A few weeks ago, we wrote an article in these pages called “Eagle Bulk – All About the Arbitrage.” The article outlined the recently filed S-1 for an IPO of handymax bulk carriers being offered by New York private equity fund Kelso. In this article, we discussed the concept of private equity funds buying ships just prior to, or even concurrent with, IPOs so that they could capture the arbitrage that exists between the value of ships in the private and public markets.

Although much of this premium has been drained away during the last six weeks due to choppiness in both the equity markets and the shipping markets, we believe it is likely to return in the very near future and look for shares back in the range of 1.5x net asset value. The transaction concept is one with which private equity funds are comfortable: buy a company cheap, then sell enough of it to the public to get their money out with a return through a dividend, and then keep a slug of shares in the company that has the potential to result in a real home run.

With the economics of the shipping markets fitting this bill, the concept is spreading, and we are seeing more and more non-shipping company issuers in the shipping markets. The way to think of this is that Wall Street wants products and is willing to pay a certain price for them, and in response a variety of experienced financiers are creating these products and attempting to bring them to market. There is nothing necessarily wrong with this; in fact companies created for the sole purpose of equity offering might offer cleaner management structures and fewer conflicts of interest than old-line companies.

This week, we saw the filing of an IPO called Quintana Maritime, which is backed by Corby Robertson, whose family sold the Quintana oil field in Texas to Exxon many years ago, and who has since made investments in commodities such as coal mining. Robertson has teamed up with First Reserve of Greenwich (who have been plotting an entry into shipping ever since their agreement to purchase OMI shares at about $1.50 each a few years ago failed amidst bad feelings) and American Metals & Coal International, also of Greenwich. Stamatis Molaris, former CFO of Stelmar, is serving as CEO and President of Quintana. Citigroup and Morgan Stanley, who lent the company the money it needed to acquire its fleet, are acting as joint bookrunning managers.

Quintana does not have the storied history that many recent and future issuers have. They cannot point to hundreds of years of experience or their origins from an island – except perhaps Long Island. In fact, they were formed on January 13th, 2005, and began operations in the following April, in other words last month. As of March 31, 2005, Quintana had not taken delivery of any of the identified panamax vessels, though the company did take delivery of three such vessels in April, and expects to take two more in May and the remaining three in July, August and September.

One of the challenges borne of the incredible torrent of deals heading to market is differentiation. What we mean is that there is nothing particularly compelling about this deal compared to others currently or soon to be trading in terms of asset type, employment, age, deal size, management or structure. Like Eagle Bulk, Quintana has signed MOAs and placed deposits on the eight modern panamax bulkers outlined in Figure 1.

Although we expect valuations to improve, the company shows strong asset and structural similarity to Diana Shipping, which suffered from bad timing in both the shipping and equity markets that may have been exacerbated by the fact that it was fully priced and sold into the wrong types of accounts. This must be a little unnerving for the sponsors, and we fail to understand how this deal will ever be judged on anything other than how much of discount it is offered at relative to Diana. Although Quintana does not indicate that it will use the model of a dry cargo version of Nordic American Tankers as Diana did, the company does plan to repay its debt in full upon consummation of the offering.

Perhaps there will be enough buyers to go around. There is nothing inherently wrong with the Quintana deal, but the sponsors will need to see valuations improve and have one heck of a good roadshow. That said, with the firepower of Citigroup and Morgan Stanley behind them, who likely do lots of other business with the sponsors of this deal, it is unlikely that it will be sold into the accounts of hedge fund “flippers” as the Diana deal seems to have been.

As we also wrote in our article about Eagle Bulk, these kinds of deals are not without risk to the sponsors as we cruise along a high point in the cycle. In fact, they involve a lot of risk. Unlike the Top Tankers IPO, in which the purchase of the Sovcomflot fleet was contingent upon a successful equity offering, both Eagle and Quintana involve the sponsors buying ships first and hoping they can get a premium in the future. In this case, the joint bookrunners have provided both secured debt and mezzanine facilities to result in 85% financing. This structure is not dissimilar in concept to the highly leveraged facility that Citigroup and Nordea provided to soon-to-be-public Genco, sponsored by yet another private equity firm, Oak Tree Capital.

