins are sufficiently rewarding for oil companies to engage in exploration and production (“E&P”).
Perhaps we oversimplify, but the trend shown in figure 1, which illustrates the price of a barrel of WTI over the two-year period since we began the rankings, shows the price of oil rising to record highs in 2008, and then the sharp descent through the first quarter of 2009 with recovery beginning in the next quarter. By June, the oil price had reached $70, a level that is “economic” for the oil companies. This takes you to the next leading indicator. According to Thor Andre Lunder of DnB, “In the E&P value chain, the oil companies’ spending is the key determinant in driving the fundamentals of the Offshore Supply Vessel (“OSV”) sector. We argue that using the aggregate value of the E&P spending as a yardstick can provide us a quantifiable measure of the general direction of the demand for oil services, hence the demand for the OSV sector.” However, like the general shipping markets, the offshore sector is susceptible to overbuilding and is therefore also cyclical.
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Investment Opportunities Within the Offshore Space in Asia
By Thor Andre Lunder, DnB NOR Markets Equity Research, Asia
Oil companies are again increasing their Exploration and Production (E&P) spending, after a temporary dip in 2009 following the financial crisis. Existing oil fields show a decline rate of 4.5% or more. This needs to be replaced by new production and enhanced oil recovery. Higher spending among the oil companies benefits the offshore companies. Although the overall picture looks strong for the offshore industry, companies and sub-sectors will, to varying degrees, benefit from the increasing activity in the E&P sector. We see good investment opportunities within several niche players in Asia, such as ASL Marine, Swiber and Ezion. With oil prices at the current level driven by the decline in production from existing fields, we expect a continued strong appetite for offshore companies from Asian and international investors.
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Risk and Sesitivity Analysis
SUMMARY A shipping company is exposed to a number of different risks. Concordia Maritime divides these risks into four main categories: corporate risks, market-related risks, operational risks and financial risks. These are assessed according to effect and probability. Each risk is countered by a risk strategy.
Editot’s Note:
We are masochists. We read many annual reports, particularly in the preparation of our annual rankings, and we enjoy them in a perverse sort of way. We are students of footnotes, analyzing them and hoping for transparency instead of obfuscation. We often wonder why different offices of the same accounting firm might be more flexible than others and long for the opportunity to witness the negotiations between the accountants and their clients. We marvel at the different styles of presentation and the different emphasis on disclosures. Despite IFRS, annual reports differ by geography. Asia’s are consistent, emphasizing corporate governance. In the U.S., the SEC has made risk the crux of the annual filing so much so that anyone who bought the shares should be deemed insane. In Europe, one size does not fit all and one company has seized upon the opportunity to use the annual report to educate their shareholders.
While much is standard fare and is required, Concordia Maritime’s annual report is a textbook on business in general and theirs in particular. Clearly, Hans Noren and his team have given much thought to the material and in the manner in which it is presented. A guiding principle might be the slogan of Syms, a clothing store in NY, which proclaims: “An educated consumer is our best customer.”
Unexpectedly, the annual report begins with the business concept, a mission statement and a strategy as an overview. The business model follows. Measurement of performance is always critical and that is what the numbers do but management also looks at performance anecdotally, reviewing goals, development, challenges and action plans in three categories, growth, profitability and equity ratio. Why you might ask do they focus on the equity ratio? Quite simply, it is their belief that a strong balance sheet will afford them opportunities.
A discussion follows on the simple things: vessels, customers, safety and the environment. For Concordia safety and the environment are not costs but a competitive edge. To truly have a picture of the company you need to understand the markets in which it operates. There are, therefore, discussions on oil, the oil trades, demand and supply and of course price. Bringing it down to the business, the company describes the tanker market, chartering, the vessels, competition and the elephant in the room, ship supply. It goes on, but you now have a sense of the content. We encourage you to take a closer look and hope you appreciate their effort as much as we did.
For the most part, there is nothing new here for the readers of Marine Money. There was however one section which was thought provoking in its unique perspective. While we all believe we understand and assess risk, we have never seen it presented in this logical framework. Risk assessment becomes much clearer and more thoughtful.
Below you will find an excerpt from Concordia’s 2009 Annual Report entitled “Risk and Sensitivity Analysis”. We are grateful to the company for allowing us to reprint it here.
Cycle Management in Shipping
By Dr. Peter Lorange and Dr. Arlie Sterling 1
Introduction
How risky is shipping? We are often asked that question in the context of an investment analysis, when rating a loan or a shipping company, or helping senior management refine its strategy. We believe the answer to that question is fairly clear. The shipping business is not inherently risky – the risk is rather in how owners, bankers and charterers manage the positions they take in the business.
We will expand on that point in this article by considering a simplistic case study of an owner’s financial performance over the last ten years, and then consider how some of the lessons could be applied in today’s environment.
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Shipping Industry Primary Equity Offerings in the U.S. Public Market in the First Half of 2010
By Hannah Arntzen
There is hope for the shipping market yet! According to a recent survey undertaken by Francois Janson and Frode Jensen of Holland & Knight LLP, in the first six months of 2010 there have been fourteen primary equity offerings in the U.S. Public market made by thirteen different issuers, Nordic American Tanker Shipping Ltd., Teekay Tankers Ltd., Overseas Shipholding Group Inc., General Maritime Corporation, Seanergy Maritime Corporation, Capital Products Partners L.P., Navios Maritime Partners L.P., Safe Bulkers Inc., Tsakos Energy Navigation Ltd., DryShips Inc., Baltic Trading Ltd., Crude Carriers Corporation, and Scorpio Tankers Inc. Three of those fourteen offerings were IPO’s, the remaining eleven offerings were follow-ons. Of those eleven follow-ons, nine were firm-commitment underwritings and one was an at-the-market offering. Ten of the issuers were foreign and organized outside the United States, two issuers were foreign but had headquarters in the U.S. and only one issuer was a U.S corporation with headquarters in New York City. Ten of the thirteen issuers were organized in the Republic of the Marshall Islands, one in the United States, and the remaining two in Bermuda.
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Improving the Math
NewLead Holdings Ltd. announced this week that a 1-for-12 reverse stock split of its common shares has been approved by the Company’s Board of Directors and a majority of shareholders, effective August 3, 2010.
As a result of the reverse stock split, the number of common shares of the Company’s common shares outstanding will be reduced from 88,363,265 to approximately 7,363,605 shares.
The reverse split will allow the Company to maintain its listing on the NASDAQ Global Select Market by maintaining compliance with the minimum bid requirement for continued listing. The transaction will also establish a higher market price for the Company’s common shares and reduce per share transaction fees as well as certain administrative costs.
While the market cap remains unchanged, the higher share price will remove it from the “penny share” class and perhaps pique investor interest.
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