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Ka-ching for your 401K
Although the financial press is full of articles touting corporate bonds as a great investment, we failed to pay attention. After all, it is hard to unlearn the lessons of the world’s greatest investors who promoted only of the stock market based upon fears of inflation. Well, we know where that got us.
Although recently the market has shown signs of life, a look at the Jefferies High Yield Issues, which regularly appear in this publication, highlights the opportunities for returns that might rival those in the stock market in at least the near term, if not longer. Moreover, the bonds are more secure holding a higher place in the capital structure, and some are even secured by assets.
Just Say No!
Options are a wonderful thing. Having an ability to exercise them or not, gives one a great deal of flexibility. It was no surprise then when Navios Maritime Partners chose not to acquire TBN II, a newbuilding capesize vessel from Navios Maritime Holdings for $135 million based upon unfavorable conditions in the capital markets.
We suspect price may also have had something to do with the decision. A portion of the risk was mitigated through a five-year time charter at $55,100 per day. To assess the risk at the end of the five-year period we calculated the future value based upon the following assumptions:
Strained Bedfellows
If things were not bad enough, U.S. Shipping Partners’ joint venture with Blackstone to build five U.S. flag product carriers is in the process of unraveling as the latter tries to protect its investment. Under the various operative documents, Blackstone has declared a Board Reduction Event and a Manager Termination Event, the effect of which would be to remove USSLP’s subsidiaries as the managing member of the joint venture and the manager of the vessels under construction. Adding to the woes, the lenders to the joint venture gave notice of default under the credit facility and their intention to foreclose on the M/T Golden State, the first vessel delivered to the joint venture by NASSCO.
USSLP is contesting these claims through a lawsuit and in the interim has filed a motion for a preliminary injunction enjoining Blackstone and the banks from taking these steps. The hearing is set for April 30th, the same day as the latest extension of the forbearance agreement expires. In the interim, the court has issued a temporary restraining order precluding the parties from foreclosing upon the vessel and replacing USSLP as manager.
“Wishin’ and Hopin’ and Thinkin’ and Prayin’”
Back in March, U.S Shipping Partners (“USSLP”) entered into the fifth extension of the original Fobearance Agreement dated as of December 30, 2008, which extends the period of forbearance until April 30th. By the terms of this agreement, the banks agree not to take any action or exercise any right or remedy under the loan agreements with respect to the partnership’s:
Not Tom Paine’s Common Sense
This week we have been thinking about President Obama’s dilemma on how to disclose the results of the banks’ stress tests and whether to allow Goldman Sachs to re-pay TARP borrowings. In a simple world, the answers are straightforward. Would the President and First Lady be satisfied if Maila’s and Sasha’s report cards only showed pass-fail as grades? If you insist upon transparency, you must walk the talk. And, in fact, it does not take a rocket scientist to know which banks are stronger than others. Ratings are reflected in share prices and CDS spreads. Share prices of good banks should rise while those of weak ones should fall. The grades are of little concern as the poor ones will just remain at the government teat longer. Nationalizing the banks was an anathema and we therefore ended up with a multitude of programs to prop up the banks. If you don’t believe in social programs why would you support these? If anything needs to be graded these days it is, in fact, these programs.
And, as far as Goldman Sachs is concerned, why shouldn’t the taxpayers get their money back. It is a stronger bank and with its conversion to a bank holding company it is now more regulated.
Old Faces, New places!
In these difficult times we are happy to report some good news as good friends have found new opportunities. Carl Rasmussen is now with Cambridge Global Capital Partners. And two stalwart Fortis Capital employees, Tobias Backer and Evan Uhlick have landed at ICON Capital Corporation and DnB NOR respectively. Good luck to all.
What’s Good for the Goose is Good for the Gander?
We have written frequently as of late on the waivers granted by the banks for the breach of covenants by borrowers. Waivers, in all but one instance, involving public companies have been granted. In a majority of the cases, there has been a quid pro quo involving certain amendments to the terms of the loan agreement, although there are instances that they were given gratis. Our reporting has naturally been limited to the public companies.
Historically, the price for the waiver for the breach of the LTV covenant, which has been the predominant trigger of late, has been the requirement that the borrower provides additional collateral or pays down the debt to a level which meets the test or is acceptable to the lender. This has not been the case recently. In most instances, the lenders and owners have agreed to cessation of dividends, accelerated debt repayment, or amortization in the case of non-amortizing loans, and increased interest spreads, in effect making up for the cheap money and soft terms granted earlier. In only few instances, among them Star Bulk and Excel, has there been additional collateral proffered or debt prepaid.
The Eitzen Group Also Cleans Up
This week Camillo Eitzen (“CECO”) and its subsidiary, Eitzen Chemical disclosed the results of their visits to the Japanese shipyards. CECO got the better deal having been able to cancel six 2,500 cbm gas carriers against a full and final settlement of $2.5 million. Eitzen Gas no longer has any newbuilding commitments.
Eitzen Chemical did not fare as well. The company has entered into an agreement with a Japanese shipyard to cancel five 12,000 DWT stainless steel chemical carriers which had a further capital commitment of $175 million. The company will compensate the yard by releasing a deposit of $7.5 million and paying a further cancellation fee of $7.5 million by November 30, 2009. The company expects to record a loss of ~$10 million as a consequence.
Both companies are presently in discussions with their lenders “…to amend the debt repayment schedule and to adjust the covenant structure to better fit today’s market environment.”
“I Will Survive”
After what must have been extremely difficult negotiations, Excel Maritime Carriers (“Excel”) cast more light on its previously announced restructuring in this week’s earnings announcement. Last week, the company announced that it had amended its Nordea Syndicated Facility and the Credit Suisse Bilateral Facility as well as secured the necessary covenant waivers for these facilities that are valid through January 2011. The amendments are highlighted in the two charts contained herein. The first shows the adjustments to the covenants as well as the increased margin. The second slide relates specifically to the Nordea loan and the agreed amended amortization, which discussion, we would surmise, must have been extremely contentious both between the parties and within the syndicate. Nonetheless, it was agreed that the company would defer principal repayments of $150.5 million (originally scheduled for 2009-2010) to the balloon payment at maturity (April 2016). The agreed debt deferral will allow the company to meet its $97 million newbuilding obligation in 2010 and more importantly brought its breakeven rates to hopefully sustainable levels The company also has the option to defer against the balloon payment further principal payments, on a dollar for dollar basis, equal to the equity contributed by the major shareholders during 2009 and 2010.
Few Surprises But Nonetheless Interesting
A quarter, particularly the first one, does not make a year, but according to the first quarter Dealogic tables, which we received today, the axis of the ship financial world has tipped eastward. Looking at the Top 20 Bookrunner Table of which there are only eight, Asian banks populate four of the places including the three top spots, which are held by SMBC and SBI Capital Markets (State Bank of India), and Mitsubishi UFJ Financial Group (“Misubishi UFJ”) respectively. In the case of the Top 20 MLA Table, Mitsubishi UFJ Financial Group and HSBC took the top two spots and three other Asian banks populate the top 20. Total volume for the quarter was $10.6 billion, continuing the downward trend since 2007. However for those who see a glass as half full this quarters volume is in line with the comparable periods in 2005 and 2006. Is it too early to say we are reverting to the norm?
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