Quintana entered into a $150 million bridge loan facility, dated as of May 3, 2005, with Morgan Stanley Senior Funding, Inc., not a regular player in the world of ship finance. In addition, the company entered into a new six-year three-month $262 million secured delayed-draw term loan facility, dated as of April 29, 2005, with Citigroup. The term loan facility consists of Tranche A, in an aggregate amount equal to the lesser of $213 million and an amount equal to 65% of the fair market value of the vessels, and a Tranche B, in an aggregate amount equal to the lesser of $49,210,500 and 15% of the fair market value of the vessels. The aggregate principal amount applied in respect of any vessel acquisition must not exceed 80% of the fair market value of the vessel. According to the filing, interest on amounts drawn will be payable at a rate of 1.625% per annum over LIBOR in respect of Tranche A and 2.50% over LIBOR in respect of Tranche B, for interest periods of 1, 2, 3 or 6 months or, if agreed by all lenders with commitments, 9 or 12 months. In the event the Tranche B term loans are not syndicated within 45 days, Tranches A and B will collapse into a single tranche and interest will be payable at a rate of 1.75% per annum over LIBOR.

Having released phenomenal 1Q05 earnings, announced a massive $225 million stock buyback, held a swinging bank meeting in Vegas and closed a dirt cheap credit facility, Teekay is now ready to hit the road to sell a 20% interest in Teekay LNG Partners LP next week. With this confluence of events, there is little doubt that TK will be a strong performing investment. In an amended filing submitted yesterday, TK filled in a critical blank – the price range – which is $20-$22. Looking at projected EBITDA of about $100 million in 2005, the new deal will be priced at about 12x cash flow assuming middle-range pricing. There are about six shipping deals set to IPO in the coming weeks and having a blue chip deal like this kick off, even though it is an MLP and the others aren’t, will set a good tone. Here’s the line-up for the Teekay LNG deal: Citigroup; UBS Investment Bank; A.G. Edwards; Raymond James; Jefferies & Company, Inc.; Wachovia Securities and Deutsche Bank Securities.

A few weeks ago, we wrote an article in these pages called “Eagle Bulk – All About the Arbitrage.” The article outlined the recently filed S-1 for an IPO of handymax bulk carriers being offered by New York private equity fund Kelso. In this article, we discussed the concept of private equity funds buying ships just prior to, or even concurrent with, IPOs so that they could capture the arbitrage that exists between the value of ships in the private and public markets.

Although much of this premium has been drained away during the last six weeks due to choppiness in both the equity markets and the shipping markets, we believe it is likely to return in the very near future and look for shares back in the range of 1.5x net asset value. The transaction concept is one with which private equity funds are comfortable: buy a company cheap, then sell enough of it to the public to get their money out with a return through a dividend, and then keep a slug of shares in the company that has the potential to result in a real home run.

With the economics of the shipping markets fitting this bill, the concept is spreading, and we are seeing more and more non-shipping company issuers in the shipping markets. The way to think of this is that Wall Street wants products and is willing to pay a certain price for them, and in response a variety of experienced financiers are creating these products and attempting to bring them to market. There is nothing necessarily wrong with this; in fact companies created for the sole purpose of equity offering might offer cleaner management structures and fewer conflicts of interest than old-line companies.

This week, we saw the filing of an IPO called Quintana Maritime, which is backed by Corby Robertson, whose family sold the Quintana oil field in Texas to Exxon many years ago, and who has since made investments in commodities such as coal mining. Robertson has teamed up with First Reserve of Greenwich (who have been plotting an entry into shipping ever since their agreement to purchase OMI shares at about $1.50 each a few years ago failed amidst bad feelings) and American Metals & Coal International, also of Greenwich. Stamatis Molaris, former CFO of Stelmar, is serving as CEO and President of Quintana. Citigroup and Morgan Stanley, who lent the company the money it needed to acquire its fleet, are acting as joint bookrunning managers.

Quintana does not have the storied history that many recent and future issuers have. They cannot point to hundreds of years of experience or their origins from an island – except perhaps Long Island. In fact, they were formed on January 13th, 2005, and began operations in the following April, in other words last month. As of March 31, 2005, Quintana had not taken delivery of any of the identified panamax vessels, though the company did take delivery of three such vessels in April, and expects to take two more in May and the remaining three in July, August and September.

