Tuesday, December 13, 2011

Mediterranean Shipping Co (MSC) and CMA CGM join up to stem the Maersk challenge


The latest shipping news is that these former rivals have had to team up on several key liner services in order to compete with Maersk Line on the key Asia-Europe route. As a privately held company, MSC’s financial information is not easily available, but they are just behind Maersk in TEU capacity. CMA is in third place. The partnership is operational for a two-year period. There has not been any discussion of corporate merger.

The direct goal of the MSC, CMA commercial partnership is to offer a liner product comparable to the “Daily Maersk” service.

They are doing this on five Asia-to-Europe services, deploying 53 ships of 9,500 TEU to 14,000 TEU capacity. Four are cover routes to northern Europe (the Swan, Silk, Lion and Condor services) using ships of 11,400 TEU to 14,000 TEU. The fifth is the Asia-to-Mediterranean Jade service using nine ships of 9,500 TEU. Together, the two lines will control one-third of capacity of the over 10,000 TEU fleet (operating and on order), compared to Maersk’s 20%.

This move reflects the lack of volumes in the market as a consequence of the economic crisis and the difficulties of managing the vessels on these liner services. It is likely to make it very difficult to compete on these routes using vessels smaller than 10.000 TEU. Both partners need to bolster their balance sheets and have been selling ships and chartering them back at a time of loss-making Asia-Europe rates. The collaboration will allow both to cut costs and fill ships at the expense of other lines.

It is also likely that this synergy will attempt to tighten the screws on beleaguered vessel provider companies. MSC and CMA are reputed to be among the toughest negotiators in the charter market. There is concern that they might seek to renegotiate charters in the face of falling freight rates, potentially causing overstretched companies like Danaos serious problems. Shippers, on the other hand, are expressing concerns that the two mega lines may attempt to restrict capacity to maintain higher rate levels, making the Asia-Europe route an oligopoly.

There is a window of opportunity in this partnership for the next 12 months as Maersk has no large ships for delivery, while MSC and CMA CGM will receive 21 new buildings of over 13,000 TEU by the end of 2012. This will cause Maersk to lose market share until it starts to take delivery of their 10 Triple-E 18,000 TEU vessels. The Swiss-Italian carrier MSC would keep its fleet employed while allowing CMA CGM to achieve its growth plans, which have been derailed by the crisis and financial problems.

Maersk Line pioneered the advent of larger vessels with its E-class vessels (+15,000 TEU) back in 2006-7 and last year it embarked upon the new Triple E series.

It is clear that the liner industry suffers from serious earning margins problems, and another downturn in expected cargo volume will come with the growing recession in the E.U. Maersk, MSC and CMA are trying to face this challenge with larger vessels for lower unit costs as well as commercial strategies that give them some pricing power over rates, such as this potentially oligopoly of two mega carriers on the Asia-Europe route, squeezing out smaller liner companies.

Tuesday, December 6, 2011

Genmar Chapter 11 reorganization: The importance of distressed asset investors being earnest lenders


Oaktree Capital Management (OCM) has their hands full with General Maritime in bankruptcy. The market is questioning the wisdom of taking a position last March in this beleaguered shipping company just months before this Chapter 11 filing. In the meantime, unsecured creditors are trying to make life difficult; they are opening issues that have implications for other shipping companies contemplating this path. The looming question is what would OCM do with a revamped Genmar?

OCM is now obliged to pump a further $175 million into the Peter Georgiopoulos-led company to shore up its original $200 million outlay. Some might call this throwing good money after bad. A common Wall Street expression when investments go bad is: ‘Don’t frown, double down.’ The European Union is a grand master in these kinds of ‘pretend and pray’ lending practices, but OCM are professionals dealing with a distressed asset situations, where doubling up is generally frowned upon as poor risk management.

The immediate challenges are one minor and one major issue. The lesser issue is the unsecured creditors’ court petition, filed in New York, to get control of the Genmar’s cash flow from all accounts. Genmar’s senior lenders are European-based shipping banks. Nordea Bank is one of Genmar’s lead banks and heads a group providing Genmar with a $75 million in debtor-in-possession (DIP) financing to see the company through the Chapter 11 process, which Genmar hopes to exit in April. This would be a generic issue for any shipping company in Chapter 11 proceedings. Nearly all the major shipping banks are European and based outside New York. We will see whether they can find a temporary solution through a large U.S. clearer like Citibank.

The more substantive issue is the negotiation of the “haircut” for unsecured bondholders. They are being sandwiched between OCM and senior lenders, who already appear to be in pre-agreement with one another.

Genmar was in no position to make the $18 million semi-annual coupon payment on these bonds on November 15; The company was virtually out of operating cash. One key to successful restructuring is to get out from under the bond burden, paying only a fraction of the face amount. It’s telling that Genmar’s bonds were trading at around 10 cents on the dollar just prior to the filing, reflecting the market’s view of their worth.

The unsecured bondholders will try to argue that OCM is not a lender, but in an equity position pari passu with them in distribution. This is a common cause in any bankruptcy situation. We can safely assume that OCM studied this matter carefully with its legal counsel in structuring their first $200 million capital injection into the company. It was done in loan form with warrants and controls on stock dilution.

Once these legal issues are resolved, the really interesting part will be what OCM - presumably the new owner of General Maritime – will do with the company? There are a number of aging vessels close to scrap value. Genmar does not have the comparative advantages of peer tanker operators like TeeKay or OSG. Even Frontline has more options. It will take no small effort to make Genmar competitive again, but perhaps OCM is really looking to sell it off to the highest bidder for profit once the tanker markets improve.

Wednesday, November 30, 2011

Danaos exposed to counterparty credit risk with large exposure to some of the financially weakest liner companies


Danaos has been a perennially weak stock since the 2008 meltdown. The company suffers from high bank leverage and a heavy capex budget. Earnings have been marginal at best. In 2010, it racked up a whopping loss of US$ 101 million. This year, Danaos negotiated an excellent restructuring agreement with its senior lenders that also covers its future capex needs. It has significant long term charter cover. Is Danaos now out of the woods?

Danaos has a fleet with an attractive age profile. It has kept pace with changing industry dynamics, with almost 50% of its fleet capacity in the 8,000+ TEU range. Its fleet’s average age is 6.27 years and it has a new building program of 13 containerships to be delivered through mid-2012.

Danaos recently carried out a massive restructuring of its debt. The company raised in excess of $1 billion through a $200 million equity issue and new debt commitments of $818 million. Further, Danaos announced formal completion of the restructuring of its new building capex finance obligations. Fortunately, Danaos is a listed company and has the size and clout to pull off this this operation, underscoring the resilience of the publicly listed shipping company business model.

The fleet is heavily contracted with average length charters between 8 to 10 years. This employment profile facilitated the loan restructuring and capex commitments. Needless to say, the loan repayment was tailored to this cash flow with no bullet payments until 2019. Interest expenses are not negligible with projections of $191/$202/$234 million in years 2011/ 2012/ 2013 respectively, which represent about 50% of anticipated EBITDA (US$ 317/ 433/ 442 million respectively).

The weakest element here would appear to be the 29% exposure to Hyundai Merchant Marine (HMM) and 28% exposure to CMA-CGM as charterers. HMM has a gearing of three times debt to equity. It announced heavy losses of $ 205.080 million for the first semester of 2011. It is a smaller liner company vulnerable to pricing pressures from larger operators like Maerk in the fight for market share.

CMA CGM was downgraded by Fitch to BBB- with negative outlook and then Fitch ceased coverage. Their first semester 2011 profits were down 72% to $237 million from 2010. CMA CGM has been selling vessels at a discount to complete the reorganizing of $7 billion-worth of debt overseen by French court authorities, part of which involved Turkey’s Yildirim Group injecting $500 million into the company in exchange for shares.

Liner companies are generally considered too big to fail (TBTF) businesses. Should a major liner company go into bankruptcy, the fall-out would be substantial given that these companies charter about half their fleet from vessel provider companies like Danaos.

Alternatively, with a deepening recessionary environment, there are prospects of charter party renegotiation as occurs normally in shipping sectors like tankers and dry cargo. Theoretically, liner companies would have substantial negotiating power given the concentration of the industry and total dependence of vessel providers on them for employment.

Will the Maersk gambit succeed in gaining pricing power over the Asia-Europe head haul container route?


