TMM Troubles

Transportacion Maritima Mexicana (TMM), the largest shipping company in Mexico, remains on the debt rating “watch lists” of both Moody’s Investors Service and Standard and Poor’s, where they were placed in mid-September after a financial scandal. Moody’s placed TMM’s Ba2 debt rating under review for possible downgrade, and S&P placed BB- senior unsecured debt on the list.

The listings, which could remain in effect for the better part of a year, came after Mexico’s Attorney General accused Carlos Cabal Peniche of financial fraud, issued a warrant for his arrest and seized his company, Banca Cremi, to prevent further trading of the company.

TMM has several business interests with Cabal including US$43m or 5% of Banca Cremi, a 5% stake of Del Monte holding company, and a 49% interest in Global Reefers Carriers, Inc., a joint venture with Del Monte. Continue Reading

The Role of Covenants in Asset-based Financings

Marie J. Lucca

When shipowners shop for a loan, rates and repayment schedules are generally uppermost in their minds.  However, covenants in loan and security documents are also an area of keen interest and concern.  Although most covenants are standard, there have been several recent and significant changes to the covenants sections of loan agreements and ship mortgages.

Covenants are the shipowner’s undertakings to minimize risks during the period of the commitment and for the duration of the loan.  Violation of a covenant gives the lender the right to refuse to make additional advances or, after giving notice and the passage of the applicable grace period, creates an event of default which permits the lender to call for the repayment of the loan and cancel the commitment.

Both affirmative and negative covenants permit the lender to influence the future conduct of the shipowner – and sometimes its subsidiaries or affiliates – in a manner which will reduce the risk that the loan will go into default. They do this by setting minimum standards for the shipowner in the areas of loan repayment and security, corporate structure and finances, liens, insurance, vessel maintenance and trading. Continue Reading

Cash Management Services – A Must For Today’s Shipping Industry

Picture this: You are a shipowner and today is the due date for you to make a bunker payment. You also need to place an urgent new bunker stem.  Not knowing exactly how much money is in your bank account, you fax a wire transfer instruction to your bank for payment of the bunker invoice. Meanwhile, you call the supplier to place the new stem.

“We are sorry but we cannot sell you the additional IFO until your account balance is zero,” explains the supplier. “We must have some kind of proof of payment.”

You call your banker to get the CHIPS reference number for the transfer as proof of payment and are horrified to learn from the banker that the transfer was never made because there were insufficient funds in your account. You ask the banker, “What about the hire payment that we should have received yesterday?” The banker states that no incoming wire transfers were credited to your account. Continue Reading

The Substance of Things Not Seen: Optimistic Mid-size Tanker Companies Step Out in Faith

Despite overcapacity and the low rates which continue to plague the tanker industry, ownership consolidation of world-class independent oil tanker companies is on the rise. And many mid-size companies, believing in the future of the business – particularly the product tanker business – are exercising their faith.

ICB, Benor, Bona, Eletson, London and Overseas Freighters (LOF) have all taken significant action to consolidate and build tanker ownership. Maturation of this segment of the business, while not complete as the following data from mid-year indicates, points to a healthy trend of ownership consolidation into the hands of long-term owner/operators.

As we reviewed the 1993 and first half financials, the obvious was just that – consumption and global production of oil rose somewhat, but transportation capacity also increased, slowing to a trickle, already-strained cash flow among tanker companies. Nevertheless, consolidation of tanker ownership among the principal tanker owner/operators increased in a less obvious, but still evident trend. Continue Reading

High-Yield On the High Seas: Keep Your Life Jacket Handy!

The rebirth of the high-yield market has lured more nontraditional issuers than ever before to test the previously shunned waters on the capital markets. Several ocean transport companies, the historically introverted and highly secretive empires, were among those which found the attractive financing opportunities of the of the junk-bond market too hard to resist. While these issuers may have found a fountain of youth through issuing long-term, fixed rate and non-amortizing paper, the high-yield shipping investor should at all times be prepared for rough seas ahead.

Seemingly bottomless cycles, thin profit margins, contingent environmental liabilities, and the persistent demand/supply imbalances, may leave investors wondering if this industry is not a bit more inhospitable than originally anticipated.  This was certainly the sentiment of the big commercial banks a few years ago as they watched a brutally competitive market erode the asset value of the ships they financed.  Although this debacle was largely contained to the super-tanker crude oil carrier segment, one cannot ignore the chilling message sent by the experience of one vessel owner who took delivery of a new crude-tanker in the late seventies, then failed to place the vessel on a revenue generating voyage for over a decade.  And just when things seemed to be improving, the shipping industry collided with 1992, which, arguably, has been one of the most difficult of the past ten years for bulk ship operators.  Charter rates for all major categories of oil tankers dropped substantially, and rates in the international dry bulk markets were considerably lower than 1991.  Although the sudden drop in charter rates was not necessarily an anomaly, it does underscore the highly cyclical nature of this industry that is caused by often unpredictable factors affecting the demand and supply for vessels. Continue Reading

Editors’ Kudos and How We Do It

With 15% more companies ranked this year than last, Marine Money  is proud to report that its annual ranking issue now includes all significant publicly traded maritime shipping companies around the globe.

