Concurrent with its Global Transportation Conference held today in New York, Bear Stearns has made a much-awaited break into the world of shipping analysis through the work of Justin Yagerman. Bear Stearns’ coverage initiation includes Diana Shipping, on whose IPO the firm served as underwriter, OMI, Nordic American, OSG and Teekay. Mr. Yagerman uses clever slogans to sum up the capabilities of each of the companies, citing Nordic American as “yielding results through a simple plan,” Teekay as having “a diversified growth portfolio,” and OSG as “sailing on many seas,” and he initiates all three of these companies with a relatively neutral “Peer Perform” rating. OMI, described as “putting the tanker market into focus,” wins the only “Outperform” rating of the tanker group for virtues including growth and favorable charter rates across its asset classes, strong company-specific chartering performance, and a modern, double hull fleet.

Diana Shipping, the only dry bulk company included, was also awarded an “Outperform” rating with the slogan “a great time to buy dry.” Mr. Yagerman cites Diana as having undervalued shares and thin research coverage in an industry with solid fundamentals. Additionally, the fleet’s age averages only 13 years and the revenue outlook is steady, with all currently owned vessels fixed on time charters. The $20 year-end price target Bear Stearns has for Diana represents a 34% upside from current levels based on 10x 2006E EPS estimate of $1.99. Unfortunately for Diana, neither this nor a positive report issued last month by Jefferies have had much of a strengthening effect on the company’s stock price to date, which at press time sits notably below the $17 offering price at $14.40. Investors looking for value in a seasonally week period may do well to take note.

Shares of Diana Shipping were trading below its offering price of $17 this week. The fact that lead underwriter Bear Stearns does not publish shipping equity research probably has not helped investors see the value in the stock at current prices.

The Street.com featured an article on oil tanker stocks this week stating that; “One of the lessons of recent market action is that you generally want to own companies in industries where supply is tight and sell companies in industries where supply is plentiful. The framework would lead you to be long natural resources and trucking stocks, to be sure, and short the makers of dime-a-dozen stuff like commodity semiconductors. But the idea also takes longs into the fabulous and mysterious world of oil tankers.”

Incidentally, many of the traditional tanker stocks staged a comeback today, trading up by a dollar or more.

Diana Shipping –

Sailing Toward a Successful IPO

Simeon Palios and Fortis-owned Diana Shipping began its roadshow in London this week to raise $241 million through the sale of 14.2 million shares of common stock, which will trade on the New York Stock Exchange under the ticker “DSX”. Bear Stearns is sole bookrunner on the deal, and co-managers include Jefferies & Company, UBS Investment Bank and Fortis Securities, which immediately prior to the offering will own 25% of Diana through its private equity fund Maas Capital Investments.

A Dry Bulk Version of Nordic American Shipping

We see absolutely no reason why this offering will not be wildly successful. As we’ve seen in the last 12 months, every new shipping deal that comes to market brings with it a slightly different structure, fleet and philosophy that suits both the selling shareholders and, ideally, investors – and Diana is no exception.

For example, proceeds from the Diana IPO will be used to reduce the net debt on the company’s post-IPO fleet of 10 bulk carriers to zero while the company has pledged to pay out all of its free cash. Sound familiar? It should; this technique is reminiscent of Nordic American Tankers, which not coincidentally is the brainchild of underwriter Bear Stearns – NATS enjoys the strongest valuation in its peer group.

According to our own 2004 pro forma of the company’s financial performance (and assuming no reserve), Diana would have been able to pay a dividend of $1.94, which equates to a whopping 11% yield based on the anticipated offering price, although this is before whatever amount the management feels it should keep on hand for working capital and growth. When the opportunities arise, the unleveraged Diana will simply borrow against its unpledged assets and go shopping. The prospectus notes that “in times when we have debt outstanding, we intend to limit our dividends per share to the amount that we would have been able to pay if we were financed entirely with equity.”