Whilst volume on the Asia-Europe container route is dropping off and competitors are struggling, Maersk is doubling up its efforts to dominate this trade in coming years by placing new building orders for large E class (15.000 TEU) and triple E class (18.000 TEU) ships. Maersk is highly dependent on its container division with almost 40% of its total volume carried coming from Asia-Europe trade. Its strategy is to benefit from better supply-demand fundamentals in late 2012 and into 2013.

Container shipping is increasingly a game of larger vessels with an emphasis on lowering slot costs. The one who has the lowest cost structure is able to garner higher volumes by out-pricing competition.

Maersk Line is the world’s largest container line. At the end of H1 2011 it controlled more than 600 vessels – 245 owned and 376 chartered container vessels – with a total capacity of 2.4m TEU. It also operates a major global port, terminal and inland services business – APM Terminals - operating a geographically diverse portfolio of 61 ports and terminals in 33 countries. It has 16 new terminal development or expansion projects underway and 132 inland services locations in 48 countries.

In the container shipping downturn of 2008-09, Maersk carried out a major restructuring drive in its container shipping division. The goal was to target more than $1 billion in cost savings to provide better operating efficiencies and minimize losses. Reduction and stabilization in unit cost is the key operating matrix in the container industry.

Maersk’s major competitors are Neptune Orient Lines (NOL), Hapag Lloyd and OOIL. Each has more than 7% of the greater than 12,000 TEU orderbook and stand to benefit as they are able to lower the slot costs and improve margins even if freight rates are just seen improving marginally. Maersk has the largest share at 13% whereas the each of competitors holds a 7% share. NOL, presently under pressure of earnings losses, is struggling with a very large capex budget and may be obliged to postpone some new buildings.

The second largest player, MSC, is more or less absent in the larger vessel category, which will help Maersk extend its lead further in coming years.

Hanjin Shipping, Hyundai Merchant Marine (HMM) and CMA CGM are highly leveraged. The two Korean line (Hanjin and HMM) have a gearing of three and two-times debt to equity, respectively. In Europe, the focus is on CMA CGM, which bond-market pundits expect to breach its debt covenants in the near future. It is undergoing considerable debt restructuring.

The long haul market will increasingly be dominated by fewer players with stronger standing and prowess, even in a depressed freight rate environment with very large containerships and low unit costs. The smaller peer operators do not have enough large vessels on order and will have to stick with smaller and less competitive tonnage or pull out of the trades completely.

Maersk Line is making an open gambit to gain the pre-eminent position on the Asia-Europe trade beginning in late 2012. It could out-price competitors and even potentially become a price setter on these trades.

Monday, November 28, 2011

Is Frontline headed for Chapter 11, following Genmar?


Frontline bills itself as the ‘world’s largest tanker company.” This is definitely not the place to be these days with tanker earnings barely covering operating expenses. After the General Maritime Chapter 11 filing, attention has turned to Frontline and its dismal Q3 results: a loss of $ 166.47 million. Frontline, however, is quite a different story that Genmar. The John Fredriksen shipping empire has far more resources than Peter Georgiopoulos.

Unlike General Maritime, Frontline has not yet run out of cash, but the odds of cash crunch in 2012 are substantial. Most market experts don’t expect a significant recovery until 2013. Platou Capital Markets projects accumulated capex totals of $451 million by the end of 2013 with only $147 million bank debt committed. The group is highly leveraged with term debt of $ 1.163 billion and capital lease obligations of $ 1.173 billion but total equity of only $ 557 million. Frontline’s fleet market value is just at par with the term debt and the trend is downwards on vessel values. Frontline’s operating losses in Q3 (net of substantial vessel impairment charges) were $14.4 million with an interest expense of US$ 32.5 million uncovered.

Ironically, the Frontline Suezmax vessels that created its asset impairment charges were ex-Top Ships vessels that Fredriksen had purchased just before the 2008 meltdown in mistaken hopes of an expanding market for this category of tanker. This transaction saved Top Ships from bankruptcy at the time. They were first generation double hull tankers without transversal bulkheads that raised controversial stability problems. Bulkheads are critical for tanker stability.

The Frontline fleet has a large number of older 1990’s-built tankers that are currently at scrap-level prices. Major oil companies have tightened their age criteria to ten years, creating pressure on these older units. This was reported to be one of the factors that led to the departure of Frontline from the TeeKay managed Gemini Suezmax tanker pool. Frontline and Nordic America had older units and they have now gone off to create a pool of their own.

Frontline Chairman John Fredriksen, nevertheless, has resources that he can bring in to restructure Frontline if he wishes. He remains the wealthiest man in Norway (although he has now taken Cypriot nationality for tax relief). Indeed his investment interest had been waning in the Frontline for a few years as he focuses on more profitable ventures like Golar LNG. The related downstream company Ship Finance International, which leases tonnage to Frontline, is invested in a variety of shipping sectors as well as off-shore drilling rigs.

Already Frontline is selling older vessels to raise cash. Like Eitzen, which was initially in trouble in 2009, Frontline is currently airing a number of alternative restructuring ideas. It is considering splitting the company by separating the trading fleet from the new building orderbook. There is also talk about renegotiating the lease payments to Ship Finance with lower payments now and larger payments in the future.

Generally, “Big John” seems relaxed about the situation. The market is counting on Fredriksen to come up with a creative solution to restructure the company.

Wednesday, November 23, 2011

General Maritime and Omega Navigation: Two very different approaches to Chapter 11


This week has seen substantial developments for both General Maritime, which recently filed for Chapter 11 reorganization, and Omega Navigation, which filed some months ago. The companies’ approaches are radically different.

General Maritime (Genmar) and Omega Navigation (Omega) have been ailing for some time. Both incorrectly believed growth would save them.

Omega was the smaller company. It had an expensive asset base and was caught during the 2008 meltdown with loan covenant violations. It tried to grow itself out of its problems with a joint venture with Glencore, but that did not work out. Management was not proactive in increasing outside capital and the company’s small size imposed constraints for institutional investors. As a means of dealing with its senior lenders, Omega took on more debt with second mortgages from NIB Capital and BTMU. This year Omega got into an impasse with the lenders and filed Chapter 11 as a shield.

Genmar was a larger and more mature company with access to capital markets. It entered into the market downturn in 2008 with somewhat high leverage (75%) and some loan covenant violations. It did an unsecured bond offering to improve liquidity. Ultimately, it chose a large block deal with Metrostar that enabled it to raise a substantial amount of capital in 2010 from investors at par without discount and obtain additional bank credit. Unfortunately, the timing and size of the transaction proved disastrous.

The two companies diverge substantially in their approach to restructuring and dealing with creditors. Omega chose to declare open war on its lenders with a dramatic trial alleging that its lenders broke agreements on restructuring. This seems dubious prima-facie, given the way banks normally work in these cases. Omega’s New York legal team seems no less bombastic with this week’s heated exchange between bank and company lawyers over alleged intimidation of Omega directors. Where Omega and their legal counsel seem absent so far is putting forth any coherent plan to reorganize, raise new capital or restructure its debt. In the meantime, Omega’s financial condition seems parlous and with heavy legal fees, consuming valuable company cash flow and mounting unpaid debt service increasing their already negative net worth. NIB Capital and BTMU risk losing their entire loan outstandings.

Genmar, by contrast, is focussed on working with its senior lenders. Earlier this year, Genmar secured an equity injection from Oaktree Capital, which organized a very professional debt restructuring as part of the deal. Genmar also sought to raise capital with a follow-on equity offering. Unfortunately, their operating losses grew and the increased interest costs from the restructuring put severe pressure on their liquidity. This week, Genmar entered Chapter 11 with agreements for additional support from both Oaktree and their lenders paving the way for reorganization. Unsecured bondholders, however, are in a nasty position, facing substantial losses. It will be interesting to see how these approaches fare in coming months. Omega would appear to have much to learn from Genmar.

Friday, November 4, 2011

Ship-owner refuge in Chapter 11 proceedings may prove a game-changer in bank foreclosure actions


Several high profile moves by beleaguered shipping companies dealing with their lenders by filing Chapter 11 proceedings in US courts may put shipping banks in a difficult position. In both the Marco Polo and Omega cases, the companies have succeeded to hold their senior lenders at bay. Faced with paying large professional fees that eat into depreciating equity on secured vessels already below loan outstandings puts banks in an extremely difficult position with few options.

