Nordic American Deal: Breaking New Ground and Causing Concern

$5 on a Total Flyer

While the structure of the recently completed Nordic American deal drew early praise which, considering the fact it was oversubscribed, is understandable; upon closer examination, the returns for investors are poor and quite conceivably disastrous. Yet the warrant structure for newbuildings is genuinely creative, and a Carnival or OSG might examine the benefits.

The structure is interesting from an investment banking point of view: warrants, all equity, BP’s tax advantaged position and a good fall back structure in case the warrants are not exercised, but that is quite different from thinking it makes sense for investors. The deal protects investors on the downside of freight rates. But the next step has to be dealing with the residual value risk.

The reasons are simple. And, we are not alone in looking at the deal’s numbers and reaching the conclusion that investors will be lucky to get their money back. The warrants opened at a discount to their $5.00 sale price. They are trading today at $4.75 and we would not be surprised to see them at $2.00 well before the two year option date.

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