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.

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.

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.

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.

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.

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.

Jefferies analysts Magnus Fyhr and Douglas Mavrinac continued to expand their comprehensive shipping sector coverage with the initiation of coverage on Diana Shipping with a Buy rating and a $21 price target. The analysts note that Diana operates a modern dry bulk fleet while dry bulk fundamentals remain attractive. The company has a strong balance sheet that is readily available to support future growth, and it has announced a policy to pay out all free cash as dividends, a policy which is supported by Diana’s timecharter strategy.

The analysts also reiterated this week their Buy rating for Arlington Tankers, with a target price of $25.00, though the report also reduces EPS estimates based on lowered charter rate expectations. One thing that both these Buy ratings have in common is a notable dividend yield. Calculating the value of near-term returns, dividend yields mean a lot to analysts, but how much do they mean to equity investors?

General Maritime’s recent inauguration of a considerable dividend policy gives us a rare venue to test the hypothesis that higher dividends translate into higher share prices. The accompanying graph comparing General Maritime’s share price evolution, starting in the beginning of January and going through the period when the company announced its new dividend policy, to that of Frontline.

Ships have gotten a bit more expensive in recent weeks, with prices holding firm but rates slightly softer, especially in the Pacific. Although we think it is probably just another blip on the radar, softening share prices and cash flows mean that the arbitrage that exists between private sales and public company valuations has compressed a bit, as evidenced by the stock of Diana Shipping, which has been trading below $16 compared to an initial price of $17.

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.

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.

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.

As we reported last week, Diana Shipping became the newest member of the public shipping company family last Friday when the company priced its 12.3 million share issue last week at $17 each to raise approximately $210 million. As always, we thought it would be interesting to take a look at how the valuation compares to other public companies. As you can see from the calculation, Diana priced at about 1.37x net asset value and 8x 2005 estimated cash flow. The most recent comparable deal is DryShips, which priced at 1.84x net asset value and 4.1x 2005 cash flow. The reason for the difference in valuation has less to do with market conditions, which remain very good for issuers, and more to do with the fact that Diana has a fleet of vessels with an average age of three years versus DryShips fleet, which has an average age of 13 years. The reason DryShips has the better valuation on assets and not cashflow is that 13-year-old vessels cost a lot less than 3-year-old vessels but have similar earning power. However, what this also means, of course, is that the quality of the Diana cash flows is higher in that the vessels have more years to earn back their cost than the DryShips vessels do.