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Chris Weyers & Scott Burk – Bankers Move On
We also note the following friends who have found new positions:
Chris Weyers has left Fortis to join FBR Capital Markets as a Managing Director. He can be reached at (212) 457-3314 or cweyers@fbr.com.
Finding life after Bear Stearns, Scott Burk has accepted a position as Lead Ocean Shipping Analyst at Oppenheimer & Co. Scott can be reached at (212) 667-7402 or scott.burk@opco.com.
We wish them all good luck in their new positions.
Written by: carisk | Categories: Freshly Minted, People & Places | August 28th, 2008 | Add a Comment
DnB NOR Chief Bullish Expansion Set – Lending Grows
It is always a pleasure to hear from someone with a fresh and confident outlook, and such was the happy occasion when the Norwegian American Chamber of Commerce presented Rune Bjerke the Group Chief Executive of DnB NOR at an early evening, late summer event in New York. Mr. Bjerke joined the Bank leaving the successful Hafslund ASA where he was CEO. And as he noted the switch to banking left some of his friends perplexed it was the sort of challenge that appealed even though his start date approximately coincided with the start of the Sub Prime crisis.
Written by: carisk | Categories: Freshly Minted, Market Commentary | August 21st, 2008 | Add a Comment
Passage
On a somewhat somber note, we observed, as we walked by 383 Madison Avenue, that the Bear Stearns name had been removed in its entirety, a victim like Arthur Andersen, if anyone recalls, of the financial follies of our times. The new signage brought back the old brand J.P. Morgan & Co. under which the investment bank will operate. While we wish JP Morgan good luck, we hope the Bear Stearns employees all land on their feet in these tough times.
The Wall Street Journal’s Shipping Analysts Of the Year
For a Wall Street analyst the annual Wall Street Journal Best on the Street rankings is like an AcademyAward, only worth more, certainlyto those investors who bought basis the winning analysts picks.
This year Scott Burk at JPMorgan, but Bear Stearns when his picks were made (JPM acquired Bear Stearns in a sub-prime fire sale last March) came out number one in the Industrial Transportation classification. Doug Mavrinac of Jefferies & Co came in second and Omar Nokta with Dahlman Rose grabbed the third spot.
Banking on the Future
It’s starting as a trickle, but banks are again developing the comfort level to close new deals and owners are becoming accustomed to the necessary changes in pricing, terms and covenants. HSH Nordbank, our 2007 winner for Greatest Contribution to Ship Finance, has since the fall been fielding accusations that it had stopped its ship lending. Countering such concerns, HSH announced this week two loans it has closed for Greek shipping companies, both of which were arranged in 2008 – and so are not unfinished business from before the credit crunch.
Written by: carisk | Categories: Freshly Minted, The Week in Review | March 13th, 2008 | Add a Comment
Certainly Not Built of Sand
According to Wikipedia, “a castle is a defensive structure seen as one of the main symbols of the Middle Ages. The term has a history of scholarly debate surrounding its exact meaning, but it is usually regarded as being distinct from the general terms fort or fortress in that it describes a building which serves as a residence of a monarch or noble and commands a specific territory.”
Investors will soon have the opportunity to invest alongside Fortress Investment Group in their commanding intermodal leasing business, as Seacastle Inc. readies itself for its initial public offering. With the assistance of joint bookrunning managers, Citi, Bear Stearns, Deutsche Bank and Merrill Lynch, the company is preparing to sell 20 million shares at a price between $15 and $17 per share. See our Guts of the Deal table (Figure 1) for the main parameters of the transaction.
Written by: carisk | Categories: Freshly Minted, The Week in Review | January 24th, 2008 | Add a Comment
Bear Stearns Follows Up with Report on NAT’s Latest Acquisition
On June 24, Nordic American Tanker Shipping, Ltd. (NAT) announced its decision to purchase a seventh modern suezmax tanker for $71.4 million. Justin Yagerman of Bear Stearns acted quickly to discuss the implications of this for the company he just recently initiated. The seller of the Korean built tanker is presumed to be Frontline (FRO). In January, NAT announced the purchase of the Nordic Fighter for $68.3 million, a sister ship to the most recent tanker purchase. The two tankers are among the four suezmax’s acquired by NAT since 2004. The newest tanker acquisition falls in line with NAT’s avowed policy of expanding through purchases with promising potential. Mr. Yagerman believes that this new vessel acquisition will provide for an increase in net voyage revenue, higher earnings, and share distributions.
