J.F. Lehman Sells Ship Repair Unit for $325 Million

Great instances of opportunity exist, its just locating them. Even in the sleepy backwater maritime industry in the US.

J.F. Lehman & Company completed the sale this week of Atlantic Marine Holding Company to a subsidiary of BAE Systems, Inc. for an estimated $325 million. J.P. Morgan provided M&A advisory services for Lehman and Blank Rome the legal advice.

That’s the news this week….here is what we said about Lehman’s original acquisition of the yard – at a price of $190 million in the fall of 2006.
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Taking Care of Business

While we know the capital markets are abuzz with activity, there are still the mundane but important things that must be taken care of. On Tuesday, General Maritime amended its $750 million credit facility with Nordea, DnB NOR and HSH Nordbank, as joint lead arrangers and joint bookrunners (the “Credit Facility”) to permit the incurrence of indebtedness under the new $372 million credit facility being utilized for the acquisition of the Metrostar vessels.
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Promises Kept

At the Morgan Stanley conference last month, Robert Bugbee of Scorpio Tankers spoke of the importance of maximizing shareholder returns. In his presentation, free cash flow can be used to acquire assets, for share buy backs or to pay dividends. Last Friday, Scorpio’s board of directors authorized a $20 million share buy back program, with the goal of purchasing these shares in the open market at prices considered to be appropriate. Scorpio surely is walking the talk.

The Other Side of the Capital Markets

Last week we discussed how Paragon and Hellenic Carriers were fine-tuning their respective strategies, the former through diversification while the latter through fleet renewal. This week’s transactions, a merger, a divestiture and a joint venture, evidence shipping’s evolution from simple asset trader to corporate strategist.

Fulfilling the theory that two is bigger and better than one, Eidsiva Rederi ASA and Dyvi Shipping AS agreed last month to enter into a business combination in which Eidsiva would acquire Dyvi to form Norwegian Car Carriers ASA (“NCC”).

The combined company will be the 4th largest car carrier tonnage provider with a total of 16 ships (13 car carriers and 3 Ro-Ro vessels) and the world’s only listed pure-play car carrier tonnage provider. The car carrier market is currently dominated by a few large operators, including NYK, Wilh. Wilhelmsen, Eukor, MOL, K-Line Hoegh and Grimaldi. These companies provide complete logistics services incorporating terminals, inland transport and IT services to meet their customers needs.   These operators control 80-90% of the deep-sea fleet in capacity terms and depend on the tonnage providers for capacity. Intending to gradually exit all of its pure Ro-Ro investments, the new company will focus on the most standardized and liquid PCTCs, the mid-size 4,000-5,500 CEU and the large size 6,000 to 7,000 CEU vessels, which are the backbone of the fleets of all the major operators.
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In Management We Trust

Last week, two Greek owners, true to their heritage, acted upon perceived opportunities and re-positioned their fleets. In a diversification move, Michael Bodouroglou of Paragon Shipping took advantage of the sale and purchase market and sold a contract for one of its three Kamsarmax newbuilding contracts for a profit while agreeing to purchase two 3,400 TEU container ships built at HDW for delivery during July and August. The containerships were purchased for EUR 40 million each. The timing for both was propitious. Values of dry bulk vessels have held up despite a plummeting BDI and despite a recent rise in containership values are near recent lows, while prospects are improving.

Less drastic but still profound was Hellenic Carriers decision to enter into newbuilding contracts for two 82,000 DWT Kamsarmax vessels with Zhejiang Ouhua Shipbuilding Company of China at a price of $34.2 million each. This was an interesting move by Fotini Karamanlis, who has built the company in the Greek style of older second hand tonnage based upon her personal preference for mainly Japanese and Korean construction. A good Chinese yard, favorable pricing (sold a 1993 Panamax for $23.5 million) and tail-heavy payment terms (60% at delivery) were likely convincing. The newbuildings as well as the disposal of older tonnage will reduce the fleet age and increase the focus on the Kamsarmax/Panamax class. Both principals have excellent track records and we expect these moves will benefit shareholders in the long run.

Same Deal Just a Bit More Opaque For Now

Not to be defeated, Bob Burke’s Ridgebury Tankers is back on its feet shaking off the lukewarm reception from the 144A institutional market. Changing its focus, Ridgebury filed a preliminary prospectus for an IPO after the market closed Friday. Although details for the moment are scarce, the deal structure remains virtually unchanged except for the fact that that the three Teekay Suezmaxes are no longer part of the deal, creating a void that needs to be filled. We expect that specific vessels will be identified prior to the road show.

