COSCO Corp Suffers Analyst Downgrades

Last week, Singapore listed COSCO Corporation suffered multiple analyst downgrades from major securities houses. Analysts were largely disappointed by the weak 2Q11 net earnings and flagged concerns over demand, risk of order cancellations and delivery delays. BNP Paribas Brenda Lee pointed out that even though turnover in 2Q11 was up 3% year-over-year but net profit was down 53% year-over-year to SGD 31.9 million (USD 26 million). The poor operating performance, attributed largely to sliding margins for offshore engineering, shipbuilding, ship repair and conversion, was also aggravated by a higher tax rate due to lower tax-exempt shipping profits and lower deferred benefits.

CIMB Analyst Lim Siew Khee warned that given COSCO’s lack of experience in turnkey offshore projects (including deepwater drillships, tender rigs and jack-up rigs), margins are expected to remain low. “We fear that a history of provisions for lossmaking contracts in shipbuilding could repeat themselves in offshore as these provisions typically surface after projects have reached substantial completion,” she added. Meanwhile, DBS Analyst Janice Chua pointed out that the Chinese shipbuilder will face rising cost and currency pressure. Based on her sensitivity analysis, every 1% increase in steel cost and RMB appreciation could decrease Cosco’s bottomline by 1% and 2.2% respectively. Recent news of Cosco’s Norwegian client Sevan Marine’s potential bankruptcy also fuelled more fears among investors who were already worried about weak orderbook growth and rising costs. Sevan now accounts for 22% of COSCO’s order book, with 3 deep water drilling rigs.

Full Steam Ahead!

It is not exaggerating to say that investors are infatuated with Hong Kong Tycoon Li Ka-shing. In 2000, hundreds of thousands of people queued outside banks hoping to cash in on the Internet mania generated by the offer of shares in his Tom.com venture. Fast forward to today and you will read that the institutional book of his USD 5.8 billion business trust in Singapore, Hutchison Port Holdings (HPH) Trust, is also oversubscribed by strong demand. Perhaps this has to do with his philosophy in making sure that money is always left on the tables for his business partners.

In a Fortune magazine article years ago, Mr. Li was quoted advising his sons in the following fashion: When you enter into a partnership with somebody and you expect to make a dollar and your partner expects to make a dollar, too, then when the deal is over, why don’t you just take 80 cents? And if you take 80 cents, maybe he will offer you 90 cents, and you still have a good partnership. But even if he doesn’t offer you 90 cents and you take your 80 cents, that’s okay. But never, never should you try to take $1.10. If you follow my advice, he told his sons, you will never lack partners.  Continue Reading

Bitter Pills to Swallow but Recovery Nearer in Sight

Over 12 months of negotiations and uncertainty, Rickmers Maritime has finally reached an agreement with its lending banks and sponsor, Rickmers Group. Who would have thought that the decision to acquire ships with long term charters from the major liners during the good days could exert such a severe impact on the trust’s performance? After all, during the boom investors focused largely on growth but this has led to the challenges that shipping trusts are facing today in the form of deflated asset values and lease rates. Rickmers Maritime has two pressing issues to resolve – a) a USD 130 million top-up facility that matured in April 2010 and b) an obligation to acquire 7 vessels from the sponsor with total contract value of USD 918.7 million.

In terms of loan restructurings, Rickmers Maritime’s lenders believed to be Citibank, DBS and HSH Nordbank have agreed to convert the balance amount of the USD 130 million facility into a five-year amortising loan and the value-to-loan covenants will be waived by all the lending banks for up to three years. In addition, the trust can take comfort that no market disruption clause will be invoked during the wavier period. But in exchange for the loan extension and temporary covenant waivers, the trust is required to prepay USD 59 million in FY 2010 and accept a revised interest rate of 1.75% per annum over three month LIBOR, which represents increases of between 55 bps and 105 bps on its existing borrowings. Unitholders will also have to live with the decision that the trust can only make quarterly distribution payments of up to 0.6 US cents per unit, provided no event of default has occurred under any facility. Continue Reading

Notes in Demand

Singapore listed marine services provider Ezra Holdings is raising new debt with the advice of DBS and HSBC. The three year USD 100 million unsecured guaranteed financing will comprise fixed rate notes and a transferable term loan facility. What is a transferable term loan? Simply put, it is a bank loan facility that can be traded between lenders. According to the Law of Multi-banking Financing: Syndications and Participations published by Agasha Mugasha, transferable term loan is a form of securitization that allows banks to trade loan assets, with the objective to improve the liquidity of the transferor banks and diversify lending risks.  