After the recent purchase, NAT now has six of its seven ships trading in the spot market. However, Mr. Yagerman explains that although spot-rates usually outperform time charters, Bear Stearns would still like to see some additional long-term charters to add stability to NAT’s cash flow.
Mr. Yagerman believes that NAT will finance this deal with a combination of cash readily available as well as drawing from its currently untouched $300 million credit resource, though this purchase will increase NAT’s daily cash break-even hurdle. The analyst does not expect NAT to come back to the equity market to refinance this debt at any time in the near future.
However, given the fact that NAT’s dividends and earnings are so dependent on suezmax spot rates, Mr. Yagerman finds NAT’s risk/reward is less than convincing. NAT was down 1.1% on June 24 versus the S&P 500, which was down 0.7%; while the rest of the Tanker Universe was down 0.8%. Even though NAT has more than doubled its fleet in less than a year, there is still a significant amount of risk considering the company’s leverage to the suezmax spot market. The latest tanker acquisition follows suit with NAT’s precedent of purchasing vessels at peak prices, which Mr. Yagerman sees as a risk to NAT’s return profile in the current rate environment.
Another cause for concern is NAT’s decentralized vessel management. It is unclear as to who will control the commercial and technical management of the newly purchased vessel. Mr. Yagerman gave the company a rating of Peer Perform, meaning he projects that the stock will perform approximately in line with the analyst’s industry coverage over the next twelve months.
Written by: carisk | Categories: Freshly Minted, Market Commentary | June 30th, 2005 | Add a Comment
Why Capital Maritime Pulled its IPO – What it Means
Evangelos Marinakis had the world of shipping and capital markets contemplating and strategizing after Capital Maritime’s decision to withdraw its 16.7 million share IPO during pricing on Monday night. Goldman led the deal while Bear Stearns and Jefferies played supporting roles as co-managers. With deals for Genco, Quintana, Wexford, and others confidentially filed by foreign issuers in the process of coming to market, Capital’s decision to pull has been a reality check for both issuers and underwriters that valuations are coming under increasing pressure with every new deal that comes to market, irrespective of the quality of the fleet and corporate structure.
Dissecting the Deal – Lessons Learned
Ironically, the factors that most influenced the pulling of this deal were determined before the company jumped on the first private jet out of Teterboro: the price range and the corporate structure. As we understand it, a solid group of blue chip institutional investors liked the Capital deal, especially in light of the fundamentals for the product tankers that Capital has on order. However, they became very focused on the price relative to the range.
Set the Range High and Negotiate Down
Unlike Eagle, which went to market at about 180% of net asset value and therefore had a lot of room to negotiate with investors, Capital was boxed in from the start. Goldman advised the company to put a very reasonable price on the cover of the red herring at $14-$16 (5.3x-5.8x EBITDA), hoping that investors would place enough market orders (which do not specify the price) to push the stock to the high end of the range or above it.
Unfortunately, since investors recently had their way with Aries, TBS and Eagle, they put in limit orders (which state a firm price) at $13 – or $2 below the range. The problem was that with a net asset value of about $15/share, Capital had little room to be negotiated down. This inflexibility was compounded by the fact that Evangelos Marinakis put his entire family fleet and management company into the public vehicle, making the impact of a dilutive deal even greater.
Don’t Offer Newbuildings If You Won’t Get Valuation Credit
Yield deals like Diana, Aries and Eagle were able to tap an investor community that focuses on valuations such as Price/EBITDA and dividend yield. However, Capital had much of its net worth in newbuilding contracts (which produce negative cash flow until the ships deliver) and therefore put the company squarely into the world of value – net asset value in this case – which allowed investors to feel they possessed the upper hand. This is not a new phenomenon; TEN has also struggled to have its fantastic newbuilding program assigned a fair value.
Keep It Simple
As superficial and shallow as it sounds, valuing the Capital fleet may have been more time consuming for investors than expected. As of June 3, 2005, the company’s existing fleet was comprised of 39 vessels of which twenty-six are product tankers, four are OBOs and nine are bulk carriers. In addition, Capital currently has 16 Ice Class 1A MR product tanker newbuildings on firm order, which are scheduled for delivery in January 2006 through November 2007. These tanker newbuildings have an aggregate carrying capacity of 665,500 deadweight tons and currently comprise the largest fleet of this type and size on order in the world. As sad as it sounds, valuing Capital’s fleet, which has a wide range of ages and types, may have required more of a commitment than the average value investor wanted to make.
