In the light of the fact that at least 3 IPOs (Quintana, Genco and Wexford/Cavan) will be coming to market before the equity community goes on holiday in August, and another 5 have been completed recently, we thought it would be interesting to take a look at the valuations of these deals at the time of issue to see what, if anything, we could conclude about valuation trends and investor preferences.

As you can see from the deals in Figure 1, which are presented in reverse chronological order, it is very difficult to compare shipping deals to each other in a true “apples to apples” way. Some fleets are focused on a certain sector while others are diversified, some are new while others are older, some are exposed to the spot market while others have term time charter coverage, some companies charter-in tonnage while others prefer to own their ships – some pay hefty dividends while others conserve their capital for further growth and fleet replacement.

At the risk of being overly simplistic, if companies want to have any chance of pricing their deal at a high premium to net asset value, then they have to demand that value from investors. What we have seen in recent deals is that investors are now in discount mode and will likely put in limit orders at 10% or more off the bottom end of the price range. Although this led to a disastrous result for Capital Shipping last week, which had set its initial range at a reasonable level, it did not have a major impact on Eagle, which set its initial range very high. And the winner in this category is DryShips. In looking at why this company was able to achieve nearly 2x all-time high net asset values, it is clear that momentum played a role. In the world of IPOs, in which many investors buy deals simply to flip them for a quick profit, buyers do not care if they overpay so long as someone else will over pay more once the deal starts trading. The same was true of Arlington, which priced at 120% of net asset value, but did so with under the market charters, which would have effectively reduced their cash flow generation power.

In looking at this metric, it is clear that two of the highest valuations, Aries and Arlington, went to the companies with the longest term employment of their vessels. Diana, boasting the highest cash flow valuation, also had what would qualify at the time as long-term contract cover, though as the market has come down this approach has come more into vogue. The lowest valuation, on the other hand, went to TBS and DryShips, which do not place any emphasis on long-term contracts. Another factor here is that this latter pair of companies also has the oldest vessels which also trade at the lowest multiples to cash flow because of the diminished productive life of their assets.

And, finally, with respect to dividends, it is unclear whether investors are really paying up for them when those dividends are not backed up by long-term underlying contracts. What is clear, however, is that when it comes to IPOs investors like to buy into markets that have positive momentum and the chance for a quick profit.

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.

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.

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.

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.

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.

In light of the pricing pressure we have seen on Capital and other recent IPOs, we thought it would be interesting to dig into the valuation of Quintana Maritime, which began its roadshow and filed an updated red herring today.

Where it seems that Eagle Bulk attempted to ensure a premium by aiming for a price range that would value the company around twice NAV and an EBITDA valuation that would put it at a premium to comparables DryShips and Diana, Quintana has taken a different approach and is instead looking to come to market right around where comparables Diana and DryShips are currently trading. Today’s dry bulk market is widely acknowledged to be at a low, and as a result comparables – and correspondingly Quintana if it prices in its range – hope it will spring back over the next few months, leaving some meaningful potential value for investors to capture. It is a fairly pragmatic approach at this point in time, enabling increasingly savvy investors an opportunity to buy into dry bulk while its bull run cools in the hopes that another is yet to come, and at the same time offering a substantial, if not particularly high, dividend yield in the realm of 8% with the long-term contracts necessary to support it.

Upon the consummation of its offering and delivery of all identified vessels, the newly-formed panamax company will have a fleet of eight modern to middle-aged panamax carriers, which have market value we estimate to be around $304 million, as shown in Quintana Maritime – Vessels & Values. From this we subtracted total liabilities, which the prospectus anticipates to be under $43 million post-offering, and add then add back cash and cash equivalents of $6.2 million. These calculations lead to a net asset value for Quintana post-offering of approximately $268 million.

Based on a total number of 23,019,492 shares, 16,700,000 million of which are to be publicly offered, this translates to a healthy net asset value per share of $12.00. This in turn implies that the targeted price range of $14.00-$16.00 is hardly outrageous but neither is it overly conservative. Rather, the bottom of the range would put Quintana at a price to NAV ratio of 120%, which is inline with comparables DryShips and Diana, who analysts now widely consider substantially undervalued. Even so, a bottom-of-the-range pricing would still mean a 20% premium for the selling shareholders, assuming they bought the vessels at current market prices. But the important thing is that if Quintana can price within its stated range, it will be capturing a premium at the same time that it leaves something on the table for investors.

