K-Sea In Rough Water

For the first quarter, K-Sea Transportation Partners L.P. reported lower operating results across the board largely reflecting market conditions in the Jones Act trades as well as an impairment charge attributed to an earlier than planned phase out of its single hulls vessels. Based upon its performance, the company cut its dividend from $0.77 to $0.45, a reduction of approximately 58%, and has proactively begun discussions with its banks with respect to potential breaches of covenants in its loan agreements, which may occur by the end of the 2nd or 3rd quarter. The intention is to amend the affected covenants.

As is the case with dividend payers in general and full payout models in particular, the impact of the dividend reduction was substantial with the stock trading down on the day of the announcement to $14 from the prior day close of $22.45, a 37.6% fall. The shares continue to trend downward trading in the $11 to $12 range and are currently yielding 15.6%. The impact of the decline was in all likelihood magnified by the company’s stellar record of increasing distributions over the past 5+ years.

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All Eyes Are On Genmar

We know that General Maritime’s dynamic duo, Messrs Georgiopoulos and Pribor are on the road marketing their $300 million senior unsecured notes offering due in 2017 and so, while they are busy selling we thought we would take a read of the high yield market.

Earlier this week, Navios Maritime Holdings closed its successful $400 million private offering of first priority ship mortgage notes due in 2017. Rated BB-/Ba3, the coupon on the notes was 8.875% and was priced to yield 9.125%. The company escrowed $105 million of the proceeds to provide additional financing to complete the purchase of two new vessels with the balance used to repay existing credit facilities.
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Do What I Say, Not What I Do

Last week, we utilized FBR’s Paul Miller’s analysis of the large bank’s 3rd quarter’s earnings in order to shed some light on what these results might indicate to the shipping world. This week we intend to draw again on his experience to drill down and look at the reporting and disclosure by banks of non-performing loans (“NPL”). Mr. Miller sets the stage as follows:

“While several recent bank earnings reports for 3Q09 have highlighted improvements in early-stage delinquencies and NPLs, we are concerned with the surge in loan modifications and “troubled debt restructurings” (“TDRs”), which allow banks to move loans away from non-accrual status, effectively just delaying credit deterioration. We expect this trend to continue as most banks report earnings over the next few weeks, and while delinquencies may appear to be stabilizing on the surface, re-default rates on TDRs are generally very high and could lead to prolonged credit pressure across the industry. Currently, GAAP rules do not specifically define non-performing assets (NPAs), allowing for some flexibility from bank management teams in what they classify as an NPA. For FBR’s interpretation of NPAs, we include all non-accruing loans (NALs), TDRs, real estate owned (REO), and all other non-accruals, in accordance with regulatory filings. Interestingly, out of the top 25 banks and thrifts by asset size, we estimate 2Q09 NPA levels under regulatory filings were 17% higher than that reported under GAAP accounting, on average. That said, we view loan modifications themselves positively, and we realize that not all loan mods re-default. The issue is that accounting for loan mods is not transparent and makes delinquency data appear better on the surface. We are drawing attention to this because we are concerned about comparing early-stage delinquency and NPA data for banks when it is not apples to apples for all banks. When you include TDRs in NPAs, stabilization in the credit metrics becomes more unclear.”

To have a clearer understanding of the issue, one needs to have a rudimentary knowledge of the various forms of restructures. Again, Mr. Miller helps. Loan restructures can take several forms. “Loans can be classified as TDRs if they are modified and grant a concession to borrowers, not in accordance with a bank’s regular modification policy. They generally take the form of lower interest rates, loan balances, accrued interest, or an extension of the maturity date.” Alternatively, “a bank can restructure a loan without classifying it as a TDR if the terms of the modification are in line with the bank’s normal refinance or restructuring policies. In addition, a loan extended or renewed at an interest rate equal to the current interest rate for new debt with similar risk is not to be reported as a TDR. As a result, while TDRs likely capture the more severe modifications, requiring concessions to borrowers that would not normally be granted, a large number of other loans become modified in the regular course of business and often go unreported.”  Moreover, if a restructured loan is in compliance with its modified terms, it may be re-classified as performing if it remains current for at least six months. These belie the issue of re-default, which is not unlikely in these perilous economic times. Banks, of course cannot create revenues or profitability they can only try to align payments with forecasted cash flow.