Like many good deals, the sellers didn’t need the money, and indeed may have been disgusted by the way future partners valued the company after the efforts made to construct a first class investment opportunity. All in all, this was a good deal and it is a disappointment that it didn’t get completed. In the end, we think it is the investors who have lost out here. Although every deal seems to influence the next one, we do not think the pulling of this deal will have a major impact on future shipping IPOs – so long as issuers go into the market with reasonable expectations. The fact remains that at today’s high net asset values, issuing a minority interest in equity at even a slight premium is a very attractive proposition.
IPO Market Remains Robust For Shipping Issuers
Don’t be misled by the trade press articles and the fact that recent shipping issuers have priced IPOs at the low end of already lowered price ranges; the fact remains that based on our valuations of these companies, issuers are continuing to do U.S. capital markets deals at very attractive valuations. Moreover, we are seeing deals with single hull tankers (Capital), older vessels (TBS) and secondary share sales (Eagle), as well as related party management companies (various). Despite claims to the contrary, the fact remains that the American equity markets are wide open for all kinds of shipping deals. As we see dry cargo rates begin to bounce in recent days, we would not be at all surprised to see this sector regain momentum and enjoy another run.
As one of the 150 investors at Marine Money Week said over coffee, “just because we aren’t paying the retail price that investment banks put on the prospectus doesn’t mean that sellers aren’t getting a premium.” We would concur with that. The message being telegraphed back to the industry from Wall Street and Main Street investors is that the market is open for shipping IPOs even though the heady days of 2x net asset value are gone – at least until rates begin to gather momentum in the coming months.
That said, we should acknowledge the two companies currently engaged in roadshows in the U.S. Capital Maritime & Trading Corp filed an F-1 today for the issuance of 16.67 million shares at $14-$16 per share on the NYSE. We will discuss this deal further next week, when it is expected to price. Cosco has also traveled a long way to bring its roadshow to New York this week.
Eagle Bulk – Don’t Believe What You See
But deals still in the market do little to demonstrate investor appetite. Let’s take Eagle Bulk as our first in-depth example of why the U.S. equity markets are still open, and yes even attractive, to shipowners. The U.S.-based handymax owner Eagle cut the estimated price of its initial public offering to $14-$15 a share from the planned $16-$18 a share, but the company increased the size of the IPO to 14.4 million shares from 13.25 million to make up for the shortfall. The deal priced at $14 per share, which we estimate to be around 1.6x a net asset value that is already high, especially in light of declining charter rates. This is a phenomenal execution that gives start-up Eagle a better valuation than Teekay or OSG. As mentioned above, despite the fact that investors have supposedly rejected issuer’s attempts to sell secondary shares, private equity fund Kelso, which is the financial sponsor behind the Eagle deal, was able to extract about $70 million through fees and debt repayment, which represents almost the fund’s entire investment in Eagle, even while it still retained about half of the equity.
Soft Aftermarket Trading for Eagle
As we saw with Diana Shipping, Eagle has sagged in early aftermarket trading as the stock immediately sank to $13.50. As we understand it, Citigroup’s Smith Barney and UBS’s Paine Webber sold about 65% of the deal to retail investors while the joint bookrunners, which include the names above plus Bear Stearns, sold the balance of the deal to institutional investors. Although this type of sales technique resulted in solid pricing, as it did in the Diana deal, the aftermarket performance prevents “flippers” from immediately selling their stock for a gain. We do not know whether the underwriters exercised the green shoe or are willing to offer support by buying stock to stabilize the pricing. If they have already used their dry power to support the stock, however, we would not be surprised to see continued soft price performance, at least until we run into some sort of market upturn.
Are Dividends Losing Effectiveness?
One question we’ve been asked lately relates to yields. Specifically, how are investors looking at them? The answer, in our view anyway, is that yield can be used to increase valuation among certain fringe buyers of these stocks such as retail, but most experienced institutional investors clearly are looking at net asset value because issuers like Eagle do not have the long-term contracted cash flows required to meet the dividend in question over a sustained period.
In fact, investors that we spoke with at Marine Money Week seem to like growth stories and are discounting the real value of the dividend over the long-term. They are, however, looking at dividends as a way for them to lower their cost basis by receiving their deprecation and earnings in cash. As one Eagle investor said, “Do I think the 16% dividend is a guaranteed? No. But based on the company’s charters, I know I can get more than 30% of my money back over the first two years, meaning that I am really buying this company at closer to net asset value. That is the trade.”
This logic, although tempting, neglects to embrace the potential loss of principal that would result if rates and values return to historically normal levels. In our view, companies that seek to pay dividends and do not have long-term employment to back them up should just be careful to set them at realistic levels that do not stress the company’s liquidity and leave enough cash to take advantage of growth opportunities. It follows from this that Eagle priced at a quite respectable valuation, indicative more that investors have sobered a bit since January than that they have lost interest in dry cargo equity.