As the fleet list indicates, Diana owns a fleet of seven modern panamax vessels with an average age of just 3.1 years, which should make the fleet very attractive to investors so long as the price can be justified. As the fleet is indeed focused, it is not diversified, meaning investors will be exposed to one of the most volatile segments of the dry bulk business. According to the Form F-1 filed with the SEC, during the nine month period ended September 30, 2004, the company’s vessels achieved daily time charter equivalent rates of $25,269. To give you a sense of just how volatile this business is, the company also said that “during 2001, 2002 and 2003 and the nine months ended September 30, 2004, we recorded net income (loss) of ($0.4) million, $0.1 million, $9.5 million and $28.5 million, respectively.”

Diana’s plan is to grow the business with modern units, and the company recently entered into newbuilding contracts with a Chinese shipyard for the construction of two additional 73,000dwt panamaxes. The company also signed an MOA with Louis Dreyfus Armateurs to purchase a secondhand capesize vessel. All of the new ships should be in the fleet and earning money by the first half of 2005.

Use of Proceeds

As mentioned above, one of the novel features of the Diana transaction is the fact that the company will use the proceeds of the offering to eliminate debt. Of the $182 million proceeds, after fees and expenses, the company will use $15.0 million to fund the final installment due on the new panamax dry bulk carrier that it expects to be delivered to the company in April 2005 and the remaining $166.4 million to repay all of seven of its outstanding credit facilities that mature between June 2013 and November 2015 and bear interest at LIBOR plus 1.125% to LIBOR plus 1.3%.

Although the company’s ships are managed by an affiliate, another interesting feature of this deal is the fact that Diana has agreed to buy the ship management company, Diana Shipping Services (DSS), in the future. According to the filing, “We have entered into an agreement with the stockholders of DSS pursuant to which the DSS stockholders may sell all, but not less than all, of their outstanding shares of DSS to us during the 12 month period following the consummation of this offering for $20.0 million in cash. Under the terms of the agreement, if the DSS stockholders do not sell their outstanding shares to us prior to the one-year anniversary of this offering, we may purchase the DSS shares from them for the same consideration at any time prior to the second anniversary of this offering. We expect the DSS stockholders to sell their outstanding shares of DSS to us during the 12 months following the offering and intend to exercise our option if they do not do so. We intend to finance our expected acquisition of our fleet manager with borrowings under our new credit facility and to refinance the acquisition related debt with the net proceeds of future equity issuances. Upon our acquisition of DSS, DSS will become our wholly-owned subsidiary and we will conduct the strategic, commercial and technical management of our fleet in-house.”

According to the filing, DSS charges Diana $15,000 per month to manage its soon to be 10 ships – giving DSS revenue of $1.8 million. DSS also charges Diana a 2% commission on all revenue generated by the company’s ships. Using the figure of $25,000 per day, each of the 10 vessels will generate $9.1 million, or $91 million on a fleet basis. Using the 2% commission structure, DSS will earn another $1.8 million on the revenue, lifting DSS’ gross revenue, from Diana alone, to $3.6 million. Although we have no idea what sort of overhead the company will have, we would estimate that running 10 ships from Greece would cost in the order of $1 million – leaving net income of $2.6 million. Therefore, according to the purchase price to be paid by the public company, DSS will fetch 13x earnings.

Dilution

Any shipping deal that comes to market with assets on its balance sheet that are less than current market values plus the premium to NAV currently assigned to shipping companies will result in dilution to the new shareholders – and Diana is no exception. Moreover, as we saw in the case of DryShips, this dilution is increased when the selling shareholders extract cash from retained earnings from the balance sheet prior to the offering. In this case, here is how it works: “As of November 30, 2004, on an adjusted basis giving effect to the payment of a $34.0 million cash dividend in December 2004, the declaration of a $14.0 million dividend in February 2005 (payable in April 2005 to stockholders of record in February 2005) and a $19.5 million preferential deemed dividend (representing the portion of the consideration to purchase our fleet manager that exceeds the carrying value of our fleet manager’s net assets as of September 30, 2004) that we expect to record in connection with our acquisition of our fleet manager, we had net tangible book value of $20.7 million, or $0.75 per share. After giving effect to the sale of 12,375,000 shares of common stock at an assumed initial public offering price of $16.00 per share (representing the midpoint of the price range shown on the cover of this prospectus), our pro forma adjusted net tangible book value as of November 30, 2004, would have been $202.8 million, or $5.07 per share. This represents an immediate appreciation in adjusted net tangible book value of $4.32 per share to existing stockholders and an immediate dilution in adjusted net tangible book value of $10.93 per share to new investors.”