If one goes by the book, Chapter 11 requires a company to file a credible plan for reorganization, failing that the lenders can move to Chapter 7 for dissolution of the company and disposal of the assets. The problem is that courts in this situation will give distressed owners considerable leeway and are ill equipped to assess the underlying economics. They regard the process as a means of pressing the parties to an amicable solution. In the meantime, the distressed company can finance the legal expenses from having ceased entirely loan payments. On the other side, the senior lenders are forced into high transaction costs in legal expenses.

One asks himself how US courts would have jurisdiction over these cases of foreign senior lenders and shipping companies with vessels under foreign flags on the high seas in the first place? To the shock of Credit Agricole and Royal Bank of Scotland (RBS) last week in the Marco Polo case, the US Court in New York retained jurisdiction, making Chapter 11 viable for international ship-owners even if they have minimal contacts in the US.

The New York law firm, Bracewell & Giuliani, as counsel for both the Omega and Marco Polo cases, have made a franchise in these actions. The US courts and legal profession have suddenly opened up a new bonanza.

Alternatively, the senior lenders could sell off their loans, but the market for distressed shipping debt has been very limited. Loans made under English law generally require ship-owner consent for any transfer of the debt to a party other than a shipping lender.

There are hedge funds and distressed asset investors, who have shown interest in bank portfolios, but at a steep discount. So banks and potential buyers are presently very far apart on price ideas. For distressed asset investors, English law on transfer of debt limits their ability to get control of the assets. Chapter 11 is now a new potential obstacle to this end as well.

Hedge funds increasingly have been scheduling sit downs with distressed owners offering to inject capital into the ailing company in return for an equity stake and a commitment by senior lenders to write down the loans by 10%. It is possible that this might offer a credible means for distressed shipping companies to recapitalize under Chapter 11 proceedings.

What needs to be clarified in the future is how effective US courts prove in facilitating company reorganization under Chapter 11 or they just prolong hopeless cases and make them worse by ‘pretend and extend’ and the US legal profession profits in the value destruction.

Challenges ahead for Greek Shipping


I recently had an opportunity to address the ICS 7th Annual Forum “Navigating through the Economic Storm – Setting a route in difficult time” in the questions and answers session and wish to share my thoughts on two major structural issues that could drastically reduce the competitive advantages the Greek market in years ahead, starving it of valuable human resources and entrepreneurial incubation.

Greek shipping faces two fundamental and interrelated challenges to competitiveness.

First, Greeks are no longer going to sea. The Greek government and the Greek shipping industry have been entirely indifferent to this and done nothing about it. The accession to the European Union and government policies that encouraged tourism in the islands with subsidies for rented room provided an alternative for Greeks, who normally would have chosen careers in the merchant marine. Social changes in Greece discouraged people from going to sea. Euro accession put Greek seaman at severe cost disadvantage for companies.

Greece once had numerous maritime academies, often in the islands. It also had many private marine schools in Piraeus. Today only one marine academy is still functioning at Aspropyrgos. All the private schools are closed. Greek families of marine tradition are now sending their children to US merchant marine schools for proper education that is not available in Greece. All this is very sad for a country that was one of the greatest seafaring nations in history.

30 years ago Greek ships due crew costs were cheaper on the average than peer Norwegian or Japanese operators. Now Greek companies use the same crewing resources as their peers. Far East and Indian crews with sometimes Russian or East European officers. Their costs are identical.

The Greek crews were a source of middle management for the Greek offices that gave them an unbeatable operational advantage as vessel providers with an indelible bond between the office and the vessel. Today, with fewer and fewer Greek seafarers, the labor pool for middle manager Port Captains and Port Engineers is drying up and is increasing elderly in age. Some Greek companies are beginning to use Indians from abroad, for example, in their headquarters, so why not management from Dubai or Singapore?

Second, Greek medium. small companies are now shut out of bank finance with the Greek banking system locked up in Greek sovereign debt crisis. Typically these companies have small fleets of older units, mainly bulk carriers. They buy elderly tonnage close to scrap-level, trade them a few years, building up net worth. They then roll over their fleets, buying somewhat newer units and selling the older units for scrap. Greek banks were specialists in this kind of lending with higher pricing and shorter tenor. These companies are too small for foreign bank finance and their vessels do not meet bank age criteria.

These companies are a critical entrepreneurial incubation crucible for a continuing renewal of Greek Shipping community. The best of crop become ultimately the Greek shipping powerhouses of the future. The offices are a major source of office employment in Greece. They contribute to the support of a large marine service industry in Greece.

Without the human resources of seafarers and the entrepreneurial incubation of new companies, the future of Greek shipping may well be in jeopardy. Shipping in Greece risks the danger of a mature industry that consolidates with a few major players, but a much smaller base than previously where Far East and other competitors become the growth area of the industry in the future.

Monday, October 31, 2011

Capital profit disappoints, so why is Evercore pushing this stock?


Since Jonathan Chappell moved to Evercore from JP Morgan, he has been touting the virtues of Capital Products Partners and the management of Evangelos Marinakis. Chappell even went so far as to replace Teekay Tankers in Evercore Partners' conviction buy list. Despite my high personal regard for Chappell as an analyst. I find this viewpoint to be misguided. Recent financial results seem to corroborate my reservations.

Stripping out all of the noise, Capital’s bottom line stood at US$ 1.7 million, well short of the US $6.6 million the market was expecting from vessel operations. Most of its profit was made up of an accounting gain on the takeover of Crude Carriers.

Capital’s CEO Evangelos Marinakis holds the conventional view that the products market is amongst the most attractive in shipping right now. The theory is that this class of vessel, especially MR (medium range) tankers, has less of an order book overhang and will see more demand growth from new refinery projects than the crude sector.

Not everyone shares this viewpoint. DvB Bank, a transportation specialist, warns that product tanker values could fall by a fifth if the European sovereign debt crisis negatively affects all global economic markets and creates a significant drop in demand to ship refined oil products. DvB expects product tanker fleet utilization to remain less than 90% until 2013. Platou Markets - who normally have a fairly positive bias - also do not see relief in tanker markets until 2013. Recent large losses of TORM, an established top tier product tanker operator are ominous for this sector.

What confounds me is why Chappell sees Capital in a more favorable light than methodical players like TeeKay or Scorpio which both have greater depth of management? Compared to these peers, Capital is a relative newcomer without much intrinsic value. It was only last year that Capital began its foray as a listed pure play product tanker company.

By contrast, TeeKay has a proven track record and has made every effort to build intrinsic value in its business. It has a strong presence in higher margin niche businesses like shuttle tankers and LNP and in its cargo book operations where it has built up tanker pools. Scorpio invested in an exceptional chartering brokerage team as well some ex-OMI senior management. It also built a cargo book before entering into capital markets to acquire tonnage.

Marinakis has been more of a Greek wheeler and dealer with his Olympiakos football team involvement. I do not see the same management depth at Capital. Does it belong in the same league as the above mentioned peers? Marinakis tends to be very mercurial in his decisions. After launching his pure product tanker play, he then used company funds to buy a bulk carrier that he chartered to Cosco. A year later, he decided to merge his crude tanker listing into this venture, adding VLCC’s and Aframaxes with significant spot exposure.

Although Chappell is cautious in his market projections in both dry and tanker sectors, there seems some irrational exuberance in betting on Capital over other peer companies with more solid management.

Tuesday, October 25, 2011

Major Chemical Tanker Operators continue to expand in liquid storage with new acquisitions and innovative financial partnerships


Both Stolt Tankers and Odfjell AS continue to leverage their considerable franchise in chemical transportation expanding in the chemical storage business. Both have a chemical logistics operation with sizeable cargo books. They control a major share of the chemical transport market. Liquid storage is a healthy growing business with good return on asset and attractive risk profile. This diversification enhances bottom line results, provides increased earnings stability and gives them competitive edge over peer competitors.

The chemical sector is traditionally a very low margin business with high operating costs and asset values, suffering from poor returns on investment. These companies have created a valuable franchise in chemical transportation, but they need earnings stability and improved returns on investment for their investors.

They have built up a global presence in chemical storage facilities that assists in meeting these goals. Sometimes, they have gone into new facilities alone like the recent Stolt acquisition of Den Hartogh Holdings bulk-liquid storage terminal in the Netherlands, other times in partnership with peer storage operators like VOPAK, Oiltanking and Vitol in select locations.