Added to a reasonable valuation is the allure of a reasonable dividend. The prospectus states that the company intends to pay out quarterly dividends at a rate of 65% of available cash less any cash reserves for capital expenditures, working capital and debt service. Making the assumption that another 15% of available cash will be used to fulfill such needs and based on annualized EBITDA of around $56 million and pricing at the midpoint of the anticipated range, this would translate into a dividend yield of around 8.1%. What’s more, we calculate the EBITDA number based on fixed contracts for the six vessels that Quintana already has in its possession. We have assumed market 1-year timecharter rates as reported by Clarksons for the remaining two vessels, which are very similar to the rates at which Quintana has contracted out several of its other vessels. These are of course vulnerable to be lower if markets deteriorate further, but, equally, if the market picks up by the time the ships are delivered there is hope for rate improvement.

After running these calculations, we took a look at a cashflow-based valuation. Nothing particularly out of the ordinary here. $56 million annualized EBITDA, as is better explained by Quintana Maritime – Vessels & Economics, and pricing at the midpoint of the stated range would translate to a Price to EBITDA ratio of 6.16x, which falls approximately inline with comparables, though is higher than the ill-fated Capital.

Although shipping deals are clearly coming to market at lower valuations, deals such as this one are still very good valuations for selling shareholders in light of where we are in the cycle. And with the bulk market poised for another rebound, transactions coming to market now with more reasonable terms offer real upside for investors and the issuers who still control the majority of the stock after the offering and will benefit from capital appreciation. The fact remains that for serious companies committed to going public, the window is still wide open.

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 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.

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.

Aries Maritime Transport and TBS have emerged this week as the next shipping companies likely to head off on IPO roadshows to raise fresh capital. These two deals follow on the heels of the wildly successful IPO of Teekay LNG, and before that Diana’s less-than-spectacular post-offering performance.

We have been watching TBS since it made its initial S-1 filing with the SEC in March, but noticed that the company filed a revised document with the SEC this week that includes much more detailed figures, as highlighted in the Forthcoming IPOs table. Although public transactions are not generally deemed “effective” until shortly before pricing time, we imagine TBS is getting very close to launching. As for Aries, the deal was initially filed using the confidential Form F-1 and was therefore previously unknown to the marketplace.

This is a very good combination of deals to launch so close together in that they are very different and will likely appeal to different categories of investors. As you can see from the accompanying fleet list, Aries’ fleet is comprised of product tankers and container ships, 100% of which are on term charters. In contrast, TBS operates a long-established liner service using a fleet of owned and chartered-in bulk carriers to serve its industrial customers. There are plenty of other differences as well. For example, Aries plans to pay a substantial dividend that appears similar to Arlington Tankers in concept while TBS does not anticipate paying a dividend. As always, we will refrain from engaging in a valuation analysis until the deals conclude, but below are some facts and figures that appear in the public document.

As readers of these pages know, the second quarter of 2005 was expected to be the most active 3-month period for raising shipping equity in history. The first quarter closed with the pricing of the Diana IPO, and everyone was set for lots of action – and then a funny thing happened: nothing.

March 30th rolled by and as we moved into the fabled 2Q05, no fresh deals came to market. There were a few filings made both confidentially and publicly, one as recently as this week, but no new deals have priced or gone on roadshows. At the same time, Diana stock crumbled below its offering price almost immediately, and Excel and DryShips share prices have deteriorated.

But now something really interesting has happened. News came out that B+H Ocean Carriers has hired Pareto to raise equity through an international offering, which excludes U.S. investors. The deal is not unlike the one that Pareto, which has proven itself to be the most powerful and hardest working firm of its kind in Oslo, did for Stolt Nielsen. It was Pareto, we believe, that orchestrated B+H’s recently purchase of 3 OBOs that are chartered to Sempra, one of which was done through a K/S fund.

So what does this mean? B+H is no stranger to Oslo. Although the company is based in Rhode Island, it has strong ties to Norway, with an office there run by Sverre Ditlev-Simonsen and most a large proportion of banking done with Nordea. But what is interesting about this deal is the fact that such an offering, using Reg F, may be a way for foreign private issuers to raise equity capital more quickly. Moreover, there are loads of capital in Europe looking for deals that are not U.S.

Another potential scenario is that B+H has found a strategic partner that wants a listing in the U.S. and seeks to accomplish this by acquiring a substantial, perhaps even a controlling, interest. If rumors of a $100 million offering are accurate, it would mean that Michael Hudner, who controls more than 75% of the company, would dilute his interest to below 50% as B+H currently has a market capitalization of about $95 million. The move has the potential to make a lot of sense for both parties, as B+H, even with more than half its EBITDA contracted for the next 12 months and beyond, has an older fleet that needs to be renewed.

Whether B+H is selling to financial or strategic investors, the increase in liquidity and dry powder for dealmaking can only be a huge positive for the company.

It’s all about the arbitrage these days.

What we mean by this, of course, is the fact that ships have a higher value on Wall Street than they do in the shipping markets – and not surprisingly there is a steady stream of people looking to capture the difference.