Based on the ready comparison between DryShips and Diana, it is very difficult to imagine that investors will not love this deal. Although we are certainly closer to the top of the shipping cycle than the bottom, the reality is that modern ships with minimal leverage will survive even the nastiest of market corrections and be around for the next turn of the cycle. In our view, this transaction is proof that underwriters, investors and shipping companies have learned from the unfortunate high yield bonds issued in the late 1990s and have created structures that capture all of the value that shipping has to offer.

Simeon Palios and Fortis-owned Diana Shipping began its roadshow in London this week to raise $241 million through the sale of 14.2 million shares of common stock, which will trade on the New York Stock Exchange under the ticker “DSX”. Bear Stearns is sole bookrunner on the deal, and co-managers include Jefferies & Company, UBS Investment Bank and Fortis Securities, which immediately prior to the offering will own 25% of Diana through its private equity fund Maas Capital Investments.

We see absolutely no reason why this offering will not be wildly successful. As we’ve seen in the last 12 months, every new shipping deal that comes to market brings with it a slightly different structure, fleet and philosophy that suits both the selling shareholders and, ideally, investors – and Diana is no exception.

For example, proceeds from the Diana IPO will be used to reduce the net debt on the company’s post-IPO fleet of 10 bulk carriers to zero while the company has pledged to pay out all of its free cash. Sound familiar? It should; this technique is reminiscent of Nordic American Tankers, which not coincidentally is the brainchild of underwriter Bear Stearns – NATS enjoys the strongest valuation in its peer group.

According to our own 2004 pro forma of the company’s financial performance (and assuming no reserve), Diana would have been able to pay a dividend of $1.94, which equates to a whopping 11% yield based on the anticipated offering price, although this is before whatever amount the management feels it should keep on hand for working capital and growth. When the opportunities arise, the unleveraged Diana will simply borrow against its unpledged assets and go shopping. The prospectus notes that “in times when we have debt outstanding, we intend to limit our dividends per share to the amount that we would have been able to pay if we were financed entirely with equity.”

As the fleet list indicates, Diana owns a fleet of seven modern panamax vessels with an average age of just 3.1 years, which should make the fleet very attractive to investors so long as the price can be justified. As the fleet is indeed focused, it is not diversified, meaning investors will be exposed to one of the most volatile segments of the dry bulk business. According to the Form F-1 filed with the SEC, during the nine month period ended September 30, 2004, the company’s vessels achieved daily time charter equivalent rates of $25,269. To give you a sense of just how volatile this business is, the company also said that “during 2001, 2002 and 2003 and the nine months ended September 30, 2004, we recorded net income (loss) of ($0.4) million, $0.1 million, $9.5 million and $28.5 million, respectively.”

Diana’s plan is to grow the business with modern units, and the company recently entered into newbuilding contracts with a Chinese shipyard for the construction of two additional 73,000dwt panamaxes. The company also signed an MOA with Louis Dreyfus Armateurs to purchase a secondhand capesize vessel. All of the new ships should be in the fleet and earning money by the first half of 2005.

As mentioned above, one of the novel features of the Diana transaction is the fact that the company will use the proceeds of the offering to eliminate debt. Of the $182 million proceeds, after fees and expenses, the company will use $15.0 million to fund the final installment due on the new panamax dry bulk carrier that it expects to be delivered to the company in April 2005 and the remaining $166.4 million to repay all of seven of its outstanding credit facilities that mature between June 2013 and November 2015 and bear interest at LIBOR plus 1.125% to LIBOR plus 1.3%.