One of the challenges borne of the incredible torrent of deals heading to market is differentiation. What we mean is that there is nothing particularly compelling about this deal compared to others currently or soon to be trading in terms of asset type, employment, age, deal size, management or structure. Like Eagle Bulk, Quintana has signed MOAs and placed deposits on the eight modern panamax bulkers outlined in Figure 1.

Although we expect valuations to improve, the company shows strong asset and structural similarity to Diana Shipping, which suffered from bad timing in both the shipping and equity markets that may have been exacerbated by the fact that it was fully priced and sold into the wrong types of accounts. This must be a little unnerving for the sponsors, and we fail to understand how this deal will ever be judged on anything other than how much of discount it is offered at relative to Diana. Although Quintana does not indicate that it will use the model of a dry cargo version of Nordic American Tankers as Diana did, the company does plan to repay its debt in full upon consummation of the offering.

Perhaps there will be enough buyers to go around. There is nothing inherently wrong with the Quintana deal, but the sponsors will need to see valuations improve and have one heck of a good roadshow. That said, with the firepower of Citigroup and Morgan Stanley behind them, who likely do lots of other business with the sponsors of this deal, it is unlikely that it will be sold into the accounts of hedge fund “flippers” as the Diana deal seems to have been.

As we also wrote in our article about Eagle Bulk, these kinds of deals are not without risk to the sponsors as we cruise along a high point in the cycle. In fact, they involve a lot of risk. Unlike the Top Tankers IPO, in which the purchase of the Sovcomflot fleet was contingent upon a successful equity offering, both Eagle and Quintana involve the sponsors buying ships first and hoping they can get a premium in the future. In this case, the joint bookrunners have provided both secured debt and mezzanine facilities to result in 85% financing. This structure is not dissimilar in concept to the highly leveraged facility that Citigroup and Nordea provided to soon-to-be-public Genco, sponsored by yet another private equity firm, Oak Tree Capital.

Quintana entered into a $150 million bridge loan facility, dated as of May 3, 2005, with Morgan Stanley Senior Funding, Inc., not a regular player in the world of ship finance. In addition, the company entered into a new six-year three-month $262 million secured delayed-draw term loan facility, dated as of April 29, 2005, with Citigroup. The term loan facility consists of Tranche A, in an aggregate amount equal to the lesser of $213 million and an amount equal to 65% of the fair market value of the vessels, and a Tranche B, in an aggregate amount equal to the lesser of $49,210,500 and 15% of the fair market value of the vessels. The aggregate principal amount applied in respect of any vessel acquisition must not exceed 80% of the fair market value of the vessel. According to the filing, interest on amounts drawn will be payable at a rate of 1.625% per annum over LIBOR in respect of Tranche A and 2.50% over LIBOR in respect of Tranche B, for interest periods of 1, 2, 3 or 6 months or, if agreed by all lenders with commitments, 9 or 12 months. In the event the Tranche B term loans are not syndicated within 45 days, Tranches A and B will collapse into a single tranche and interest will be payable at a rate of 1.75% per annum over LIBOR.

Wan Hai Lines has galloped out of Taiwan for its first ever overshore bond deal for up $400 million that will be done through a Singapore unit.  Citigroup and Morgan Stanley will market the 10-year deal in May. Wan Hai, rated BBB- by Standard & Poor’s, is Asia’s biggest intra-regional shipper.

Wan Hai Lines forecasts its 2005 net profit will be NT$7.70 bn ($244m), or NT$4.08 a share. With shares trading at NT$34.70, the company is trading at less that 8 times forward PE.

The company has a debt to equity ratio of 53%, hence the strong rating.

A closer look at the orderbook indicates that Wan Hai is headed for the long-haul trades. The company’s orderbook stands at 18 ships, with an average of 4000 teu per vessel, which is significantly larger than the company’s current average vessel size of 4000 teu. These ships will cost somewhere in the region of $900 million.