Odfjell chose a novel approach to finance the expansion of their terminal business in Europe and North America: a strategic partnership with Lindsay Goldberg LLC, a U.S.-based private equity firm. This firm has been involved in chemical projects in the past with their holdings in PL Propylene LLC (an evolution of an earlier Lindsay Goldberg sponsored venture, PetroLogistics). PL Propylene is now constructing the largest propane dehydrogenation plant in the world to service Gulf Coast propylene consumers. Lindsay Goldberg first entered the PetroLogistics venture by supporting their purchase of an ethylene pipeline.

It will be interested to see how the Odfjell-Lindsay Goldberg partnership evolves in the liquid chemical storage business.


Thursday, October 6, 2011

Eagle Bulk once a Wall Street darling now facing forced sales


At the outside of the 2008 meltdown, Eagle Bulk with its emphasis in handymax tonnage was considered one of the safest bets of shipping stocks. Sophocles Zoullas was well-regarded in NY financial circles. Kelso, who originally banked the venture, had made very good money. Yet the business model had flaws and this is now coming to light.

Eagle Bulk concentrated on supramaxes, where there has been excessive ordering. The smaller vessels in handy sector with more flexibility in port access and variety of cargoes are outperforming.

It was a start-up company with little initial intrinsic value. It has been heavily dependent on charterer counter parties for fleet employment. Only recently has it been developing a commercial department for a contract base. Eagle has always been very secretive about its management, vessels and employment compared to peer companies. Early this year Eagle received considerable adverse publicity when it was discovered the company had significant exposure to Korean Lines, a major charterer who went bust, declaring reorganization.

Shipping is a capital and labor-intensive business with basically low returns on asset. The historical benchmark has been between 10-15% with leveraging. The challenge is how to bring this up to acceptable levels for investors, who are looking for 20-30%. Since shipping is a cyclical business, this can be done in part with timely investment and divestment decisions.

Capital cost is very important. These dry bulk issues, however, were structured with generous dividend payouts, precluding significant reinvestment of free cash flow. New business had to be financed by costly new equity raises. Eagle had few options but a large block purchase strategy to scale up and claim accretitive returns on multiples from a rapidly growing fleet.

The company chose to buy the business from another owner who had ordered a large block of vessels and wanted to resell them at a considerable premium for profit. The expectations from the transaction propelled Eagle’s share price to new highs. This was very good for Kelso, the private equity firm, which sold off shares in timely fashion; but not very good value for investors who bought into low margin business with marginal returns on residual value.

When conditions changed from fall 2008, Eagle had a high cost asset base and too much debt. This precluded any bargain hunting for vessels at lower prices. They put their efforts trying to rearrange and rationalize their order book, where they were over exposed. They had the financial capacity to do new business only through a joint venture through Kelso.

Eagle has a high break-even for its vessels due mainly to very high administrative expenses and interest cost. Executive compensation has been lavish over the years. Despite this, the Group managed to stay in the black until recently. The bad market conditions this year have depressed asset values leading to loan covenant violations. At present, their net worth is close to negative. Presumably the pressure from lenders is to encourage timely recapitalization or asset sales to reduce debt. Oaktree recently bought a small share. Eagle has got a long and risky road ahead of them for recovery.

General Maritime close to filing for Chapter 11 for reorganization

For some time now Genmar has been an ailing company, suffering over indebtedness, high interest expense and cash flow problems with a large portion of its fleet without contract coverage and dependent on a weakening tanker market. The issue now is what stand its distressed asset private equity investor, Oaktree Capital, will take in this situation. Will they eventually take full control of the company, seek fresh management to recapitalize like they did with Beluga? Meanwhile, unsecured bondholders are in a parlous situation.

The Group was not well positioned for the 2008 meltdown. It had just absorbed Arlington Tankers, acquiring some attractive assets but at a high price and it was already carrying too much debt. When the window opened in early 2010 on Wall Street for seasoned equity, Peter Georgiopoulos gambled on a large block tanker acquisition deal from Metrostar.

The proved a bad timing decision and a misread of the tanker markets. Georgiopoulos paid a premium for the vessels over the market, but thereafter tanker rates started to plummet, triggering loan covenant violations and even compromising liquidity. Investors, who had bought into Genmar’s deal in the capital raise without discount, have literally lost their shirt with a penny stock today.

Genmar is hemorrhaging with a second quarter net loss of US$ 24 mio lifting losses for the first half to more than US$ 55 mio with time charter cover for the second half of the year falling to 42%. The “too big to fail firm” is funded through two bank facilities totaling US$ 850 mio at Libor plus 400 basis points and two bonds totaling US$ 500 mio with minimum interest rates of 12%. This does not even include the heavy cost of the US$ 200 mio Oaktree facility on top that is being capitalized. Interest costs were seven times higher than the firm’s earnings before interest, taxes, depreciation, and amortization for 2012!!!

Needless to say, Moody’s rating agency cut Genmar's rating three notches to Caa3 with a negative outlook.

Genmar has a young and attractive asset base. If “marked to market” and recapitalized, this would make an attractive investment with a position on eventual improvement in the tanker market. Currently tanker market dynamics suffer from an excessive order book overhang with three new deliveries for every ten existing units. The main demand driver is Asia emerging markets, but there are also adverse structural changes in the US because of increasing use of domestic tar sand and shale gas resources for energy needs as well as ethanol in gasoline blending. It more likely than not another year of miserable rates before a possible recovery in 2013.

It seems difficult to foresee how Genmar will survive in its present form. Oaktree is an experienced distressed asset investor. They might well be better off running their own show with fresh management of their choosing for better value creation and strategy than the past. On the other hand, bondholders may be in for a very big potential ‘haircut” under Chapter 11 proceedings. The bond payments are not sustainable and they’re sucking up value.

To his credit, Peter Georgiopoulos, who secured a stake in a limited partnership related to the Oaktree investment, will assign his interest in the vehicle to Genmar.

Greece should default and restructure but the EU prefers a debt prison and the Greeks suffer Stockholm Syndrome


It is pretty obvious that Greece is insolvent, the EU/ IMF bailouts are increasing debt and the fiscal imbalances are deteriorating with the austerity measures that are pulling the country into a deep depression. The shrinking GDP reduces capacity to repay debt, so why these self-destructive policies and Greek government capitulation?

Rationally the Greek government would have long ago followed the road of Iceland, defaulted, abandoned the Euro and restructured its public debt in drachma. This would have facilitated necessary structural changes by creating favorable economic conditions for a recovery so everyone in Greece would have something to gain in rationalizing the public sector and opening up closed professions. This process would require reasonably five to ten years.

External devaluation is far less socially destabilizing than horizontal wage cuts and bilking pensioners, which is the infernal EU/ IMF remedy of ‘internal’ devaluation. The new currency would remove the vicious circle of the Euro and EU monetary policies that benefit the Core by undervaluation and gut the Periphery economies by bloating their trade balances.

What is unique to the Eurozone is that it employs deliberately deflation as a means of becoming 'competitive', considering flexible exchange rates as démodé. Conventional currency devaluation makes foreign imports more expensive, but local goods with high domestic content remain at same prices. Nobody has a direct salary cut, etc. It can be done overnight and immediately, there are results. It fosters domestic production and exports.

Admittedly devaluations do not address underlying structural problems, but they buy time for correction without undue social disruption. The EU system of 'internal' devaluation creates immediate social disruption, but actual improvement in competitiveness may take years. An insolvent member with a high debt load may collapse in the process.

Greece has a disproportionately large number of self-employed people. These people like their counterparts abroad tend to hold on to their income and under report for taxes. Choking these people to death economically not only destroys the heart of the Greek economy, but also Greek social fabric. Whatever income squeezed out of them is lost from other taxes like VAT in the deflationary spiral. Today these hapless Greeks face a similar fate of the Kulaks in Stalin’s farm collectivization.

The Eurozone has grave structural problems making it very unattractive for its members. Unlike the United States and England whose central banks were founded to facilitate the government debt, the European Central Bank serves the commercial banks, making government dependent on them for their debt operations. Basic criteria of statehood are the powers to create money, levy taxes, and declare war. Written by EU bank lobbyists, Europe’s constitution deprives Eurozone members of the money-creating function.

