Educating Industries

Marine Money interviewed the analysts, issuers and underwriters to better understand their individual perspectives on the high yield market and their thoughts on shipping’s performance, communication and future with this source of financing. Not surprisingly, the various segment participants each had different views on high yield and its future. There are some surprises and a few positives. At Marine Money, we think that the final analysis is pretty simple: shipping still has a lot of explaining to do.
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COMPANY NEWS

In a tale of two oils, J.E. Hyde’s weekly Sale and Purchase report for the week ending January 8 contained a window into the corporate thinking about ships and shipping at two oil majors.

CHEVRON was active in the market, acquiring the residual value in a refinancing of two 1973 built VLCCs the company knows well for $4.35 million a piece.  Across the pond, SHELL was disposing of yet another mid seventies built VLCC, the 1976 built 317,996 dwt Lepeta, for a reported $113 per ldt to Pakistan, as part of their quite different approach to older vessels.

DEN NORSKE BANK ASA (Arranger)  and ING BARINGS (Co-Arranger) have successfully syndicated and closed a $150,000,000 six-year Secured Medium-Term Loan for Fred Olsen Drilling AS, a subsidiary of Fred Olsen Energy ASA, a leading Norwegian offshore company.
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WORLDSCALE and THE ZEN of TANKER FORECASTING

Part One of a Two Part Series

by Geoff. Uttmark

Sometime after Richter devised a scale to measure earthquakes and before 1-10 became “Male Scale”, the quickest, albeit most primitive, measure of the opposite gender, there was Worldscale. Worldscale, abbreviated WS and sometimes simply as a percentage preceded by W, may rank with the US Electoral College in terms of vague, abstract and esoteric. Even those who live and breathe WS every day, namely shippers of petroleum cargoes, brokers and tanker owners, can be hard-pressed to easily explain the when, where, why or even precisely the how of it. Why, for instance does the petroleum side of maritime quote freight rates against an index while the drybulk side steams along quite acceptably simply quoting freight on a dollar per ton (tonne), or alternatively, charter hire in terms of dollars per deadweight ton (tonne) per month, basis? And given that bankers and other providers of services to shipping understand definitions like TCE (time charter equivalent rate), and refineries that receive oil from tankers count their cost in dollars per barrel, and consumers, if they contemplate seaborne oil transport at all, are likely to measure it in terms of cents per gallon, what is the reason for injecting, or more accurately, overlaying, another measure. The answer to this and other confusions lies in what Worldscale’s precursor was intended to do.
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Vessel Valuations: Caveat Emptor

Until issuers prove to the market that they should be valued on cash flows, the publicly traded debt and equity of shipowning companies will be judged, at best, on their break up price-asset values. While fresh newcomers, salty veterans (and perhaps anyone who has worked in the airline industry) may believe that determining vessel valuations is as simple as phoning-up a few brokers in London, New York and Piraeus, the truth is, unlike aircraft, very few ships are identical. Those financial modeling-junkies who believe that the difference in value can be accounted for by building in a margin of error would be interested to learn that sisterships that have had different levels of maintenance or have been trading different cargoes can have values which vary by as much as 40%; certainly more than enough to foul a model and scuttle a potential acquisition. Peter Cooney of Acomarit recently told us that he had seen a ship that had been treated so poorly that it had to be scrapped before its 10th birthday.
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Swimming Naked

In the words of the esteemed Warren Buffett,  “you never know who is swimming naked until the tide goes out.” So seems to be the case in the shipping high yield market. Charter rates have crashed, cash flow has dried up, plummeting second hand values have erased equity and the falling tide of the Biffex has left many deals exposed.

With every passing financial quarter it becomes more apparent that without an infusion of additional equity or other sources of financing a substantial number of shipping deals will either default or fail to generate enough free cash flow to make strategic acquisitions of undervalued tonnage. In this article, and in the coming issues of Marine Money, we will revisit the deals which we think illustrate the structural elements that have been successful and those that haven’t. While we cannot cast blame on those that did not see the Asian Crisis coming, we do believe that the shipping industry has proven cycle after cycle, crisis after crisis, that lenders should assume the worst.
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Marine Money’s Shipping Index

With a large number of shipping stocks trading at or close to their all time low, the author will fall in line with the theme of this issue and decree that there are many opportunities to make a good return on invested money. The crucial issue is finding the companies that are best able to outperform their competitors, and by that see increased earnings, even if the overall market stays as it is.

We at Marine Money, therefore found an interest in portraying how these companies perform. The companies listed on the following pages are the ones we have included in what will be a monthly analysis of shipping equities. We will also look at how the different operating segments are performing relative to  each other. The analysis will include how shipping stock performances compare to major indices around the world.
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Over Served in London

“I was over served!” the drunken driver bellows to the police officer who is shining a flashlight into his dilated pupils. Or, asked more delicately,  “if you get ill from eating too many oysters, is it fair to blame the oyster bar?” This question formed the underlying tone of this year’s Lloyd’s Shipping Economist Conference. Owners blamed bankers, bankers blamed owners, commercial bankers blamed investment bankers (unfortunately the most noteworthy of them wasn’t there to defend himself), economists blamed poor returns on capital, which was blamed on a lack of shipowner pricing power, which was blamed on the fragmented nature of shipping which was blamed on low barriers to entry, debt blamed equity, equity blamed stock exchanges, terminals blamed liner operators, liner operators blamed terminals and everyone blamed Korean shipyards. Oddly enough, the Asia Crisis seemed to emerge from the proceeding relatively unscathed.
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Movers & Shakers

ROYAL OLYMPIC CRUISES announced  the appointment of Mr. George Stathopoulos as Vice President of Marketing and Sales for Europe.

Mr. Stathopoulos with more than 20 years experience in the maritime industry has served in various executive capacities with Festival Cruises (International Marketing and Sales Director), with Celebrity Cruises ( Marketing and Sales Director for Europe), and finally as a member of the International Task Force Team working for several months to smoothly and successfully integrate Celebrity Cruises with Royal Caribbean International.
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New York City

Tis the Season to be Jolly and the New York ship finance community has been lively and in good spirits during the last few weeks. Salomon Smith Barney and the Citibank Shipping Group hosted a very well-attended high yield and equity shipping conference on December 2nd. Anyone who thinks that shipping is still in the 19th century would be impressed to know that the conference kicked off with opening remarks from Citibank’s Michael Parker who was beamed-in live from London. The gracious hosts of the event were Salomon Smith Barney High Yield Analyst Brian Johnson and veteran Citbanker Jim Grubbs who came over from London.
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LOOKOUT! EXXON AND MOBIL ARE MERGING

We thinks it’s good news for ship owners who have bet heavily on VLCCs; not so good maybe for those who have expanded OSV fleets in anticipation of greater offshore drilling in deeper US Gulf waters. That’s Marine Money’s micro-analysis of the proposed merger between Exxon and Mobil. But we also see a mega-event shaping up that transcends things afloat. Hence, we go on record predicting that a reef of economic turmoil lies beyond the two ULCC-size radar blips represented by the proposed merger of Exxon and Mobil.

What does it really mean? Anyone who has peered into a radar on a moonless, squally night knows that what is seen may not be what is actually there. A smart mate will give the bearing and range to the lookout for visual confirmation. But even favorable weather, flawless equipment, sober officers and attentive watch standers have not prevented some dramatic mishaps, the only explanation of which is usually that what was “seen” was not correctly interpreted until it was too late.
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