In short, all is not what it appears to be. A lack of definition, two sets of books (regulatory vs. GAAP) and management discretion do not add up to full disclosure and the transparency banks demand of their clients.  And notwithstanding the various classifications of problem loans, the banks in all likelihood will literally have to face the music and acknowledge the diminished value of the assets underlying their loan portfolios as their fiscal year ends and waivers begin to expire.

Delaying delinquency merely defers the problem it does not remedy it. Lacking disclosure and transparency, the true financial condition of the banks is not correctly portrayed or understood.

Despite Its Ups and Downs, It Really Has Been a Good Year

We are frequently guilty of focusing on each day or deal as it comes and often lose sight of the whole. And, so we were pleasantly surprised by a collection of data, which put his year’s capital markets activity in context and reminded us of the resilience of our industry. With bank lending at a nadir, it fell to the investment bankers to fill the void, which they have tried to do mainly with follow-on equity offerings and lately with the return of high yield. Neither is a perfect substitute for low-cost bank debt given size limits, cost and dilution, but it is all we have.

As writers, we are not big fans of PowerPoint, in general, but often there is a slide or two that reminds us that a picture is worth a thousand words. Such was the case in the presentation made by Anup Mysoor of Citi at our recent conference in Busan.

From Mr. Mysoor’s presentation we have chosen three slides that we think demonstrate where we are today and what has been accomplished to date.
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The Not So Invisible Hand

In the midst of its 3rd quarter earnings report, General Maritime disclosed that it had entered into a broad amendment of its 2005 credit facility led by Nordea this week. It would appear based upon these disclosures, that the banks are perhaps becoming more proactive in protecting their interests. The time of waiting and seeing what will happen has passed. Simple waivers, if this is an indicator of future trends, will not be granted. Amendments will require reduction of exposure, tighter covenants, and higher costs. But it is the quid pro quo for the amendment that makes this one particularly interesting. The amendment is contingent upon a re-capitalization of the balance sheet through the offering of non-amortizing senior unsecured notes (but with subsidiary guarantees) with a minimum term of five years. The offering must be consummated by November 30th and provide at a minimum net proceeds of $230 million.
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Size Does Not Matter

Following in the footsteps of it’s earlier offering in July, which raised net proceeds of $16.7 million, FreeSeas Inc. has filed a preliminary registration statement for the sale of up to $15 million of common stock in an offering to be led by Dahlman Rose. The new registration statement provides greater flexibility to raise capital than its earlier registration statement. In preparation for this as well as future offerings, shareholders had earlier approved an increase in the authorized number of shares of stock from 40 million to 250 million.

Proceeds will be used for the purchase of additional vessels, repayment of debt and general working capital purposes. An amount equal to 10% of any capital market proceeds, up to a maximum of $3 million over the lifetime of the facilities, shall be applied to the prepayment of the Hollandsche Bank-Unie facilities.

A First

These are difficult times and, as the expression goes, there is a first time for everything. Last week, A.P. Moeller – Maersk A/S (“Maersk”) successfully placed a EUR 750 million ($1.3 billion) five-year bond with a coupon of 4.875%, which equates to 237bps over German government debt, according to Pareto.  This is the company’s first bond issuance and was 6.5 times oversubscribed.

Proceeds from the offering will be used for general corporate purposes and for repayment of drawings under longer-term bank revolving facilities that will be retained as liquidity buffers.

This transaction follows a recent equity offering of $1.7billion evidencing that even for the best there is never enough liquidity.

Danske Bank, HSBC, ING, J.P. Morgan and Nordea placed the bonds, which will be listed in Copenhagen and Luxembourg.

Food for Thought

We are very grateful to Viktor Berglind for extending us an invitation to attend RS Platou Conference last week, held in celebration of its 20^th Anniversary in Singapore.

Among the many insightful market presentations, we enjoyed the panel discussion on the market outlook moderated by Mr. Erik Helberg (RS Platou Shipping Research Team), featuring Mr. Richard Hext (CEO Pacific Basin), Mr. Andreas Sohmen-Pao (CEO BW Shipping), Mr. Thomas Preben Hansen (CEO Rickmers Maritime), Mr. Kent Paulli (Director ST Shipping/Glencore) the most and here are some extracts from the very interesting panel discussion involving some of the most established names in the shipping business. Continue Reading