New Greek Bankson the Block

By Kevin Oates

All of us involved in the world of ship finance bemoan those times when a bank, long-time or short- time provider of finance to shipping, decides to step down and focus on other activities. On the other hand, new entrants are welcomed with open arms. What is peculiar about shipping finance is that there is a vital niche for all providers of finance to fill. From global banks focusing on the global shipping players with strong balance sheets and new vessels, to the small, local or provincial bank which will only lend to clients in it’s own “back yard” and with whom it has a long and lasting relationship. Such banks may be willing to lend to owners with fewer, and perhaps older vessels, based on past performance and reliability.

In Greece over the past few years generally speaking the number of banks involved in lending has reduced. Not that the amount of lending has diminished. Far from it. Those fewer banks that are left are lending more and more as the Greeks renew their fleets and order newbuildings. But the number of banks are fewer and therefore the choice of financing partner is more restricted. Some of the banks which have closed their offices in Greece include National Westminster Bank (acquired by Bank of Piraeus), Credit Lyonnais (acquired by Bank of Piraeus - to be noted is that Credit Lyonnais’s shipping business is still represented in Greece by XRTC Ltd), Banque Cantonale Vaudoise, Den norske Bank and Bank of Nova Scotia (acquired by First Buisness Bank – see below). Of the above all but National Westminster still do some business in Greece from head office, but on a much more selective basis and with only the top tier of shipping companies.

Thankfully, a couple of banks have also opened up to entertain some ship finance over the last year. First Business Bank (FBB) opened it’s doors just over a year ago and after spending a few months finding it’s feet, during 2002 committed about $150 million. Aegean Baltic Bank (AB Bank) was being talked about from the Spring of 2002 but only opened for business in November 2002. However with a partner like LB Kiel and long-time shipping expertise in top management, it is likely that it will not take long for them to make their presence felt.

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1st Gulf War, An Image

In June 1986 with attacks on tankers in the Persian Gulf on everyone’s mind Capt. Paizis of Eletson Corporation delivered a paper at Posidonia on the grim results of two years of war on tankers during the Iran Iraq war. George Weltman at Transamerica pulled the presentation from his files and gave it to MM, not that the current situation is a precursor to history repeating itself but as a reminder perhaps of the exposure shipping faces. The war against tankers began in earnest in May of 1984 when Iraq decided to prevent Iranian exports and set up a blockade around Kharg Island. The following two years saw 128 attacks on ships, 111 against tankers. Iraq was responsible for 75 of those and Iran 53.

The Road to Success

By Jim Lawrence

Thanks to the many of you who took a shot at matching the business cards in the rear of the October issue of Marine Money. We received numerous emails from readers who enjoyed the challenge or wanted to reminisce about their own baseball or football (soccer) card collections. Thanks.

Before we get to the Tony Gurnee road to success a small review of the October game.

We can tell you that out of 8 possible correct answers the highest correct answer was 5 and a half from Peter Shaerf at American Marine Advisors. The half involves AMA’s own Morten Arntzen who Peter correctly pointed out to me could arguably have been involved with several possible matches.

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Editor: Damn the Torpedoes

Contrary to popular belief 2003 has had a very promising start. Notwithstanding the Venezuela crisis, the Iraq standoff and no hint of capture for the beast Bin Laden, things are good. The US and world economies are showing signs of recovery, the tanker market is strong, containers have had a sustained rebound (a symptom of an improving economic landscape) and even the Northeast US is having a good ski season with cold temperatures raising energy expenditure putting pressure on prices.

Last year this economisteditor, in “Shipping and Global Recession” January 2002 took a look at the world’s macro-economy and took a stab at predicting the economic trends of the upcoming year. Remarkably, and largely due to a lot of assistance from good supporting sources at Citibank and others, much of it was correct. The discussion of the US recession and using expansion of money supply to combat it instead of interest rate cuts alone appears to have been correct. US M3, the broad measure of money supply has expanded 6.6% over the last 12 months, the dollar has weakened against the Euro and hints of inflation have re-appeared (albeit that the US CPI only rose 2.4% in the last 12 months and contracted in December due to holiday discounts). This signifies economic growth and will permit interest rates to go back up to sane levels where they once again become a useable tool for fiscal policy. Why is this a good thing? A better US economy means a better world economy and that is generally very good for shipping.