The locked up currency parities led to huge trade imbalances between the Core and Periphery, bankrupting a large part of the Periphery. The EZ economy is shrinking, and its own commercial banks are close to insolvency thanks to these foolish EU policies. This is creating a horrible train wreck. Even the US is heavily involved through the derivatives markets that cover sovereign default risk to backstop these weak EU banks.

The EU has been bailing out Greece to cover their commercial banks as a policy response to buy time for an elusive recovery. This also gets the US investment banks off the hook for the derivative default risk. The IMF/ EU/ ECB will eventually become the sole creditor buying out all the commercial bank debt.

The dilemma is that they will be holding worthless paper of countries that are totally barren economic landscape and perhaps even failed states from social disintegration. This why Victorian debt prisons were eventually abolished. History repeated is often a farce!

Lessons learned from this:

1.) Eurozone membership comes at significant social costs: less economic and political freedom for its members.

2.) Permanently lower living standards at least for the EZ periphery countries.

Generally the whole EU system suffers from chronically high unemployment and economic stagnation from the sovereign debt overhang that it generates. It is one of the worst performing regions of the world. It cannot compete either with the Far East nor the US.

Saturday, September 24, 2011

Cosco losses could lead to charter renegotiation in the containership sector


Macquarie Capital analyst, Janet Lewis, predicts that Cosco might continue in losses for two years or more. Cosco’s container wing, which was also loss-making in the first half, is set to take delivery of 28 new vessels in the near future. Will Cosco follow suit with containership owners to renegotiate down charter rates as they have done in the dry bulk sector?

There is considerable evidence that financial results in the containership sector are weakening this year. After the restocking boom last year in fight for market share, Maersk (OMX: MAERSKB) announced aggressive new building program for ever larger containership vessels in their on-going efforts to expand market share at the expense of peer companies.

Seaspan (NYSE: SSW), which has a pure vessel provider model and investor darling, followed suit with a new building program of their own. This group held on to all their new building contracts booked prior the 2008 meltdown, managed to cover their capex needs and take delivery. They turned heavily to Cosco (Coscon) and CSCL for employment. Seaspan is inordinately dependent on Cosco as their largest liner company customer relationship (in the order of 50% or more of their fleet from recent investor presentations).

Should Cosco be obliged to refuse delivery of new units or renegotiate existing time charter for lower rates, this would have a profound effect on Seaspan’s fortunes as well as other containership companies, who service their needs.

Seaspan shares have been falling in value since April. They have never fully recovered in share value from their pre-2008 levels.

Saturday, September 10, 2011

Omega Navigation appears to be insolvent


Omega Navigation senior lender HSH Nordbank filed a petition to dismiss Chapter 11 reorganization proceedings or convert them to a Chapter 7 liquidation. With his back to the wall, Omega CEO and major shareholder George Kassiotis has launched offensive lawsuits in Greece claiming bad faith by his lenders. Simple math indicates that his company is insolvent with negative net worth. This legal fight makes any recapitalization hope Omega had look very unlikely.

HSH Nordbank obtained an Omega fleet valuation from CW Kellock at $ 239 million for their court filing. From recent sale reports, I would charitably value Omega’s eight mortgaged units (six LR - Long Range product tankers built in the mid-2000’s and 2 MR -Medium Range) product carriers built in 2006) at US $270 million maximum. This still does not cover Nordbank’s total outstanding loan of $ 278.7 million. (HSH is owed US$ 242,7 mio plus another US$ 36 mio owed to NIBC Bank and Bank of Tokyo as 2nd mortgagees).

The debt dynamics look poor. Omega has not been servicing its debt as interest payments and legal expenses are mounting. The mounting interest liabilities are eating into Omega’s weak net worth.

There is no cushion for inevitable transaction expenses that would reduce the realized value. There are the imponderables of trade debt, unpaid crew wages and maintenance level of the vessels. Second mortgage lenders like NIBC Bank are in a precarious position.

Omega has been clamping down on financial information since their dispute with lenders, which is not helpful to their investors. Yet Omega was profitable in 2009 and declared dividends, so it is hard to understand exactly how relations broke down with their lenders.

We would guess that HSH Nordbank pressed for additional equity, but George Kassiotis, out of personal resources after his previous cash infusion, decided to balk. Presumably he was unable to inspire private equity or distressed asset investors like Oaktree or unwilling to accept their (Oaktree) conditions for participation, provided that he explored alternatives for recapitalization.

Omega is hoping to raise an additional US$ 30 million from the sale of the remaining share of the Megacore joint venture with Glencore. The senior lenders are contesting alleged diversion of funds from their cash flow to fund this project. They do not feel the amount is sufficient to secure their debt and turn the company around.

It is difficult to see at this point how the parties are going to come together. After the lawsuits, the senior lenders would likely not wish to support and work with Mr. Kassiotis any further. It seems unlikely that a private equity firm like Oaktree would be willing to step in to offer substantial recapitalization plus oversight of Mr. Kassiotis management, but that seems to me the only way that might allow an orderly reorganization.

Friday, September 2, 2011

Greece and its political oligarchs: shooting the messenger....


Today marked a mini crisis where the newly-formed Greek fiscal council warned a high primary deficit and the deep recession have boosted to the extreme the debt dynamic, now "out of control”, offsetting the impact of the first €159 bn bailout loan. Finance minister Evangelos Venizelos said the report lacked validity of equivalent international reports, resulting in the resignation of Ms. Stella Balfousia, head of the Budget Office. Welcome to Greece, land of political oligarchs and the wonders of Socialist Democracy!

Unfortunately, the political restoration in 1974 sowed the seeds of the present Greek debt crisis and national bankruptcy. Institutionally instead of a sound democracy, an ugly, rapacious political oligarchy was created that was based on crony state corporatism financed by EU transfer money and loans. The main driver was the Pan-Hellenic Socialist Party (PASOK), which gained power in 1981 and started ‘socializing’ lame duck Greek companies. These companies had become lame ducks because of the inelastic labor laws and heavy state bureaucracy preventing them from restructuring during the late 1970’s, as the economic climate deteriorated under pressure of the rising Greek Socialists. The Socialists adopted a policy of expanded entitlements and maintained employment by taking over these companies financed by deficits and public debt.

Politics in Greece became a family name franchise to make money based on relations with the Greek State. Unsuccessful party candidates became senior management in state-controlled companies. State procurement went to favored Party customers. The state corporations generally lost ever greater sums of money, but they were given state guarantees to ensure further private bank lending - a major factor in Greek over-indebtedness. Even EU privatization became a party picnic where the Socialists maintained state control of many of these entities through public pension funds and state-controlled entities. Some say state entities were even used to buy the shares and pump up the prices in rampant insider trading deals. Much of the private economy is based on business with the public sector or granting of concessions that are in effect monopolies.

Consequently politics in Greece became a highly lucrative career path leading to substantial personal wealth. Some of the most coveted positions are in Brussels in senior political positions as well as key state ministries like Defense, Education and Telecommunications and Transport. Major party members evolved into a sort of ‘landed’ aristocracy with these positions as their ‘domains’. Today, the key party members of the Greek political elite are all very wealthy, living in large walled enclaves. Party “barons” have built large manor houses like this photo on various Greek islands sometimes with private beaches. Two-thirds of the Greek police serve as their guards.

They enjoy lavish jet-set life style and revel in Yuppyish behavior. Their world is increasingly distant from the average Greek, whom they tend to see more and more as their serfs not hesitating ever higher levels of taxation in hopes of maintaining their privileges. They largely see the IMF/ EU loan money as a means of preserving their financial, social and political status as the expense of the general Greek population. How can anyone protest, since they are elected officials and above all Socialists…..

Greece is a country where the keys to political power are tightly under lock except to a privileged few. The Greek political elite have done everything possible to consolidate their power. Institutional controls are virtually non-existent. Greek Deputies enjoy Parliamentary immunity from even common traffic tickets. The Greek Presidency is solely symbolic. The President is obliged to sign whatever is put before him without personal responsibility, even if the document has forged signatures or dubious legality. Elections are at the sole discretion of the Prime Minister for any reason whatsoever. The political party in power has an absolute parliamentary majority and routinely rubber stamps any legislation at the discretion of the party leaders. There is no separation of powers in Greece. The government generates nearly all the legislation. The judiciary risk their careers and promotion should they dare overturn any government laws.