For proof of this, one need only to look at our Cash Flow Multiples by Vessel Type valuation table and compare it to the “Fair Value” table showing the valuation of shipping companies that trade on the stock exchange. It depends on the age of the vessels, of course, but on average a shipowner can buy a middle-aged vessel at about 4x cash flow and sell it to Wall Street investors at about 6x cash flow – much more if the company is valued based on its dividend yield.

Here’s where the rubber meets the road: by valuing shipping companies using a multiple of their cash flow generation, issuers of equity can effectively sell their vessels for 1.5-2.0x their value in the sale and purchase market. It is a truly remarkable moment in the evolution of shipping and the capital markets – and not surprisingly the Delta flight between Athens and New York is once again being seen as a direct journey to wealth and early retirement for shipping dealmakers.

In the early stages of this “multiple expansion” (or “bubble” for cynics) process on Wall Street, issuers of equity were largely financially savvy shipping companies that realized that by selling ships, and leasing them back as Stena did with Arlington Tankers, they could extract the premium value of their ships while at the same time maintain commercial control and chartering “upside.”

However, as we move into year three of the shipping bull market, we are beginning to see private equity funds hire some shipping professionals and form new companies for the purpose of buying ships at 4x cash flow and selling them to Wall Street for 6x cash flow – capturing the arbitrage along the way.

Not surprisingly, most of these private equity investors are focusing on the dry bulk sector where the fundamentals are rosy, and more importantly, the valuations are higher, even in situations with external management companies with older vessels.

There are several deals presently preparing or considering coming to market in which the issuer is a private equity fund, or “sponsor” as they are called, looking to capture the value arbitrage, but the first has finally reached the starting line – a newly-formed entity called Eagle Bulk Shipping owned by a private equity fund in New York called Kelso and comprised of former Credit Suisse investment bankers.

We’d like to take a moment to discuss why this deal has filed. For those readers less familiar with the S.E.C, there are two kinds of registration forms used for equity – the F-1 and the S-1 – the former of which is used by foreign-based filers and the latter by U.S.-based filers. The documents are virtually the same except for one critical difference: foreign filers using form F-1 are permitted to submit their initial prospectus filing confidentially while U.S. filers are not. That is why companies such as TBS Shipping, Horizon Lines and now Eagle Bulk Shipping have documents accessible to the public while foreign filers such as DryShips and Diana do not have their registration statements made public until they have finished with the SEC comment period and are ready to print red herrings and go out on the road. But we digress…

The first financial sponsor deal, Eagle Bulk, is hoping to raise up to $250 million through a listing on the Nasdaq under the ticker symbol EGLE. Start-up companies use the NASDAQ because it does not have the same requirements for previous years of existence and profitability that the NYSE imposes. Joint bookrunners on the deal are UBS Investment Bank and Bear, Stearns & Co. – a pair of that seems to have either officially or unofficially teamed up to underwrite shipping deals. Legal advice is being provided by Simpson, Thacher & Bartlett for the underwriter and Seward & Kissel for the issuer.

What is unique about this IPO is that the company did not actually own any vessels at the time it filed its S-1 with the SEC. A quick look at the balance sheet shows that virtually all of the company’s net worth is associated with the deposits paid to secure vessels delivering in April to June 2005. We’re sure that some of the vessels have been delivered by now and there is nothing inherently wrong with this, but it is clear that the issuer has been formed for the express purpose of the IPO.

Although we will refrain from getting into valuation issues, Eagle’s fleet will consist of 11 modern handymax dry bulk vessels, nine of which have been acquired and two of which are to be delivered in June 2005, as shown in the accompanying chart. The vessels range in size from 40,000 to 60,000 dwt and have an average age of six years, as compared to the global handymax fleet average age of 15 years. In a small industry where nothing is secret, management did a good job hiding their purchases from the market and industry publications such as Tradewinds. It is still true that if the sellers know you have plans or money, the price goes up.

The management team is lead by 39-year old Sophocles Zoullas, and Alan Ginsberg, a former editor of Marine Money, will serve as CFO. The rest of the directors are drawn from private equity fund Kelso, which is sponsoring the deal, and Norlands Shipping. This team will focus on strategic and commercial management, while technical management will be done by V. Ships.

The company’s pitch is that by focusing on handymax dry bulk vessels, they will have advantages that include reduced volatility in charter rates, a smaller newbuilding orderbook, increased operating flexibility, the ability to access more ports, the ability to carry a more diverse range of cargoes, and a broader customer base.

There’s a whiff of Diana Shipping and Nordic American to the Eagle deal, thanks to the fact that Bear Stearns is involved in all three. The company is planning to use the proceeds of the IPO to paying off existing debt and will enter into a new 10-year $330 million credit facility to refinance other existing debt, acquire additional vessels and fund general corporate purposes. Eagle plans to keep lower than industry average levels of debt. The company has not committed to a specific dividend and will leave the decision to the discretion of the company’s board of directors.