On the shipping front we have a large amount of transactions running wild in January and bankers, to a person, are in a buoyant mood:

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Deal of the Year Awards –2002 – A Moveable Feast

Companies have cut back capital spending.” “Banks have stopped lend­ing.” “Off balance sheet deals are dead.” These are just a few of the sound bytes that have been splashed across the financial papers each and every morning of 2002 – and as far as we can tell they have absolutely no relevance to the world of ship finance. In 2002, ship­ping deals, just like the ships themselves, kept steaming along around the clock with so much momentum that they couldn’t (and shouldn’t) be stopped. For those of us who have devoted our profes­sional lives to ship finance, it is comforting to know that this industry has once again proven resilient, if not wholly disconnected, to the outside world.

Except for having to suffer through the blubbering omnipresent in the main­stream financial press, 2002 has been a downright delightful year for ship finance. Most banks exceed­ed their target loan origina­tion volume and we saw a number of truly ground­breaking deals and struc­tures executed. In the realm of Mergers an Acquisitions, Teekay announced that it had purchased Navion for $800m at press time and the pipeline is full for 2003 closings. Asian companies are looking for capital in the interna­tional marketplace, the use of mezzanine came into its own, the KG market has survived despite reports of its death, French tax leases are moving to the fore, pri­vate equity continues to emerge for the right deals, a few more bond restructur­ings were concluded and we welcomed TEN and Golar LNG onto the US exchanges. It’s been a good year and we are comfortable in saying that 2003 will be even better.

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LEASE FINANCING FOR VESSELSENGAGED IN THE COASTWISE TRADES

The overall purpose of section 1113(d) of the Conference substitute is to eliminate technical impediments to using various techniques for financing vessels operating in the domestic trades. At the same time, the Conferees do not intend to undermine a basic principle of U.S. maritime law that vessels operated in domestic trades must be built in a shipyard in the United States and be operated and controlled by American citizens, which is vital to United States military and economic security.

U. S. Code Cong. and Adm. News, 104 Cong. 2nd Sess., vol. 6 at p. 4325 (1996)

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Deal of the Year –2002 Tax Advantaged Structures

The term “shipping tax lease” is, for the most part, an oxymoron. This is because one of the key ingredients to a vibrant tax- leasing environment is something that is hard to find in the shipping markets – companies that pay taxes (“I have an allergy to paying taxes,” a shipowner once told us) and governments interested in encouraging shipping investment by retail investors. Yet having said that, this year we saw a lot of very interesting tax advantaged structures done and more so than any other variety of transaction seen in these pages, these deals may provide a blueprint for what can get done in 2003.

A quick around the dial: the KG market, driven mostly by accelerated depreciation benefits for individual investors, was not a fertile ground of innovative deals. In fact, until mid-November most every KG deal done in 2002 had been a holdover from 2001, due to the threat that tax benefits would be stripped away and the fact that deals announced before 12/31/01 were permitted to be executed in 2002. But necessity is the mother of invention and the threat to KG market inspired promoters to come up with the AG structure to tap the institutional market, such as insurance companies. We saw Konig & Cie team up with Columbia to form Konig & Columbia AG, Rickmers formed Oceanica AG and Hansa and Warburg teamed up to create an AG of their own. Although the Hansa fund is the only one to have raised money so far (about Eur 40 m) we expect this structure to gather momentum as traditional KGs are phased-out and insurance companies recover from a devastating year in the European equity markets.

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Deal of the Year – 2002 M&A and Joint Ventures

In shipping charter parties, a good broker makes both parties feel that they have won the negotiation, while it is likely that both have yielded more than they would have at the start. In shipping M&A brokers and advisors too are involved, but, unless the deal is an obvious one between friendly parties, this “good broker” dynamic is often lost because the deals are done in a public forum.

2002 was a down year in shipping in general and while there were some notable successes this year, see below, just as notable was the abundance of big merger ideas that did not come to fruition. Think about what did not happen in 2002 (so far):

1. Royal Caribbean/P&O Princess/Carnival saga.

1. Torm/Norden
   

1. AET and MISC/General Maritime/Teekay?
   

1. SCI Privatization and ???

1. Bergesen/Worldwide
   

1. Golar’s rumoured sale

1. Rumoured merger of PSA and NOL
   

The list goes on…

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Deal of the Year – 2002 Bank Debt

Determining the bank debt deal of the year is usually the most challenging of all the awards we give. Of the hundreds of revolvers, term loans and refinancing totaling about $40bn done for the shipping industry each year, it is generally very difficult to determine a winner – but this year it was easy.