Not surprisingly there are no institutional spending controls in Greece on public deficits and national debt. Greek politicians have always had a complete carte blanche to borrow and spend as they see fit. The problem with this system is that it has created unsustainable deficits and debt levels. The size of the public sector is too large for the private sector tax base to support. This process has driven underground a significant portion of the Greek economy. Taxation in Greece is largely retrogressive and arbitrary based on how much the State deems one’s income by the size of house, make and model of car, etc. VAT rates are extremely high. Likewise fuel tax, etc.

Thus, we have the spectacle today of the dismal report above that they reject, shooting the messenger….




Monday, August 22, 2011

Are shipping markets heading for another leg down?


Recently private equity group First Reserve bankrolled the Diamond S deal in which 30 product tankers were acquired from ship management company CIDO at a significant premium over prevailing market levels. This speculative spirit reminds me of the General Maritime block deal last year. Similar lust for quick profits of shipping in the early 1980’s led to ill-timed, mispriced major investment decisions and a series of major shipping bankruptcies, and period of severe market disruption. Will the Chinese Eldorado and Fed financial engineering save the day for Wall Street flip-over deals or are we at the end of the 1980’s economic cycle and age of asset inflation?

The major growth driver for cargo demand has been emerging market economies. This year started badly and all sectors are presently suffering. There has been lately some interest in containership and product tanker asset speculation. The only sector really making money is LNG where there is a healthy supply/ demand gap.

Despite the dicey economic environment, the shipping industry staged an unexpected recovery in 2009 and 2010. Dry Bulk benefitted heavily from Chinese stimulus infrastructure projects and commodities stockpiling. Tankers benefitted by oil price arbitraging and storage demand. The container sector managed to reflate demand artificially by slow steaming and then benefitted from a pick-up in Chinese exports.

There is nothing ‘miraculous’ or unique about the Chinese growth model. Well-known China observers like former Morgan Stanley star Andy Xie and political economist Victor Shih at Northwestern University have long maintained that the Chinese growth model is an input driven economy fuelled by cheap money through financial repression to increasingly marginal investments subject to diminishing returns.

Everybody is banking on opportunities of a giant boundless consumer market in China, but as Michael Pettis (senior associate in the Carnegie Asia Program, based in Beijing) has recently written: “Low consumption levels are not an accidental coincidence. They are fundamental to the growth model, and the suppression of consumption is a consequence of the very policies – low wage growth relative to productivity growth, an undervalued currency and, above all, artificially low interest rates – that have generated the furious GDP growth. You cannot change the former without giving up the latter.”

China funds almost all of its major investments with bank debt. It long ago ran out of obvious investments that are economically viable, so any marginal increases in investment must be matched by increases in debt, resulting in an unsustainable debt overhang. Meanwhile, with the US economy at stall speed and the EU imploding into recession, Chinese trade surpluses are no longer desirable with its trading partners.

Rebalancing is not an option for China and it is likely to be very disruptive and for a prolonged period of time. All historical precedents are for a sharp down downturn in economic growth. The decline in Chinese growth will fall disproportionately on investment and this will severely impact the price of non-food commodities.

A sharp Chinese slowdown will have a severe impact on cargo demand and freight rates. The drop in steel consumption from the infrastructure projects will adversely impact the economics of emerging market exporters of raw materials. Liquidity will start to dry up in all emerging market economies. Finally, decline in steel prices will adversely affected vessel values. Scrap prices will fall and replacement cost for new vessels will decline. Vessel prices could drop dramatically.

All shipping sectors will suffer. A recession in the EU and US will quash any increase in demand in the products markets. Emerging markets will not pick up the slack. The larger bulk carriers are very exposed with dependency on China and its steel industry. Container overcapacity will again plague the industry. Recent speculative Greek issues like Boxships and Diana containerships riding on hopes of increased demand for feeder services will fizzle as liner companies reduce their chartered fleet. The most painful aspect will be the drop in vessel values.

In such a scenario, it may take years before any recovery, totally changing speculative business plans and discounted cash flows where time is the biggest enemy to profitability. The nightmare of any short-term player is to be stuck with a losing proposition as a long-term investor. In many cases, the best option is to liquidate in timely fashion not to ride the market down to the bottom. That will be difficult with such a large positions. Maybe this is already being reflected in the recent pressure on shipping shares, even large well-capitalized tanker companies like OSG and TeeKay.

On the other hand, depressed market conditions would facilitate industry consolidation and clean-up of over-leveraged, deadwood companies with failed management. Since the 2008 meltdown, there is a growing list of zombie shipping companies swimming in debt and heavy consumers of lease financing at any cost. This would benefit the financially solid long term players and eventually give them better market pricing power. Lower vessel prices would make the industry leaner and more competitive.

Of course, nobody is a prophet. Next year, we could have a booming shipping markets, a new vessel ordering boom, and the Dow back over 12.000…. Imagine DryShips again trading over US$ 100 per share! George Economou has been a leading advocate of the Chinese unlimited growth story.

Wednesday, August 17, 2011

Diamond S. a new business model for shipping?


The Diamond S deal with Cido for a US$ 1 bn block purchase of product tankers has been the talk of the town, especially with the involvement of 'King of Bankruptcy' Wilbur Ross who has decided to enter shipping and bankroll a large portion of this project. From the feel of this venture backed by private equity First Reserve and Ross, it seems more likely to be a flipover asset play rather than an effort to create a long-term shipping business like TeeKay with intrinsic value.

The venture starts with some very positive factors. Craig Stevenson is a successful, proven CEO in the shipping sector with an enviable track record. First Reserve successfully backed the Corbin Robertson venture Quintana, which was sold at a very timely moment to Excel Maritime (who has been struggling under the asset impairment and weight of the purchase debt leverage ever since).

The CIDO assets are young and come with period employment said to be on the average 5-years. The project is well capitalized with US$ 600 mio equity and US$ 400 bank debt. If the market takes a further leg down, they can withstand the drop in asset values on their existing fleet and they have ample reserves to purchase additional assets at lower values. If the market starts to improve, they will reap the benefits of higher asset values so that they can float an IPO at a premium for First Reserve to exit with some profits for the risks and lighten up on its holding.

Craig Stevenson sold OMI and lost his key people for which he is now busily trying to rehire. It is unlikely that he is going to have any trouble in building a new shipping organization.

Stevenson openly states that he means to keep the product carriers on period charter for secured income and will put his larger Suezmax newbuilding to the spot market to take advantage of spot market volatility.

The only case where this venture could disappoint is with a double dip recession that delays significantly the timing of a market recovery. The premium paid on the Cido assets will begin to seem a liability and the investors will face time and opportunity losses on their position unable to liquidate according to plan. Flipping the business over for a quick profit would start to feel illusory.  They might find themselves as long term investors that they had not anticipated.

It is still far too early to tell how this venture will fare. Personally, I am not sure that asset speculation and quick flip-over deals are good for the long term health of the shipping industry. In the past, this has led to chronic overcapacity and low rates. The companies that purchase the marked up assets usually have problems unless the timing of the deal is very early in the cycle so that they can ride a further leg up.

NewLead in forced asset sales


NewLead is reported to be offloading the 135,000-dwt Newlead Spartounta (built 1989) and the 34,700-dwt Newlead Prosperity (built 2003) after breaching a loan with FBB-First Business Bank. They recently hired the Moelis & Company and Fried, Frank, Harris, Shriver & Jacobson to help it fight its debts, which stand at US$ 581.9 mio. The bad news adds to an ever longer list of struggling shipping companies: TBSI, Omega, Top Ships, Zachello, etc. selling assets or fighting with their creditors.

Initially I was not a fan of the GrandUnion - Aries merger, posing a number of questions. Thereafter, I felt sympathy to the efforts of Michael Zolotas to clean up the mess at Aries and make a turnaround in NewLead.

The basic issue is that Aries was always a big lemon. I pleaded with Stephanie Kasselakis and John Sinders at the time of this controversial IPO and offered in good faith to assist Jefferies. The facts are that their investors got badly burned from this IPO and now the successor NewLead is in jeopardy. I always felt strongly that this could have been avoided.

Looking back at the time of the GrandUnion merger, really no one else would have accepted to take on Aries. Certainly not Scorpio Tankers, which is healthy company with conservative management, who forthrightly warned investors last fall of coming tanker market turbulence.

