Is Hawaii the Next Puerto Rico?

Is Hawaii the Next Puerto Rico?

As we have seen in the Puerto Rico market since the demise and withdrawal of Navieras, a little bit of extra capacity in a captive market can really pollute rates and destroy capital. Competition in the Hawaii market will be further exacerbated by the coming arrival a new Pasha-owned ro/ro working on the trade lane between Los Angeles and Hawaii. If there is a bright spot here, it is that the Hawaiian economy has been strengthening and might even be able to handle the added capacity.

Using Equity to Finance a Debt Deal

The debt financing of these vessels will be another interesting facet of the OceanBlue deal. We highly doubt that Caterpillar will be involved in ships that will compete against those in which they have already taken a considerable amount of risk. Moreover, with the vessels essentially operating in a “start up” business and with book values that make them totally uncompetitive in the international market should the startup not work, we think bank debt will be low. Therefore we would expect to see this deal financing with at least 50% equity and quite possibly more. This would give the lenders the ability to get out whole should they need to remarket the vessels on the international market.

Ocean Blue and the Need to Beef Up

One challenge associated with raising equity for OceanBlue will be the fact that the exit strategy is unclear unless DnB and Jefferies are able to make investors comfortable with the idea that OceanBlue will be able to beef up its business through newbuildings or acquisitions and then go public at a multiple of its book value. But where will they look to expand? With the supply demand balance of Jones Act markets extraordinarily tight, it will be both difficult and expensive to find good assets. If they are able to sell this story, though, then the IPO of Horizon Lines will come at a very good time by creating a comparable valuation that will get potential OceanBlue investors excited. The challenge therefore, is that OceanBlue is really a debt deal that needs equity – but at the end of the day, we have little doubt that the new Kvaerner ships will end up being consolidated into Matson or Horizon. There have been rumors that Alexander and Baldwin has been thinking of selling off Matson Navigation, though Horizon is the more logical choice in light of the age of their fleet and the fact that they are raising fresh equity. After all, Horizon Lines will need the ships at some point, and the economics of these ships is actually pretty reasonable. Moreover, Kvaerner might well shut down after the obligation to deliver these final vessels is fulfilled, which would make it very difficult for Horizon to find large ships at a comparable price.

As we have seen in the Puerto Rico market since the demise and withdrawal of Navieras, a little bit of extra capacity in a captive market can really pollute rates and destroy capital. Competition in the Hawaii market will be further exacerbated by the coming arrival a new Pasha-owned ro/ro working on the trade lane between Los Angeles and Hawaii. If there is a bright spot here, it is that the Hawaiian economy has been strengthening and might even be able to handle the added capacity.

The debt financing of these vessels will be another interesting facet of the OceanBlue deal. We highly doubt that Caterpillar will be involved in ships that will compete against those in which they have already taken a considerable amount of risk. Moreover, with the vessels essentially operating in a “start up” business and with book values that make them totally uncompetitive in the international market should the startup not work, we think bank debt will be low. Therefore we would expect to see this deal financing with at least 50% equity and quite possibly more. This would give the lenders the ability to get out whole should they need to remarket the vessels on the international market.

One challenge associated with raising equity for OceanBlue will be the fact that the exit strategy is unclear unless DnB and Jefferies are able to make investors comfortable with the idea that OceanBlue will be able to beef up its business through newbuildings or acquisitions and then go public at a multiple of its book value. But where will they look to expand? With the supply demand balance of Jones Act markets extraordinarily tight, it will be both difficult and expensive to find good assets. If they are able to sell this story, though, then the IPO of Horizon Lines will come at a very good time by creating a comparable valuation that will get potential OceanBlue investors excited. The challenge therefore, is that OceanBlue is really a debt deal that needs equity – but at the end of the day, we have little doubt that the new Kvaerner ships will end up being consolidated into Matson or Horizon. There have been rumors that Alexander and Baldwin has been thinking of selling off Matson Navigation, though Horizon is the more logical choice in light of the age of their fleet and the fact that they are raising fresh equity. After all, Horizon Lines will need the ships at some point, and the economics of these ships is actually pretty reasonable. Moreover, Kvaerner might well shut down after the obligation to deliver these final vessels is fulfilled, which would make it very difficult for Horizon to find large ships at a comparable price.