Not only are most companies present and accounted for, but the analysis used to rank the companies is more consistent and foolproof than ever before – creating a more usable and more valuable product for our readers, whether they are institutional or individual investors, bankers or shipowners themselves.

One can imagine how difficult it is to rank the list of related but diverse companies from several dozen countries, with nearly as many disparate accounting methods.  It begs the question: how is ranking possible without manipulation tantamount to wizardry?

To answer this, we consulted Marine Money’s contributing editor John Henry Auran, who is principally responsible for the Marine Money International Financial Database and who works on the September ranking issue for the better part of a year. He reported that nothing akin to wizardry is employed. Continue Reading

Gaps in World GAAP

One of the single largest challenges in comparing the financial performance of companies in the same fundamental business but in different countries around the world is dealing with varying accounting practices.

Generally accepted accounting principles or “GAAP” is a dynamic concept requiring constant review and reaction to changing circumstances, markets and economic development.

Jim Lippert, CPA and our contributing financial editor, focuses on the issue more closely by examining the accounting methods of several different international shipping companies – Western Bulk, Stena AB, Sembawang Shipyard Limited, Stolt Partners, TORM and Transportacion Maritima Mexicana.

The accounting method choices made by these companies will be compared to the accounting principles of nine larger and perhaps more mature accounting countries such as the US, the UK, Japan, Australia, Canada, France, Italy, Holland and Germany. Continue Reading

Buy the Rumor, Sell the News

Marine Money’s Fourth Annual Ranking Issue

This year marks the fourth consecutive year that we have completed a major comparative ranking of the results of both public and private shipping and shipping-related companies.  Perhaps most notable for 1993 on a macro level is the remarkable consistency of the industry’s physical asset performance when measured against 1992.  “Stable and unexciting,” one owner called the results.  This, of course, reflects the continuation of the global recession as much as anything and its impact on shipping.  Despite the rather bland financial performance by the industry’s physical assets, 1993 was a remarkably good year for many of the industry’s share prices.

In essence, 1993 was a year when the industry’s financial assets were more attractive than their physical assets.  Before looking at just a few examples of the many interesting stories to be found among the numbers, we asked ourselves and others just why 1993 saw such a disparity between share price returns and physical asset returns.  In effect, stock markets act as leading indicators anticipating recovery.  Stock markets can be expected to be six to nine months ahead of the curve, where shares are sold on a whisper: “Buy shipping because when the world comes out of a recession, goods move and they move on ships.”  Generally, it is after shares have begun to move that sell side research steps in.  Research further spreads the word, and that is when the investment bankers enter the picture with deals. Continue Reading

WHEN MOODY’S SPEAKS, EVERYONE LISTENS

In June and July of 1994, Moody’s changed its ratings on three major companies involved in one form or another in the shipping industry. The good news is that on June 10th and 29th, Moody’s upgraded its rating on two of the premier cruise companies in the industry, Carnival Corporation and Royal Caribbean Cruises Ltd.  Carnival’s  rating for unsecured notes and debentures that was already firmly entrenched in the investment grade sector of Moody’s rating with a Baa1 rating, was upgraded to A3, and its convertible subordinated notes were raised from Baa2 to Baa1. Meanwhile, Royal Caribbean had its senior subordinated notes raised to Ba2 from Ba3 (both ratings not investment grade), its senior unsecured “shelf” debt  to (P) Baa3 from  (P) Ba1(non investment grade to investment grade) and, finally, its preferred stock “shelf” to (P) Ba2 from  (P) Ba3 (both non-investment grade).  Royal’s shelf registration was discussed in  June in Marine Money  (vol. 10, no. 10).

OMI Downgraded
On the bad news side,  Moody’s cut OMI Corporation’s already low rating of B1 to B2 in July, 1994.  Moody’s claims that the rating action reflects the continued depressed rates in the international crude tanker market and the much reduced activity level in the US flag dry bulk carrier trade, as well as the company’s continued high leverage and diminishing interest coverage. EBITDA-to-interest expense has decreased to roughly 1.6 times for the first quarter 1994, and total debt-to-annualized EBITDA  would be approximately 6.0 times. Moody’s out-look for the rating will remain negative. Continue Reading

ROYAL BANK OF SCOTLAND HAS NEW DERIVATIVE PRODUCT

Prompted by rising interest rates earlier this year, the Royal Bank of Scotland devised a derivative-based borrowing product geared specifically to shipowners. The new product, called the Guaranteed Callable Swap, allows companies to unwind a hedge for a maximum cost of 1% of the notional principal, if the swap turns against their favor, or is out of the money.

Basically, interest rate swaps are used to reduce financing costs by rolling over a loan and borrowing again, thereby creating the potential for quality spread differentials with firms of better credit ratings. Continue Reading