Although the company’s ships are managed by an affiliate, another interesting feature of this deal is the fact that Diana has agreed to buy the ship management company, Diana Shipping Services (DSS), in the future. According to the filing, “We have entered into an agreement with the stockholders of DSS pursuant to which the DSS stockholders may sell all, but not less than all, of their outstanding shares of DSS to us during the 12 month period following the consummation of this offering for $20.0 million in cash. Under the terms of the agreement, if the DSS stockholders do not sell their outstanding shares to us prior to the one-year anniversary of this offering, we may purchase the DSS shares from them for the same consideration at any time prior to the second anniversary of this offering. We expect the DSS stockholders to sell their outstanding shares of DSS to us during the 12 months following the offering and intend to exercise our option if they do not do so. We intend to finance our expected acquisition of our fleet manager with borrowings under our new credit facility and to refinance the acquisition related debt with the net proceeds of future equity issuances. Upon our acquisition of DSS, DSS will become our wholly-owned subsidiary and we will conduct the strategic, commercial and technical management of our fleet in-house.”

According to the filing, DSS charges Diana $15,000 per month to manage its soon to be 10 ships – giving DSS revenue of $1.8 million. DSS also charges Diana a 2% commission on all revenue generated by the company’s ships. Using the figure of $25,000 per day, each of the 10 vessels will generate $9.1 million, or $91 million on a fleet basis. Using the 2% commission structure, DSS will earn another $1.8 million on the revenue, lifting DSS’ gross revenue, from Diana alone, to $3.6 million. Although we have no idea what sort of overhead the company will have, we would estimate that running 10 ships from Greece would cost in the order of $1 million – leaving net income of $2.6 million. Therefore, according to the purchase price to be paid by the public company, DSS will fetch 13x earnings.

Any shipping deal that comes to market with assets on its balance sheet that are less than current market values plus the premium to NAV currently assigned to shipping companies will result in dilution to the new shareholders – and Diana is no exception. Moreover, as we saw in the case of DryShips, this dilution is increased when the selling shareholders extract cash from retained earnings from the balance sheet prior to the offering. In this case, here is how it works: “As of November 30, 2004, on an adjusted basis giving effect to the payment of a $34.0 million cash dividend in December 2004, the declaration of a $14.0 million dividend in February 2005 (payable in April 2005 to stockholders of record in February 2005) and a $19.5 million preferential deemed dividend (representing the portion of the consideration to purchase our fleet manager that exceeds the carrying value of our fleet manager’s net assets as of September 30, 2004) that we expect to record in connection with our acquisition of our fleet manager, we had net tangible book value of $20.7 million, or $0.75 per share. After giving effect to the sale of 12,375,000 shares of common stock at an assumed initial public offering price of $16.00 per share (representing the midpoint of the price range shown on the cover of this prospectus), our pro forma adjusted net tangible book value as of November 30, 2004, would have been $202.8 million, or $5.07 per share. This represents an immediate appreciation in adjusted net tangible book value of $4.32 per share to existing stockholders and an immediate dilution in adjusted net tangible book value of $10.93 per share to new investors.”

Based on the ready comparison between DryShips and Diana, it is very difficult to imagine that investors will not love this deal. Although we are certainly closer to the top of the shipping cycle than the bottom, the reality is that modern ships with minimal leverage will survive even the nastiest of market corrections and be around for the next turn of the cycle. In our view, this transaction is proof that underwriters, investors and shipping companies have learned from the unfortunate high yield bonds issued in the late 1990s and have created structures that capture all of the value that shipping has to offer.

Horizon Kicks Off IPO Process

We understand from market sources that Horizon has chosen its IPO underwriting team and kicked off the public offering process. We believe that Goldman Sachs and UBS are leads on the deal and Bear Stearns, JP Morgan and Deutsche Bank will serve as co managers. Depending on how the underwriters are able to value the company, we believe that Castle Harlan will sell a minority position for somewhere in the neighborhood of $200-$250 million. Look for the deal to come to market in the late spring/early summer.