Aries suffered from horrible technical management, lousy assets and overleverage. GrandUnion was not a strong company in terms of its ability to recapitalize Aries from its losses. They financed the merger with drop down assets and more debt. They made a valiant effort to shed bad assets, clean up the technical management and restructure, but the losses continued. They had no advantages of capital market access to dilute with additional equity or to refinance existing debt with a bond issue, but all the administrative and reporting overheads.

When the dry cargo market started to collapse this year, they were badly exposed with their elderly Capesize tonnage and high debt levels. Their current debt load is crushing. Senior lenders are forcing sales to reduce debt.

It seems to me that NewLead is going to face a difficult fight for survival. The issue for them is to save as much as they can of the GrandUnion resources put into this merger. The risk of two weak companies merging is that this drives both of them to oblivion.







Wednesday, August 3, 2011

Does the CIDO deal mean tanker values are on the upside?


Jonathan Chappell argues that Craig Stevenson's massive US$ 1 bn product tanker acquisition deal to purchase the 30-vessel CIDO fleet is good news for tanker asset values. He estimates a US$ 40 mio price tag per vessel up from his previous US$ 36-37 mio valuation for a three year old tanker. He believes that supply and demand will improve in this sector this year and in 2012 seeing this a 'smart money' deal. I am more skeptical.

We saw last year Peter Georgiopoulos's block tanker acquisition deal with Metrostar at premium prices and how bad timing resulted in drastic fall in the Genmar share price and a dramatic capital injection/ loan restructuring with Oaktree.

The Cido fleet had been up for sale for some time. CIDO has been steadily shedding off assets for months. There were numerous rumored suitors for this deal including Navios. Stevenson's company Diamond S. Shipping was the highest bidder and fixed the vessels at a premium price. Whether this is really a good deal depends on future events.

Until now, Diamond S had no ships in the water. Diamond S currently has eight 158,000-dwt tankers and two 105,000-dwt product carriers on order from yards in South Korea for delivery between next year and in 2012. His ex-OMI senior management - Robert Bugbee and Cameron Mackey - moved to Scorpio. The Cido acquisitions is a transformatory development making it a functional ship owning company that operates 30 tankers.

Scorpio by contrast is not a company that would bet on such a big move. Emmanuele Lauro first built up a cargo operation and then started scaling up incrementally. Craig Stevenson is buying assets before building his commercial or technical management capability.

Presently things in the product tanker market are bad. The transatlantic market is flat and east of Suez is slow. Big ships are in dire straights. Earning margins are poor. Operating expenses are high. Bunkers are capping any returns potential. There is very limited free cash flow to pay debt and dividends.

The product tanker story revolves on new refinery capacity coming on stream in Asia and the Middle East to catalyze CPP exports and boost ton-mile for product tankers. But the timing of this development is dependent on when a major pick-up in demand is seen for gasoline/diesel in the West, combined with the movement in CPP inventories in the latter region. For 2011, distance-adjusted demand is expected to advance 6% and the product tanker fleet is expected to grow by 5%. Rates may not improve meaningfully until 2012 and even 2013.

Whilst there is a positive general consensus on the product tanker market as a good long-term investment, such a notion could change dramatically if the fundamental outlook changes (through macroeconomic disappointments, structural changes in the industry etc).

Tuesday, July 26, 2011

Omega in bankruptcy: Test case for other weak listed shipping companies


Omega Navigation (NASDAQ: ONAV) is a product tanker play with fleet of 12 vessels plus a joint venture with Glencore (LSE: GLEN) .  Most of its fleet on time charter to Glencore.  The fleet is divided between MR and LR 1 units all built in Korea.  The company only had really one good year in 2007.  It was hard hit by the 2008 meltdown.  It had been filing for delays in publishing accounts, but known to be in protracted debt restructuring and suffering from high leverage.

Since this was a vessel provider business model with a relatively small fleet, it was dependent mainly on fleet growth and favorable market conditions to generate profit and value for shareholders. It has one very large customer, Glencore. It remains to be seen what will happen to the Glencore joint venture companies, which have not been included in the Chapter 11 reorganization filings.

Omega entered the product tanker market in boom market conditions, acquiring assets at high prices with leverage. Its CEO Kassiotis had been  commercial director of Target Marine S.A.  He tried to lock in some benefits of the firm charter rates, but its 2009 accounts show a significant drop in time charter equivalent earnings. Further its capital gearing on book value was already over 70%.

Omega's main senior lender in 2008 was HSH Nord-bank of Germany. Apparently HSH Nord-bank intervened early in the game when cashflow problems first emerged. Omega under pressure reworked its credit facility and prepaid principal owed under the main facility with a second-lien infusion of US$ 42.5 mio from new lenders NIBC Bank of Holland and Japan’s Bank of Tokyo-Mitsubishi NFT. Perhaps they were enticed by the fact that this was a public company, the asset quality and the charters; but second lien lending is a highly risky business. Also, this undoubtedly led to a significant increase in financial expense for the service.

Normally, for Omega to get a second mortgage for NIBC and Bank of Tokyo-Mitsubishi, HSH Nord-bank would require that these institutions sign a subordination agreement, preventing them from taking any action without HSH consent. Meanwhile there is no evidence that Omega tried to sell units to pay down debt. In their September 2010 investor presentation, it claims financing is in place to fund capex commitments.

Omega was too small to benefit with ATM follow on offerings to increase capital. They had to means to take advantage of the downturn in tanker values so they tried to team up with Glencore in a joint venture for this purpose. At this point in Chapter 11, they lack resources and the future of the Glencore joint venture is in question.

No doubt with such attractive assets, other product tanker companies would be interested to purchase them at present market values, but George Kassiotis is hoping to survive under Chapter 11 and keep control of this operation.

TBSI: a dry parcel liner service beleaguered by losses and financial problems


TBSI (NASDAQ: TBSI) has recently been under pressure with operating losses of US$ 16,7 the first quarter this year and senior lender pressure to increase capital by US$ 10 mio coming. When TBSI went public through Jefferies under John Sind`ers in 2005, its chequered history of its 2000 Chapter 11 reorganization surfaced. The company operates a parcel liner service with a large number of tween deckers and heavy presence in Latin American ports, an unusual trade largely superseded by container vessels.

TBS focuses on multipurpose tweendeckers and smaller dry bulk carriers varying from 17,300 dwt to 45,500 dwt that are able to navigate and efficiently service many ports with restrictions on the size of vessels. It has attempted to create niche markets  focusing on trade routes, ports and cargo that cannot be efficiently served by container and large dry bulk vessel operators. It offers regularly-scheduled sailings along with local teams of commercial agents and port captains who meet regularly with customers to tailor solutions to their logistics needs.

TBS CEO Joseph Royce has a ship brokerage background. He then served as President of COTCO, a dry cargo pool of over 45 vessels before founding TBS in 1993.

Having this parcel liner service means fixed costs and bunker exposure that most dry cargo operators do not carry. Whilst break bulk is a higher cost service than inter-model container feeder competitors, TBS tries to focus on cargo with special handling needs and personalized service. The company also has some handysized bulk carriers in their fleet. They appear to have some of their tonnage (approximately 25%) on time charter, which adds to earnings stability.

Clearly. they have suffering lately from lower freight rates and higher bunker expenses albeit their cargo volume increased slightly over last year. Another problem is the heavy off-hire and repair expenses for the ageing 1980's built tween decker fleet with a need to drydock 17 vessels, requiring about 546 days out of service. Tween deckers today are largely vintage tonnage no longer built. TBS has ordered a new series of Dwt 34.000 tween-deckers for fleet renewal.

Although TBS debt to book value ratio is not high, they have been having serious problems paying their debt and in protracted loan default/ restructuring discussions. Lenders have demanded a US$ 10 mio increase of capital to which Mr. Royce has paid in US$ 7,58 mio of his own funds. They are also planning a rights offering to increase capital. Their financial expense has soared to US$ 8,7 mio in 2011  from US$ 5,5 mio last year aggravating losses.

A major New York investment house is forecasting that the dry cargo sector with its substantial order book overhang will be the slowest to recover. On the other hand, smaller handy size units have been outperforming the larger Capesize and Panamax units in current market conditions.

Tuesday, July 5, 2011

Greek economic crisis in a nutshell


The Greek crisis is a toxic mixture of politics and economics. The show case Eurozone project is in jeopardy by the looming sovereign default of one of their members.

Greece made a Faustian Pact with the European Union that allowed its political elite to freeload the system, using EU transfer money and cheap credit for local political patronage rather than building a sound goods and services economy.