Considering that China Shipping is already on the equity market and Cosco Container Line is next, FM is not surprised that Wan Hai reached for the bond market. To date, it looks like an iron-clad credit, though deeper water trades can be more treacherous.

Merrill Lynch Capital Equipment Finance National Sales Manager Randy House announced today that Ravi Dandapani has joined Merrill Lynch Capital as Vice President, Marine Market Manager. Most recently, Mr. Dandapani served as Managing Director for Global Origination of Maritime Structured Products at Citigroup, and he has also worked as Vice President for maritime financing and business development at the CIT Group. All told, he has over 33 years of experience throughout both the operating and financing sides of the marine industry. This marks a second important move by Merrill Lynch to beef up its shipping personnel as it begins to make inroads into the industry. Congratulations to Mr. Dandapani and to Merrill Lynch!

Athens-listed ferry company Blue Star Maritime SA is currently in the market for a Euro 200 million refinancing of an existed syndicated loan as well as other smaller facilities. Citigroup is serving as sole bookrunner and arranger on the deal. The Panagopoulos family-affiliated company also recently reported 2004 consolidated net profit of Euro 10.9 million, 130% higher than the Euro 4.7 million reported in 2003.

Year of the Rooster Rung in Cautiously by Citigroup in China

Citigroup’s China Economist Yiping Huang said recently “’There is widespread suspicion that official data underestimates China’s actual growth performance… indeed, versus the official industry-based GDP growth estimate of 9.5% for 4Q’04, our expenditure-based estimate suggests actual growth could be as high as 12% last year… which, if reliable, suggests growth in 2004 was pretty close to that achieved in 1992-94 when the economy overheated… and while consumption has improved steadily – retail sales increased, on our calculation, by 13.3% in 2004, compared to 7.8% in 2003 – our concern about economic risk lies not in the rate of aggregate growth but in the problem of overinvestment… for gross capital formation accounted for 42% GDP in 2003, likely increasing to 45% in 2004… unusually high, having reached above 40% only in 1959 and again in 1993… however, while the latest data points to renewed risks of overheating, we maintain our base case of a gradual soft landing’.”

Citigroup’s China Economist Yiping Huang said recently “’There is widespread suspicion that official data underestimates China’s actual growth performance… indeed, versus the official industry-based GDP growth estimate of 9.5% for 4Q’04, our expenditure-based estimate suggests actual growth could be as high as 12% last year… which, if reliable, suggests growth in 2004 was pretty close to that achieved in 1992-94 when the economy overheated… and while consumption has improved steadily – retail sales increased, on our calculation, by 13.3% in 2004, compared to 7.8% in 2003 – our concern about economic risk lies not in the rate of aggregate growth but in the problem of overinvestment… for gross capital formation accounted for 42% GDP in 2003, likely increasing to 45% in 2004… unusually high, having reached above 40% only in 1959 and again in 1993… however, while the latest data points to renewed risks of overheating, we maintain our base case of a gradual soft landing’.”

Citigroup Takes Eletson into Market for Half Billion

Refinancing

Eletson is in the market with a massive $500 million deal to refinance the entirety of its existing debt. Citigroup is serving as sole Bookrunner while Citigroup and HSH Nordbank are joint MLAs. Eletson operates a Greek-flagged fleet of 11 handymax, ten panamax and post-panamax, and four aframax double hull tankers with an average age of 9.5 years and a total capacity of 1.6 mdwt.

Eletson is in the market with a massive $500 million deal to refinance the entirety of its existing debt. Citigroup is serving as sole Bookrunner while Citigroup and HSH Nordbank are joint MLAs. Eletson operates a Greek-flagged fleet of 11 handymax, ten panamax and post-panamax, and four aframax double hull tankers with an average age of 9.5 years and a total capacity of 1.6 mdwt.

Citigroup Promotes Simon Booth

Citigroup has promoted Mr. Simon Booth to Managing Director with responsibilities for Northern Europe.  Simon is starting to close in on the veterans in ship finance, having been involved in the industry for almost 20 years.  Congratulations to Simon.

Citigroup has promoted Mr. Simon Booth to Managing Director with responsibilities for Northern Europe.  Simon is starting to close in on the veterans in ship finance, having been involved in the industry for almost 20 years.  Congratulations to Simon.