Freight Derivatives 101

by Andrew Elmslie, SSY Futures

Introduction
The oil tanker trade is one of the most physically hazardous and risk laden areas of commerce, being exposed to the mercy of both the sea and volatile trading conditions. Fortunes have been made and lost, with dramatic periods of intense activity being contrasted by lengthy periods of stagnation.

The vessels themselves have advanced greatly in terms of technical sophistication, with developments in communications and rapid changes in information technology altering the methodology of tanker operations on a continuous basis.
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Fast ferry market

Executive Summary
We believe that there are opportunities for commercial banks to participate in lending to owners and operators in the Jones Act fast ferry market. At present, two financing companies dominate the US fast ferry financing landscape: debis and Caterpillar. The primary purpose of these institutions is to support their engine building affiliates by financing the newbuilding of fast ferries or financing the re-powering of existing ferries. debis and Caterpillar have played-and will continue to play-a vital role in developing the US fast ferry market from a newbuilding standpoint.

While engine financing companies currently dominate the market, we are of the opinion that, as more vessels are built and launched into this immature market, we will see the strengthening of operator balance sheets, the proven profitability of new routes, the viability of shoreside facilities, and increasing consumer demand. In our opinion, these factors will reduce some of the risks involved with lending to start-up operations, and will stimulate a market for niche secondhand vessel financing by US commercial banks which are willing to the commit the time and resources necessary to understand the technical and commercial elements of the fast ferry market.
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Dueling Agencies

Pegasus Shipping has the notable distinction of seeing its senior debt upgraded and downgraded on the same day by Moody’s and S&P respectively. For a company with ambitious long term goals, the Moody’s upgrade must be considered a fair response to current specific corporate activities as related to its Bonds, while the S&P downgrade may simply reflect the need for additional “investor relations” or be taken as that agency’s belief that the preferred stock is more debt than equity.

Moody’s lifted the senior debt of Pegasus to B3, while S&P lowered the rating to single B- with a stable outlook.
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Chase Leads Barge Deal

Underwriter Chase is leading a deal to recapitalise American Commercial Lines (ACL), a unit of Richmond, Virginia-based CSX Corp. CSX had announced plans to convey ACL to a venture formed with Vectura Group Inc for approximately $850m in cash and securities. CSX is to receive $695m in cash and $155m in securities issued by the venture, including a 34 per cent stake in the venture. Wasserstein Perella & Co served as CSX’s advisor on the transaction. As part of the transaction, National Marine Inc (NMI), a wholly owned subsidiary of Vectura, will be combined with ACL to create a company with assets of about $1bn. The business will be based in Jeffersonville, Indiana.
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S&P Assigns ‘BB’- Rating to Cenargo International

London, June 9/PRNewswire – Standard & Poor’s today assigned its double- ‘B’- minus corporate credit rating to Cenargo International Ltd. (Cenargo) and also expects to rate the company’s proposed Rule 144A $175 million senior secured notes at double- ‘B’- minus. The outlook is stable.

The rating reflects the worse-than-average industry characteristics and an aggressive capital structure, but benefits from the company’s established market position on the Irish Sea freight ferry market and the introduction of two brand new “Roll-On Passenger” (Ropax) ferries, which Cenargo was able to order at  favorable terms in Spain. The proceeds of the proposed bond issue will be used to repay existing bank debt, as well as to finance the building of two new RoPax ferries to be delivered in mid-1998. In addition, Cenargo has put in place a $100 million secured ship construction finance facility which will enable it to order a further two new RoPax ferries from the same yard in Spain for delivery in 2000.
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THE AFRAMAX SECTOR: Where is this Bull Market Headed?

Extracted from a report prepared by Jerry Lichtblau of Mallory, Jones, Lynch, Flynn & Assoc., Inc.

The aframax sector has enjoyed a significant run-up in rates over the last few years and, in the tradition of drawing a straight-line, is expected to continue indefinitely by some. There are those who recall the levels of late 1991 – when a five year timecharter on the Sanko Quality was concluded at an average rate of slightly below $25,000/d for the period and a seven year charter plus options on the Stena Concert was also concluded – and the 1st half of 1992 and feel that market can be revisited and this time maintained.

We do not share this opinion. Commencing currently through the 1999/2000 period we expect a softening in the earnings for this fleet. This is either in contrast to other crude carrying markets or a steeper drop depending on your perspective.

In the markets reviewed in this report, the increase from 1994-1997 has ranged from just under 40% to 50% for the most part. In one trade the increase in earnings has topped 70%; a 40-50% increase implies a 12 -14% annual growth rate in revenues for owners.
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Ultrapetrol: Stressing the Importance of Relationships

by Alan Ginsberg

Sometimes picking a winner is easier than you think it is. We were sold on this deal before we finished reading the Summary. The first page of the Offering Memorandum reads like poetry: “The Company… has concentrated on providing specialized oil products transportation for an identified group of customers through direct contracts rather than through contracts arranged  by ship brokers. This approach enhances customers’ ability to transport cargoes at agreed rates generally without regard to the uncertainties associated with the spot, or single voyage, charter markets. In 1997, approximately 3% of the Company’s revenues were derived from operations in the spot charter markets.”  By the time we finished reading the laundry list of oil companies who are major customers of the Company (see box) are hearts were all aflutter. Please do not get us wrong, there are risks in the deal. But the credits in this deal greatly outweigh the debits.
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Osprey’s Plan “A”

Sometimes we get the feeling that the ship finance community suffers from amnesia. As an example, in May of 1997 it celebrated Osprey’s epic $944 million loan facility and one year later when there are reports that the company has sold two ships, there is talk in the market that the whole deal is unraveling and banks are pushing the company to de-lever. We don’t see it that way. We believe that Osprey’s proposed sale of two of the four Gotaas Larsen VLCCs was a deliberate plan which was a structural component of the original syndication package – which predated the Asian Flu.

Perhaps part of the confusion about Osprey’s recent activities is a result of the economic situation in Asia coupled with the fact that the company did not do as John Fredriksen did when he bought London and Overseas Freighters: buy a fleet with the express caveat that the three panamax vessels would go to Pegasus.
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Movers & Shakers

On April 16, more than 100 institutional investors, analysts and shipping executives crowded into the New York Yacht Club in Manhattan to hear road show-style presentations from five issuers of high yield shipping bonds.

Sponsored by ING Barings Furman Selz and Marine Money, the event was the first high yield conference to be held.

Making presentations were (in alphabetical order): Peter Anturri, CFO of Teekay Shipping in Vancouver; John Blankley, EVP and CFO of Hvide Marine in Florida; Michael Hudner, Chairman, President and CEO of B+H Ocean Carriers in Rhode Island; Robert Knutzen, President and COO of the Golden Ocean Group in London; and Nicholas Tsakos, President and CEO of Global Ocean Carriers in Greece.
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Mosvold

Executive Summary
We believe that Mosvold Shipping will depart from its original strategy of owning and operating exclusively 1970s-built, CAP 1 and CAP 2 VLCCs and small ULCCs and will diversify its fleet in the coming months.

It is our opinion that given a lack of suitable crude carrier tonnage available in the market, $27 million of cash on its books (which translates to nearly $40 million of buying power taking into account the company’s conservative gearing ratio of about 30%), Mosvold will look to other segments of the tanker market to purchase the additional vessels needed to reach a critical mass with respect to operations.
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