Eagle Bulk: Coming to Market at 200% of Net Asset Value
In what we think is a truly defining moment in history of shipping and the capital markets, Eagle Bulk Shipping began its roadshow this week to raise approximately $255 million of equity against a fleet of 11 handymax bulk carriers. We don’t mean to be histrionic here, but we think the valuation of Eagle will strongly influence the dozen other dry bulk deals queued up to come to market.
What we find fascinating about the deal is that Eagle Bulk is using its circa 14% dividend to come to market at approximately 2x net asset value at a time when the comparables are trading closer to 1x net asset value.
According to our calculations, the net asset value of the fleet is about $221 million. We arrive at this figure using our fleet value of $339 million (which includes 3 vessel to be acquired) against liabilities of about $130 million (which includes $97 million on those 3 new vessels and $30 million drawn from the company’s credit facility) and cash of $12 million. Based on the 26 million fully diluted shares (by which we mean the 13.25 million sold to the public and the balance allocated for the green shoe and retained by the sponsor) Eagle Bulk has a net asset value of $221 million, or $8.50/share versus an offering price of $16-$18 per share.
With the serious institutional shipping buyers very savvy in their ability to value shipping companies these days, we can only assume this deal will be sold into the retail market where buyers will be attracted to the yield. Another possibility is that the underwriters have put a very high number of the cover of the prospectus knowing that it will be negotiated down by the investors in today’s choppy IPO market. Eagle Bulk could effectively price its offering more than 50% below the mid price of the range and still capture a premium.
The Opportunity
Aside from the high valuation, small enterprise value and lack of vessel diversification, we think the Eagle Bulk deal provides a well-structured opportunity for investors to participate in the handymax dry cargo market. We say it’s well structured because commercial management is inside and technical management is in the hands of third party V Ships. Moreover, the charters are good, the ships are modern, the company has a large credit facility and the vessels operate in the handymax sector – which enjoys the best supply/demand fundamentals of all the dry cargo markets.
If this deal is successful, the real credit goes to whoever at Eagle (or, perhaps, credit facility provider Royal Bank of Scotland!) decided to put medium term charters on the ships while the market was still strong. Although charter default risk exists in a weakening market, as you can see from our calculations the cash flows generated by these vessels for the next 18 months are presently higher than what could be achieved in the market today and will improve the EBITDA and net asset valuation of the company.
The Challenges – Overcoming Diana
The successful execution of the Eagle Shipping IPO will not be without some challenges, at least if it is sold to institutions. For one thing, the deal is being brought to market by the same pair of bookrunners that brought out the similarly structured Diana Shipping – UBS and Bear Stearns. Citigroup was also added on the cover recently (they did not appear on the original S-1 filing), perhaps to broaden the distribution, and CSFB is the sole co-manager.
Although the high dividend yield structure has created extraordinary premium valuations for tankers companies such as Nordic American Tankers, Knightsbridge Tankers and Arlington Tankers and has clearly inspired replicas in other sectors, the model has not yet successfully translated into dry cargo. Take for example, Diana Shipping, a first rate, high quality company that was the first deal of this sort in the dry bulk space, which has suffered mightily since it began trading in March. It trades at a premium of about 1.3x net asset value and was priced at about 1.4x net asset value before falling in the aftermarket.
Market sources indicate that there were some mistakes made with the execution of Diana, such as who it was sold to, high pricing and a premature exercise of the green shoe, but to be fair to everyone involved the fact that the dry cargo market began falling immediately after the offering was probably the underlying culprit. That said, the unpleasant fact remains that buyers of the Diana IPO have suffered losses – which is why we assume from the high pricing on this deal that it will sold into a new market that puts a greater emphasis on yield than underlying value – retail. Although many within the shipping industry have been astounded by the valuation of companies like Nordic American Tankers, the fact remains that they have delivered very good returns to investors who bought them and held the, over the years.
The Valuation
As is our editorial policy, we will not tell you what we think Eagle Bulk is worth. We will, however, attempt to help you make sense of the information that is presented in the prospectus. As mentioned earlier and outlined in the accompanying figures, the Price/Net Asset Value appears to be high relative to comparables. The key to achieving this high valuation will derive from the healthy dividend that the company is able to pay from free cash flow. As you can see from our calculations, Eagle will generate close to $80 million of EBITDA per year of which about $60 million will be returned to shareholders through a dividend, which will equate to 13.5% yield.
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