Managing Risk

Master limited partnerships are designed to be a haven in a storm, offering fixed long-term secure cash flows and a certain return. Shipping companies were formed based upon this model, but unfortunately, with the exception of the LNG sector, contracts cannot be considered “long-term” in the same fashion, as, for example, a pipeline. Today’s volatile markets are an anathema to a shipping master limited partnership, as ships come off charter and become exposed to the spot market. To provide a modicum of certainty, Capital Products Partners came up with a solution to the problem. At the conclusion of the current charter with BP this month, the M/T Arionas will go on to a 12 month charter with Capital Maritime Trading & Trading Corp., an affiliate, at a rate of $12,000 per day, in line or perhaps slightly higher than current market, with a 50-50 profit sharing. The company gets fixed cash flow with upside and a bridge to when hopefully the market comes back. With the market risk shifted, Capital may take a loss on trading the vessel, but will benefit as a shareholder in Capital Products.

Mining the Gap

Last week, SEACOR Holdings Inc. and Tiger Group Investments, Inc. announced the formation of a joint venture, SeaTiger Capital, which intends to provide structured financings and make financial investments in markets where the partners have operating experience with a focus on assets and related operating risks. Strategic investments will remain at the shareholder level while SeaTiger will focus on financial opportunities.

Potential opportunities will be sought in traditional shipping, energy services, logistics/infrastructure, transportation, aviation and related businesses.  Investments can cover the full gamut of the balance sheet from senior loans to preferred or common equity investments and may also include specialty financings such as mezzanine lending and bridge financing. Continue Reading

From The Playbook

When you’re good and connected, anything is possible. Last week, Seaspan announced that it had purchased a newly delivered 4,250 TEU newbuilding containership for approximately $43 million from Zhejiang Shipbuilding Co Ltd of China. Based upon information provided by our neighbors, this is a very favorable price, approaching the newbuilding low prior to 2004, calculated at $10,000 per TEU. The price likely compares favorably with their Samsung newbuildings, which formed the core of its initial fleet.

Seaspan has fixed the vessel to United Arab Shipping Company on time charter for a period of two years at the strong rate of $20,500 for the first year increasing to $20,850 for the second. Continue Reading

Sister Act

Last but not least, Peter G’s spot trader, Baltic Trading Limited, announced this week that it had agreed to acquire also from Metrostar, three 35,000 DWT Handysize bulkcarriers, including one newbuilding, for an aggregate purchase price of $99.8 million. The three vessels are expected to be delivered in a similar time frame as the Genco vessels.

All three vessels are employed on straight four-year spot market related charters also to Cargill at a rate of 115% of the average daily rates of the BHSI with no structural enhancements. Here, too, Metrostar will retain technical management.

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The 2nd Act

When you find a willing seller don’t let him go. Last week, Genco also agreed to purchase five 35,000 DWT Handysize bulkcarriers, including three newbuildings, from Metrostar for an aggregate purchase price of approximately $166.3 million. The five vessels are expected to be delivered between July 2010 and September 2011. The acquisition will increase the fleet to 40 vessels, with a total carrying capacity of ~3.1 million DWT and an average age of 7.1 years.

The vessels are on spot market related charters with Cargill, which are based upon a rate equal to 115% of the Baltic Handysize Index (“BHSI”). Four of the charters are structured with a floor of $8,500 and a ceiling of $13,500 and a profit sharing equal to 50% of the amounts earned above the ceiling. These charters are for 3 years. The fifth vessel is chartered for four years with a rate also equal to 115% of BHSI but is freely floating with no caps or ceilings and no profit sharing.