The Euro destabilized the balance of payments. Local production waned and imports soared. Price inflation led to pressure for wage increases. Greece lost competitiveness. Public debt mushroomed to finance never ending public sector deficits. For many years the EU blinked.

The EU elite fearful of the Lehman precedent and protective of their scandalously undercapitalized banking system have chosen a contradictory approach of debt bailouts to cover creditors by musical chairs and wage and price deflation austerity.

The Devil is now seeking its due. Greece is locked into an ever growing debtor's prison with a shrinking GDP causing its tax base to implode and a rising mountain of debt that is currently 140% GDP shortly to rise to 170% with the next bailout loan on the pyramid. Unemployment is skyrocketing, shops and businesses are closing. The government cracks the whip cursing its own people every time its unrealistic tax revenue projections fall short, creating ever more draconian penalties for tax evasion. This climate seeds an increasing flight of capital and lack of investor confidence.

EU policies are terrorizing periphery countries with deep recessions and mounting unemployment, creating disorderly default risk from rising social unrest. Northern European taxpayers are also growing restless and upset over ever growing demands for bailout money from Brussels, as the periphery sinks under the growing debt overhang. They are concerned that these are stealth transfers with growing doubts that the periphery has the capacity ever to repay the money.

Nobody in the EU is happy. The more EU voters see Brussels asking taxpayer money to bail out banks and socialize losses, the angrier they get. This causes growing discontent with the whole EU system. The EU elite seem smugly sure of themselves, appointed with secure positions rather than democratically elected. Politicians in member countries face a rising storm. Few however have the courage to express openly their discontent from fear being ostracized by the Brussels elite for daring to question them.

So far the EU elite refuses to discuss rationally successful restructuring techniques in past emerging market crises. The markets presently see 80% prospects of a Greek default. Their emotional outbursts against default or debt restructuring are directly related to their exposure to sovereign toxic debt and weak balance sheets. After their own meltdown in 2008, the US authorities want to keep this mess under the rug as long as possible, basically turning over the IMF to them as a European bad bank.

As it stands presently, there are basically two trends of thought. The EU elite seem intent on the EU public sector picking up an ever increasing share of Greek sovereign debt. In a few years’ time, there will be one sole public creditor with the private creditors paid off and Greece will have a very high debt GDP ratio, likely in excess of 200%. There is no clear plan thereafter what to do about this mountain of debt. There is a vague hope that somehow Greece will grow its way out of the debt. Structural reforms have been discussed for the last 20 years in Greece but the many stakeholders in the present system create substantial resistance to change. Locked into a hard Euro and compulsory wage and price deflation, it is hard to see from where this growth will come.

The other school of thought comes from mainly American economists like Simon Johnson, Nouriel Roubini and Paul Krugman, heavily influenced by the disorderly Argentine debt default and emerging market debt restructuring. They have support from German economists concerned about Greek debt sustainability and capacity to repay. They are calling for orderly and coercive debt restructuring as soon as possible to remove the default risk and provide relief from the huge debt overhang. Such action may make the structural reforms more palatable, gaining the good will of the Greek public with burden sharing and allowing more gradual adjustment. Both structural reforms and debt renegotiation are necessary conditions to resolve the Greek debt crisis.

Unless the EU elite realize that they must meet periphery needs, the divergence between the core and periphery will grow so large that it may lead to a breakup of the currency zone. It may take generations to restore the credibility of EU institutions after such an aftermath. Moody's in the latest downgrade of Portugal cited poor EU crisis management as a major risk factor, angering many EU politicians. The truth frequently hurts.

Top Ships revisited in recent bulker sale

Top Ships recently sold the 'Astrale' for US$ 23 mio, which seems low compared to the recent sale of a sister vessel. They bought this unit in August 2007 for US$ 72 mio (peak boom-era prices) in hopes of diversification to dry cargo in response to massive losses that they were taking on the tanker fleet. This company became a penny stock. I was among the first to signal the risks in an article in April 2008. Events so far appear to have vindicated my views.

The original TOPS IPO was sponsored by Cantor Fitzgerald with Hibernia taking a significant share. It was considered the work of Anthony Argyropoulos, who was then working at DvB Bank after leaving Jefferies. He sold the deal to Marc Blazer at Cantor later joining Cantor himself. Everyone considered the deal a breakthrough proving that Wall Street access to shipping issues was open to all.

The proximate cause for the decline to the company was a lease finance deal with DvB bank for a large portion of its fleet and a massive dividend payout to shareholders. This weakened the company financially and left a highly leveraged fleet. A downturn in the tanker market in 2007 put them into operating losses, causing a signficant drop in share price.

The company management reacted by doubling up on a bulk carrier expansion plan that was badly timed at the peak of the dry cargo boom. They did not have liquidity for such massive asset expansion so they financed it by short term loans that would be repaid with a follow-on share offering. Unfortunately, the subprime crisis in the fall 2007 hit Wall Street and their efforts to raise capital proved difficult with a succession of public and private offerings at ever deeper discounts. TOPS had to sell assets for liquidity to make the bulker transaction work.

This angered one of their major hedge fund investors, who requested the company to appoint two directors of their choosing to the BoD. The company refused flatly and the investor started a shareholder activist action with the SEC.

"Tradewinds" published an article referring to my work on the company, which angered TOPS. Later the publication wrote a retraction, claiming that I misspoke but not referring to anything specific. They were wrong. My warnings were reflected in subsequent analyst questions.

At a very early stage in the game, TOPS found themselves with covenant violations. They sold off a large portion of their Suezmax fleet at a critical moment in 2008 just prior the fall meltdown. Other problems continued to plague them such as covering CAPEX needs for their product tanker newbuildings for which they ultimately covered by bareboat chartering the vessels. Ultimately senior board members left them. Their CFO resigned.

It is difficult to see where TOPS is heading these days. We hope they make a comeback for sake of their weary investors.



Sunday, July 3, 2011

Awilco LNG listing with promising business plan


The AWILCO LNG start-up is attracting investor interest from blue-chip investors. The Awilco Group of the Wilhelmsen family in Norway is well known for Wilhemsen Marine Services, a major ship management company as well as their investment in Royal Caribbean Cruises. The business plan to enter the LNG market was conceived last fall. They made a debut in March and April this year purchasing three elderly LNG units from NYK LNG. In June, they closed an order at Daewoo for two new LNG units.

AWILCO has strong technical expertise in offshore, heavy lift transport and drilling. In each of these areas, they have created value for investors with imaginative business plans sometime involving major conversions of sophisticated marine assets like heavy lift vessels for drilling rig transport and upgrading/ reactivation of drilling rigs. They have been innovative in arranging the finance and successful in securing profitable employment. AWILCO Offshore was sold off to China Oilfield Services in 2008 for US$ 2,5 bn.

AWILCO LNG's purchase of the NYK LNG units provcd propitious timing, just prior the Japan Tsunami disaster. In March, the Wilgas (ex Dewa Maru) built 1984/ Wilpower (Bishu Maru) built 1983 were purchased for US$ 25/ 23 mio respectively. In April, the Wilenergy (Banshu Maru) built 1983 was purchased for US$ 23 mio. The Daewoo newbuilding deal was reported in early June, where they closed firm on two vessels with delivery August and November 2013 plus two options for 2014.

AWILCO plans to trade the older units on short term time charter and then replace them with the new building deliveries. They have already fixed the Wilpower for six months with three addition 6-month options. Ultimately, they plan to convert these older units into FRSU's or possibly G2W units. The Norwegians have considerable expertise for a FRSU conversion. These Moss tankers are well suited for conversions due to their self-supporting aluminum tanks, which do not deteriorate and do not structurally weaken the hull.

A major capital markets group is forecasting for the LNG sector a startling 17.7% advance in fleet utilization this year. This sector has been a very thin 'boom and bust' market, where last year due oversupply, earnings were so marginal that a number of units went into layup. Nakilat, a Qatar LNG export project, ordered a series of mammoth Q-max (266.000 m3) vessels for US export, which has collapsed due shale gas technology. The units remain laid up white elephants for the time being.

Natural gas should see increased market share in the global energy market due to its attractive price compared with oil, as well as more environmental friendly features. Combined with a low orderbook, this will likely lead to strong growth for LNG carriers. Already spot rates have surged to levels over US$ 100.000 per day from the marginal 2010 levels of US$ 20.000.