Appraisers – January 1999

Appraisers – January 1999

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THE ZEN OF FORECASTING TANKER DEMAND

Part Two of a Two Part Series

by Geoff. Uttmark

GOTCHA!!

Saunter up to the bar in an owner’s club in any world maritime center and the lament of the old men is the same: “It isn’t as easy to make money in shipping as it used to be.” And they are right. Not to disparage in any way the spectacular achievements of legends like Y. K Pao, D. K. Ludwig, Aristotle Onassis and Stavros Niarchos – members of that rarest breed of men who find ways to dominate any set of circumstances instead of circumstances dominating them – consider the advantages the old men enjoyed in their younger years. From the end of World War II until the first oil shock in 1973, world economic growth often exceeded three percent or so per year, consistently. War-surplus, ever so reliable T-2 work horses were cheap, and long-term charters with oil majors were common. In short, an owner could do well simply by riding the general economic expansion and not making any serious mistakes. By comparison, today’s more integrated world economy is also more volatile, tankers are expensive assets that come with liabilities additional to financial, a full payout charter is usually the first fantasy vaporized by morning’s coffee, and the day’s first telephone call is as likely from a lawyer or regulator as from a broker. For conspiracy theorists, it’s almost as if the Gnomes of Zurich have designed GOTCHA!, a shadowy Global Oil Tankers Charterer’s Association, to confound the independent tanker owners. But owners have their own hand in penning the sardonic advice on how to make a small fortune in shipping: start with a big one. It is their signatures on the contracts, not the banks’ willingness to lend or the yards’ eagerness to build, which produce the tonnage surpluses. And it is the owners – both independents and tanker arms of oil companies – who have literally given away the store to shippers in the form of rock bottom freight rates rather than take some of their investment in improved efficiency to their own bottom lines. Continue Reading

Accountants – January 1999

Accountants – January 1999 Continue Reading

Volatility in Oslo

Before we begin to analyze what has happened to the shipping stocks around the world over the last six weeks, we would like to shed some light on an often forgotten fact about the Oslo stock exchange. Norwegian investors claim that the market is run by a few insiders, and their foreign counterparts sigh over the lack of liquidity. This may all be true, but to say that there is no money to be made would simply be a lie. Marine Money has taken a look at the 17 companies that are included in the Shipping Equity Index, trading in Oslo. We analyzed the companies’ six-week highs and lows (11/25/98-1/12/99), and ranked them according to percentage change. As can be seen in the graph below, the volume might be missing but the prices are moving like yo-yos.

Of course, one must be a master of timing if one is to capitalize on the full spread of the high/low, not to mention one must know which stock to short and which to long. In the light of last year’s market performance, we would think that Oslo-based investors would be familiar with shorting stocks by now. However, due to the low volume and volatility at the stock exchange, one must realize that even if an investor has a sense that a stock will be falling in the near future, he cannot be certain that he will be able to borrow against the stock. Continue Reading

Pony Rides with Ronnie

Observers of Ronald Reagan once commented that the former president and film legend was by his very nature so optimistic that, upon stepping in a huge pile of dung, a big smile stretched across his face. When asked why he was so happy, he responded, “with a dung heap this big, there’s sure to be a pony nearby.” That, gentle readers, is the kind of guy we need in the shipping high yield market.

Well-known fund manager Sir John Templeton once said that the time to buy is when there is blood in the streets. At a moment when bond prices have stabilized, perhaps it is time for investors to put on their Wellies, pull out their checkbooks and start consolidating their positions. On the credit ratings front, the future of shipping high yield looks pretty grim. In mid November, Golden Ocean Group had its credit rating lowered from B3 to Caa2 by Moody’s. The feeling among rating agencies is gloomy over all. In mid December, Standard & Poor’s took negative action on nine shipping companies, of which only Alpha Shipping was downgraded, from B to B-. Continue Reading

Playing Chicken with George

by Matt McCleery

We think that George Economou of Alpha Shipping will tender for his $175 million in unsecured ten year notes for about $0.35 within the next four weeks. In the following analysis, we will tell you why we think bondholders should negotiate to increase the call to $0.45 and then accept. Mr. Economou has indicated that he is unwilling to work for the bondholders throughout this cycle without the prospect of a return for himself. Therefore, the Alpha fleet is going to be liquidate – it is simply a question of who takes the keys.

In our opinion, if bondholders allow emotion to eclipse arithmetic, they will find themselves in a further deteriorating market with wasting assets, capital unemployed for as long as two years, and value squandered through transaction costs and lawyers – all in pursuit of a return no greater than that which they could have wired into their accounts immediately, should a tender offer be made. In a song entitled “The Gambler”, the legendary Kenny Rogers sings, “you got to know when to hold ‘em, know when to fold ‘em.” In our opinion, bondholders should probably “fold ‘em.” With bondholder consent untenable, the infusion of additional equity insensible, and Citibank’s willingness to use its balance sheet unlikely, it seems that a bank-financed tender is the only realistic solution.
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Not a Loan in the Syndication Market

“When you need a loan, you are alone,” a good friend said to me the other day as we were discussing shipping’s credit crunch. With spreads soaring, upfront fees skyrocketing, and banks using market-flex language in shipping deals to ensure they don’t end up holding more paper than they are comfortable with, it seems like a lender’s market. While this may be true, it is probably of little comfort to Royal Bank of Scotland, which is arresting the 22-ship Lygnos fleet, or to Nationsbank, First National Bank of Maryland or FinansBanken, which are all thought to be considering an exit from shiplending. Nevertheless, where there is turmoil there is opportunity, and deals are being done, though less in the bulk market than other areas.
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Newport News and Avondale Merge

Newport News Shipbuilding and Avondale Industries approved an agreement to combine the two companies. With Lazard Freres acting as the advisor for Newport News in this merger, the transaction is valued at $470 million and is expected to be immediately accretive to 1999 earnings. The transaction created a leading, broad-based shipbuilding company with estimated 1999 revenues of $2.6 billion and nearly 24,000 employees. The combined company will be known as Newport News Avondale Industries.
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Movers & Shakers

The Board of Directors of FARSTAD SHIPPING ASA announced that Deputy Managing Director TERJE J.K. ANDERSON has taken the position of Managing Director of the company. Mr. Sverre A. Farstad wants to step down from this position after the Annual General Meeting of Farstad Shipping ASA on April 23rd 1999.

It was announced that DOUGLAS E. SWANSON, Chairman of the Board and CEO of Cliffs Drilling, will head a third business unit of the Company, focusing on expanding business opportunities in Venezuela and the international shallow water markets. In this regard, the Cliffs Drilling well engineering and the management services group is expected to play a major role by expanding business opportunities via turnkey and integrated services drilling contracts. Mr. Swanson was elected to the Board of Directors of R&B  FALCON CORPORATION, bringing the number of directors to seven.
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Millennium Manifesto

What a profound responsibility to close one millennium and open another. Recorded history is said to have begun perhaps 10,000 years ago but, until very recently, the record has been long on the seminal events and short on the stuff of everyday life. For instance, back in 999 did the prospect of adding a fourth digit to the year cause Leif Ericson and company as much anguish as the Y2K problem today?  No laughing matter if the rune stones were pre-cut for three digits!

The information age changes things. Preserving a record is now easy. The challenge is to make a record worthy of preservation by a jury yet to be born. If that sounds like a sobering thought, it is – but no more so than contemplating just how few of us who ever walk the Earth actually witness a new millennium. Once in a thousand years!  That makes this run up to year 2000 a special time, and we at Marine Money think it may be even more special for our industry than many think.
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