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Tinker to Evers to Chance

The shipping version of this famous baseball double play combination is Angelopoulos to Georgiopoulos. Like Eyjafjallajokull, a dormant volcano that was quiet for centuries, Peter G’s companies erupted with news of acquisitions, some known and others new. First, the much-publicized acquisition of five tankers by General Maritime Corporation from Mr. Angelopoulos’ Metrostar Management Corporation was formally announced. Genmar has agreed to acquire five VLCCs, with an average age of 4.2 years, and two Suezmax newbuildings, to be delivered in 4Q 2010 and 2Q 2011 for an en bloc price of approximately $620 million. The seven double hull vessels are expected to be delivered between July 2010 and April 2011 and will effectively increase the size of the fleet in tonnage terms by 50%, while improving the fleet’s age profile. Moreover it increases Genmar’s exposure in the VLCC market from 2 to 7 vessels. Two of the VLCCs have time charters, which expire in the 1Q 2011, with the balance being charter-free upon delivery.

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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. The measures developed for the 2004 Rankings remain unchanged and are likely to remain so, giving us now six years of completely consistent comparison.

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.

For our rankings methodology, we have chosen six performance ratios, namely Total Return to Shareholders (TRS), ROE, ROA, Profit Margin, Price to Book and Asset Turnover. To evaluate financial strength, we look at Current Ratio, Debt to Capitalization, and Interest Coverage Ratio. From a valuation point of view, we leave the EV/EBITDA ratio as a straightforward, standalone benchmark.

This year again, we have ranked and present performance and financial strength separately. In each of these divisions, we rank each company’s performance for each indicator and then compute average rank scores based on the unweighted average of those indicator ranks. The overall rank is determined according to the average rank scores, with smaller being better, a rank of one, of course, being the best.

Equations for the financial ratios we use for Marine Money Rankings are listed in Figure 1, and in the following paragraphs we provide detailed descriptions of each metric, as well as justifications for inclusion.
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The Classes of 2007, 2008 and 2009 Where are they Today?

By Jim Lawrence

In the Unites States today, recent college graduates have never faced a more difficult job environment. The government and universities are closely tracking their prospects as a window onto the state of the broader economic conditions. But shipping’s classes of 06, 07 and 08 have fared much better.

It is worth taking a quick moment to review what the recent shipping graduates to the public markets have accomplished.  In most cases, there is real cause to celebrate. For one, Safe Bulkers, their performance placed them Number 1 for the 2009 Rankings. Given the power that the capital markets provide a shipping company, we expect these recent “graduates” to indeed be running things shortly.
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Fun with Numbers – Is Shipping Big or Small?

By Richard Lemanski

Shipping is somewhat of a bi-polar industry.  On the one hand, we are probably the most global of all industries for which world trade is very dependent upon.  Furthermore, history has shown that disruptions to the maritime industry (e.g., Suez Canal closings, Katrina in U.S. Gulf, etc.) can wreak havoc in the global economies.  On the other hand, despite the higher profile of the shipping industry in recent years, many people in the industry still have somewhat of an inferiority complex that we are just a small and mature industry.
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The Fickle Finger of Fate, or How to Go from Top to Bottom in the Blink of an Eye

By Jim Lawrence

One would like to say that it is all about the markets.  One year dry is up; the next it is tankers.  And, in fact, that is frequently the case.  In 2007 the dry sector dominated as it did again in 2009.  In 2008, the results were a mix, but with a heavy preponderance of tanker companies at the top of the performance list.  But is performance simply a function of your market focus?

No the bottom is a special place, reserved for special cases.  Before anyone thinks the bottom is bad, it is not, at least not necessarily.  Remember the companies ranked are the most important publicly listed shipping companies and just in that regard, are important. Their access to capital, transparency, and general stature are all elevated.  But someone had to bring up the rear in a list limited to 100.

Fully half of this year’s bottom ten, were in previous years at or near the top, and it is worth pausing for just a second to look more closely at why they are, in 2009, at the bottom, in the off chance that their change in fortunes can shed some light on strategy, or sector performance.  Is it management, bad luck, over leverage, an incident, size, sector concentration, or perhaps where they are in the capital expenditure cycle?

In fact it is a bit of all those in different amounts that contributed to 2009’s Ranking.
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