According to the filing, the company intends to raise a maximum of $250 million, which proceeds will be used to acquire three to four Suezmax tankers, which will be deployed in the Blue Fin Tankers Pool, managed by Heidmar Inc., for a minimum of three years. In addition, a portion of the net proceeds will be used to pay the commitment fee in respect of the credit facility, described below and for working capital. The pool, which is currently the 2nd largest spot market-related Suezmax tanker pool in the world, currently operates a fleet of 18 vessels with 9 different pool partners. The relationship with Heidmar extends beyond these initial tankers with Ridgebury having committed to put any subsequently acquired Suezmax tankers into the pool as well as any other tankers into an appropriate tanker pool operated by Heidmar, also for a minimum of three years. Like Teekay did in the original offering, we would expect Heidmar to purchase shares in the offering as the quid pro quo for this commitment. Third party technical management will be provided by Bernard Schulte Ship Management, a company that currently manages 600 vessels.
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In Some Respects, a Return to Normalcy

This week Dealogic published its first half 2010 Bookrunner and MLA Tables for Syndicated Shipping Loans and the news was still dismal but in some respects hopeful. In terms of the big picture, while dollar volumes continued their downward trend, the number of deals in the first half actually increased slightly indicative of, perhaps, less capacity or more focused lending. While the number of club deals increased slightly, from 19 to 23, the deal value declined in proportion to total volume intimating at the revival of the larger syndications. And finally, approximately 90% of the dollar volume was new business rather than refinancings, which is indicative of an improving credit market.  Illustrative data are shown graphically herein.

But, for our readers, it is truly the standings that matter as they represent a scorecard of their performance for the first half of the year. While there was shifting in the standings compared to a year ago, the bookrunner table remained relatively stable. Mitsubishi UFJ displaced its fellow Japanese bank, SMBC for the pole position, while DnB NOR moved into second pushing Nordea into the 4th spot. Outsiders from a year ago, Credit Agricole CIB and ABN AMRO found spots in the top ten this time around. In terms of number of deals, DnB and Mizuho had a substantial lead recording 9 and 8 deals respectively far outpacing the remaining bookrunners. Finally, market share is clearly more concentrated at the top compared to the comparable period last year.
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Heresy

Despite the extent and improving quality of data coming out of China, we have never been true believers to the core. While the quality and extent of the data emanating from China has much improved, much of what is known is anecdotal, logical and belief driven. In fact, our whole industry is making a bet on China’s becoming the pre-eminent manufacturer and consumer of commodities as it grows to meet the needs of its people and the world. And, while the data supports this view, we should not forget that this is a managed economy and the ultimate guiding principals are unknown to us but assuredly driven by self-interest.

With thanks to Hussein Allidina of Morgan Stanley, we received a copy of the IEA’s Medium-Term Oil & Gas Markets 2010 report. We took comfort in the support provided by a slide entitled, “China’s Contribution Remains the Big Uncertainty.” Among two graphs showing China’s contribution to oil demand growth and the interdependence of GDP, oil demand and income elasticity were the following bullet points:

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Leveling the Playing Field

In the world of shipping, the Jones Act, like Rodney Dangerfield, gets no respect. It is only of interest to the parties involved, not many, and like most protected trades it is at best a political minefield. In political speak, participants in the trade are compensated for the higher costs of construction and labor in the U.S. in order to maintain a fleet of merchant vessels for our defense. The political reality however is that it is in fact a jobs program. And there is nothing wrong with that, except for the burden the inefficiencies put on the taxpayer. As a self-contained system it works. But what of the player, who operates both in the Jones Act and internationally.

Unlike the rest of the international shipping community, OSG pays taxes. It is the price it pays for being a U.S citizen, a requirement to participate in the Jones Act. This makes the company less competitive and therefore focused on managing this cost. On the domestic side, they have minimized taxes by electing to be taxed under the new tonnage tax rather than the corporate income tax regime. More challenging is foreign source income, which is a regular target of the revenuers. Historically, so long as the earnings from shipping operations of the company’s foreign subsidiaries are invested abroad and not repatriated they are not subject to tax. Today, all foreign earnings of U.S. corporations are a high profile target of the current administration. However, unlike other industry segments, the maritime unions have supported deferral of the foreign source earnings of US shipping companies because they recognize that this would better enable US companies, such as OSG, to invest in the US business while maintaining the international competitiveness of their foreign flag business. So when OSG asked for support for deferral from the main maritime unions, it was not surprising that they agreed to do so, after all OSG is the sector leader and one of two who have actually contracted and built new vessels in major fleet renewal programs ensuring shipyard and sea jobs. With the assimilation of OSG America back into OSG, Mr. Arntzen is a committed man and we have no doubt he will succeed in his efforts to position his Jones Act and international fleets competitively.

EMGS Issue

Also, last week, Electromagnetic Geoservices ASA (“EMGS”) entered the market with a private placement of its shares despite the many concerns associated with the problems in the U.S. Gulf.

The private placement contemplated an issue of up to 30 million shares, corresponding to 24% of the current number of outstanding shares, with the subscription price set through a book-building process. That process began on the 21^st of June and concluded the following day. The placement was successful with the company receiving orders for 28 million new shares with the subscription price set at NOK 7 per share giving gross proceeds of NOK 196 million (~$30 million). Proceeds  will be used for general corporate purposes, including working capital for a recently awarded contract.

The private placement was managed by ABG Sundal Collier Norge ASA and First Securities AS.