This year’s Bank Debt Deal of Year award goes to Citigroup, the Korea Development Bank and the Korea Exchange Bank for the $1.05bn facility that they arranged to finance Wallenius Wilhelmsen’s (WW) acquisition of Hyundai Merchant Marine (HMM)’s car carrier business, including the term charters with Hyundai Motors and Kia Motors (HMC/KMC). The NewCo, known as “Korea Ro-Ro”, is to be jointly owned by Wallenius 40%, Wilhelmsen 40% and HMC/KMC 20%.

There were several things we liked about this deal. Perhaps more impressive that its sheer size was the fact that it attracted more funding from foreign lenders than any previous Korean leveraged deal. This Norwegian/Korean transaction was also extremely complex, requiring securitization of cash flow streams into three tranches with multiple security packages and pricing.

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Deal of the Year – 2002 Restructuring

You got to know when to hold ‘em, know when to fold ‘em, know when to walk away, know when to run.” These words, sung by the legendary Kenny Rogers and written by Lionel Ritchie, are a startlingly accurate description of restructuring shipping deals. As the country ballad suggests, there is no single blueprint for achieving a successful restructuring. What you do depends on cards you’ve been dealt.

This year’s Restructuring Award goes American Marine Advisors of New York for their role in two very different deals– deals that we think typify AMA’s ability to engage in a dirtunder-the-fingernails dogfight and also execute the disposal of a business franchise. In our view, it is this combination of skills that has allowed the merchant bank to earn its dominant role in this critical niche. So long as the maritime industry remains highly leveraged and volatile, restructurings will occur and AMA has proven itself to be a “first call” for stakeholders in deals that go bad.

In the first broken deal, AMA represented the bondholders in their action against reefer turned containership owner/operator Enterprises Shipholding. The Enterprises deal was, without a doubt, the most contentious of all the maritime high yield restructurings we have seen in recent years. More than just a case of the Asian Crisis pushing over leveraged bond-issuing companies into financial restructuring, Enterprises bondholders began preparing for battle 18 months before the company actually missed its coupon payment, decrying that the company “stole” bondholder value by fraudulently selling new- building container ships to affiliated companies at bargain prices. Adding insult to injury, Enterprises management offered to assist the bondholders by selling the vessels, for a fee of $20m after they had defaulted.

What impressed us about this deal was that AMA was able to use its understanding of how shipping and shipowners operate to put commercial pressure on Enterprises shareholders. From understanding the disposal of the newbuildings, to managing the media, to piercing the veil of ostensibly unaffiliated companies, to affecting arrest of the containerships in the ports around the world even though they represented unsecured creditors, AMA was able to make trading partners and vendors so nervous that Enterprises reached into its pocket for a $0.50 settlement. If there was any disappointing element of the deal to AMA and its bondholders, it was that during the nine months that it took to conclude the deal, the container market had a precipitous drop and values plunged making the financial recovery lower than it might have been.h The second transaction includes AMA’s work on selling the Delta Queen steamboat business owned by bankrupt American Classic Voyages.

For those of you for whom the details are fuzzy, AMA was mandated for this assignment by the US Maritime Administration when Sam Zell controlled American Classic Voyages defaulted on about $800m of Title XI bonds. After canvassing the market, AMA developed a list of about 100 potential buyers. When the day of the auction finally came, seven interested parties spent an entire day bidding in an open outcry fashion led by AMA’s Paul Leand; the auction commenced with a stalking horse bid of $3.75m and moved in $150,000 increments to its final price of about $80m.

The winning bidder was a company called Delaware North, a global leader in hospitality, retail and food service, whose holdings include the Fleet Center in Boston. Delaware North paid $80m, 4x 2000 EBITDA, for the business. To put this in context, Morgan Stanley indicated that financing for LBOs fell to 3.8x at the time AMA sold the company. How AMA was able to take a company that had ceased operations (very damaging for a company that depends on confidence of consumers, credit cards companies, travel agents, etc.) and sell it to a substantial company for the kind of healthy valuation generally assigned to a going concern, is nothing short of astounding.

Honorable Mention

Amer

What do you get when you combine Coco Vroon, Kristian Siem, Ravi Mehrotra, Alan Ginsberg, Gary Wolfe, Jim Lawrence, Greg Petrick and Judge Arthur Gonzales of the US bankruptcy court? A heck of a good holiday party, for one thing, but also one of the most mutually beneficial of all the shipping high yield restructurings. This entire restructuring, while certainly acrimonious, was a bit like “the gang that couldn’t shoot straight,” with both sides making one tactical and procedural gaff after the next. But in the end, the final deal was negotiated principal to principal and with very good results for both sides.