No details on the actual split between the two arrangements have been announced but marketing for the notes has commenced on Tuesday, with the institutional investors largely in mind. Proceeds will be used to finance new business opportunities and capital expenditure, possibly to fund the acquisition of the Crusader 2, an ice class DP3 well-intervention vessel. Continue Reading

The Importance of Self Preservation

In 2009, the equity markets had a roller coaster run, but some shipping companies found windows of opportunity for share placements, often tied to debt reduction. Self help through raising equity capital for balance sheet recapitalization is one way to ride through the difficult times. There had been varying degrees of success and among the most notable would be Neptune Oriental Lines’ (“NOL”) USD 972 million rights issue in June and NYK’s recently concluded JPY 116.4 billion (USD 1.3 billion) global equity offering. Continue Reading

DBS Finances Oiltanking Odfjell Terminal Singapore

Oiltanking Odfjell Terminal Singapore Pte Ltd has signed a 6 year syndicated term loan facility of SGD 200 million (USD 138 million) via a club deal by DBS Bank Ltd, Calyon, and Oversea-Chinese Banking Corporation Limited. DBS Bank Ltd was the sole Bookrunner. The proceeds from the 6 year facility will be used to refinance existing loans and to finance the company’s expansion project on Jurong Island. OOTS is one of the very few companies in Asia who has been able to successfully tap the syndication loan market for a facility with tenor of more than 5 years.

Oiltanking Odfjell Terminal Singapore Pte Ltd is a 50/50 joint venture between Oiltanking GmbH and Odfjell SE. OOTS, incorporated in December 1999, owns and currently operates a 226,000 cubic metre (cbm) chemical storage terminal in Jurong Island.

NOL Rights Issue

With the strong support from state-owned Temasek Holdings, Neptune Oriental Lines (“NOL”) announced on Monday that its USD 985 million rights issue has been fully taken up. Looking closer at the numbers, over 97% of the total rights shares were subscribed by the existing shareholders (including Temasek), and the remaining will be allocated to shareholders who had applied for additional rights shares. The excess applications of 81 million shares represent 7.3% of the total rights issue or 2.58 times of the rights shares that were previously not taken up. NOL says preference will be given to the rounding of odd lots, and the Directors and substantial shareholders (including Temasek) will rank last in priority. The success of this massive offering will not be possible if not for Temasek’s commitment in underwriting the entire rights issue. DBS, HSBC, JP Morgan and Morgan Stanley were the lead managers of this issue.

In the latest report on NOL, J.P. Morgan says there is “limited downside to NOL” due less concerns about its balance sheet risks following its recent rights issue but there is better value in OOIL given the former’s cheaper valuations and longer term upside from its property development business in China.

Bottoming Out?

Over the past week, we have experienced the first market rally from a recession trough. Asian stock markets rallied to some of their highest since mid October as investors take confidence in China’s economic recovery. The manufacturing purchasing managers’ index in China rose from 44.8 in March to 51.1 in April, passing the 50-point mark that separates contraction and expansion for the first time in 9 months.

In a market report published last Friday, JP Morgan presented an optimistic view, suggesting that “we are indeed very close to the bottom in global economic activity, and may already be there, with the world economy set to start expanding again in coming months” but acknowledged that there are still many inherent risks since banks and households are still in balance sheet repair mode and a swine flu pandemic cannot be ruled out. Continue Reading

Yujin International Goes to London

If there’s one thing that’s receded into the distant past, it’s the boom of shipping IPOs. A product of highly liquid capital markets and robust shipping markets, those days already command a bit of nostalgia even as we pay dearly for their excesses. As large operations with major ships plied the major international exchanges, a few smaller deals got through, most notably on the London AIM (Alternative Investment Market). One of these has already been privatized but a couple quietly remain.

It was rather unexpected, however, to see Singapore-based bunkering company Yujin International announce admission to the London AIM this month in a deal organized by nominated advisor and broker Seymour Pierce.

The company listed with 30,000 shares priced at GBP 0.33 each, making its total market capitalization after expenses just shy of GBP 10 million. Of this amount, Company Director and Joint Managing Director Captain Joseph Ting Siew Chiong holds 18%, while Company Director and Joint Managing Director Captain Liew Chin Chye holds  another 18%. Non-Executive Chairman Lee Keen Whye and Company Director and CFO Lim Kay Yi Bernard hold another 2.92%, while primary shareholder Kavita Capital holds 51.3%. You don’t need a calculator to tell you this doesn’t leave much in public hands – less than 10% or GBP 1 million. Continue Reading

The Week in Review

The week has been relatively quiet from a transaction standpoint, but sentiment by and large is upbeat. The shipping markets as a whole continue to perform above expectations, and the credit and equity markets functioning smoothly, if not lavishly.

For example, Caterpillar Financial Services this week entered into an agreement to increase Aker Philadelphia Shipyard’s credit line by $150 million. Under the agreement, Caterpillar will fund up to $80 million in construction costs for seven consecutive product tankers, valuing the full agreement at $560 million. Interest payments will be required only during the construction period, and Aker may apply the funding to up to three ships simultaneously. The deal takes care of financing for the remainder of the 12 Jones Act tankers under construction at the yard, which are to be sold to Aker American Shipping for bareboat charter to OSG America. Four these tankers have been delivered, three are currently under construction, and the remainder are to be completed by 2011. Continue Reading