We estimate that the circa 30% return achieved by Vroon/Siem (they bought their 68% slug of the Amer for $0.52 and sold it for $0.68 one year later) bonds was the highest since CSFB and Alpha Shipping – a friendly deal between David Matlin and George. The result was equally good for the company; commercial and technical operations of Amer Reefer went uninterrupted at all and the company’s major shareholder, Mr. Ravi Mehrotra, retained 100% ownership, thanks to a loan facility from Nordea, some credit support from Lauritzen’s Cool Pool and the cash that accumulated in the company during the 18 months that the bonds didn’t pay interest – a win/win for the final parties involved.

The other element of this deal that we found noteworthy was the approach taken by the bankruptcy judge. Although many speculated that Siem and Vroon initially bought into the Amer deal to take over the company, Judge Gonzales (who is currently handling the Enron bankruptcy) maintained a staunch company- friendly approach during the year in bankruptcy, encourageing the parties to settle and keep the company intact.

The Cost of Restructuring

New York law firm Thatcher Profitt and Wood filed a motion for payment of their legal bills associated with their defense of Millenium Seacarriers during the handysize bulk owner’s bankruptcy. The documents filed in the Southern District of New

York covered only the period January 15 to April 30, 2002. The total amount of compensation sought was $914,079.70 and the document also requested $71,599.09 in reimbursable expenses. Deirdre Dillon at the firm was the top biller at $181,150. She was closely followed by Chris Graham who billed $178,165, Jonathan Forstot at $120,911, Nicole Reninger who billed $117,928 and Louis Curcio who billed $103,235.

Interestingly, Mr. Curcio worked the most hours 540.7 and had the lowest blended hourly billing rate at $190.93. Chris Graham took the high honors on the Blended rate at $555.73. Chris and Jonathan were the partners on the case.

Low biller was Gary Silverstein who charged $167.50, for half an hour’s work. Brendan Zahner billed a total of $95,559 and his admission to the Bar was pending at the time. Overtime meals cost $5,496.

Save the Date! Restructurings for 2003

American Commercial Barge Line

A quick perusal of the American Commercial Barge Lines 3Q02 filing shows a company that’s heading back under the knife for some more restructuring in the coming months. In fact, restructuring advisors out there might be interested to know that ACBL has agreed to propose a restructuring plan to its senior lenders prior to December 28, 2002. ACBL was already restructured once this year in a deal whereby Sam Zell-controlled Danielson Holdings (AMEX: DHC) contributed $58.5 million of their bonds as equity and crammed down the company’s equity holders in exchange for $9m worth of DHC stock and then paid down $25m in bank debt.

Precious Shipping

The dry bulk owner looks set for another restructuring in early 2003 when the company’s redeemable convertible debentures are converted into PSL shares at a price equivalent to 95% of PSL’s closing market price in the month preceding the conversion. According to our calculations, RCD holders may be entitled to about 56m shares unless someone runs up the stock between now and then – which is likely. Since the current capital of Precious is 52m shares, the various European and Asia financial institutions that own the bonds may gain control of the company through the conversion –but then what?

Northern Offshore

In November 2002, John Fredriksen controlled Northern Offshore appointed US investment bank Houlihan Lokey Howard & Zukin to advise it in restructuring talks with bondholders, after warning it will again miss its interest-payment deadline and default on its $340m, 10% notes. Northern has some

$ 57m in short-term debt coming due but very little cash.

Navigator

“The more the merrier,” is an expression that is generally not used in the context of debt restructurings. That’s why the long awaited reorganization of this deal, which was dead on arrival but has been surviving on the life support of escrowed funds and a CSFB credit line, is going to be so messy.

Cenargo

According to Cenargo’s most recent 6k filing, the company will not make it’s 12/31/02 coupon payment. Wayland Advisors, which now controls the former Millennium Seacarriers fleet, is one of Cenargo’s biggest bondholders. Based on the speed with which Wayland Investments skinned the equity interests at Millenium Seacarriers, Cenargo should be getting fit for armor right about now.

Restructuring Quotables

Victor Restis ” I will do everything to protect myself from.. .these vultures which have destroyed my company.” Lloyd’s List

Kostas Koutsoubelis “The buyers were two French companies and the shareholders in those two companies will fight, I am sure. But we don’t know who was the buyer…we just spoke to the broker and the lawyers.” Reuters