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The 3rd Quarter in Pictures
We continue our periodic look at quarterly results for a basket of shipping stocks we’ve been tracking. As in the past, we look at the percentage change in stock prices, comparing the beginning price versus the closing price for the quarter 3Q2011 and 3Q2010. We also look at the percentage change in EBITDA for 3Q2011 versus 3Q2010 and 3Q 2010 versus 3Q2009. This is our version of the proverbial crystal ball.
Cautious Mood at Marine Money Asia Week, Singapore
Marine Money Asia week closed last week on a somewhat cautious note, as over 490 participants went home with a less optimistic outlook on the shipping markets, global economy and banking sectors compared to a year before. The message we came away with is that caution rules with difficult shipping markets projected over the next two years which leads to tightening of financing and challenging operational conditions. Demand remains robust but simply overwhelmed by the supply of new vessels and the real “risk” factor of excessive shipyard capacity. Those with access to capital may be able to identify attractive investment potential but structured deals with strong counter parties and term employment are the ingredients in demand.
From Dr. Marc Faber’s assertions that money value is controlled by evil governments from the very beginning and we should all consider holding a little gold in our personal portfolio, to worrisome comments on the European banking crisis and the possible repercussions that it could have on ship financing in this part of the world, and a public comment made by NordLB’s Dr. Klaus Stoltenberg that European banks should expect to own more vessels themselves, there are really not many bright spots in the world we live in today, save offshore oil and gas and LNG sectors. Continue Reading
We Erred Last Week – DryShips Correction
Pankaj Khanna of DryShips was kind enough to point out that the increase in DryShips’ shares we discussed last week was not the result of an existing ATM but instead derived from the mandatory conversion of the preferred convertible shares the company issued with respect to the acquisition of the newbuilding drillship hull 1865. The last tranche of the preferred shares related to the delivery of drillships hull 1866 will convert in the fourth quarter. We apologize for the error.
DRYS dividends out 2% of OCRG – further increasing liquidity in OCRG
With chaos all around team DRYS remains a bastion of clear thinking value creation when it announced after Freshly Minted was published last week that its Board of Directors had approved the partial spin-off of its interest in the Company’s majority-owned subsidiary Ocean Rig UDW Inc., of which DryShips currently owns approximately 78% of the issued and outstanding common stock.
Ocean Rig’s Debt Feast – Banks and Bond Market Provide Support
It’s been a very busy and productive month for Ocean Rig UDW Inc. as it has finally fully funded its current capex program. First, the company arranged a new $800 million syndicated secured term loan facility to partially finance the construction costs of the Ocean Rig Corcovado and Ocean Rig Olympia. The facility has a five year term based upon a 12 year amortization and bears interest at LIBOR plus a margin. The facility is led by Nordea and ABN AMRO and includes in the syndicate GIEK, DVB Bank, Deutsche Bank and National Bank of Greece. A portion of the proceeds of the loan will be used to repay the $325 million bridge loan used to partially finance the Corcovado.
In addition, the company restructured its $1.1 billion secured credit facility led by Deutsche Bank which is secured by the Ocean Rig Poseidon and Ocean Rig Mykonos. The parties have agreed to reduce the maximum availability from $562 million to $495 million for each rig. Ocean Rig has also agreed to provide an unlimited recourse guarantee and will be subject to certain financial covenants. This guarantee is in addition to the existing Dryships’ guarantee. With a contract now in place, full drawdowns will be permitted for the Poseidon. For the Mykonos, the company has up to one month prior to delivery to execute an acceptable drilling contract in order to draw down on its facility.
After putting these deals to bed, the company then announced its intention to offer, through a private placement, $500 million of senior unsecured bonds in the Norwegian market. While on the roadshow, the company met some resistance from investors and had to sweeten the terms. The coupon range went from 8.25%-8.75% to 9.00%-9.50% with the call options also increasing. Year 3’s call went from 103.5% to 104.5%, while year 4’s call increased 50 bps to 102.5. The company has also undertaken to have the bonds rated by both Moodys and Standard & Poors and to list the bonds publicly on a reputable exchange.
Yesterday, DryShips announced that it had priced the $500 million of the senior secured bonds due in 2016 at 9.5%, the top end of the adjusted range. The bonds were priced at par with the proceeds to be used to fund the group’s newbuilding program and for general corporate purposes. With substantial bank debt ahead of it, these unsecured bonds had to be priced right as well as carefully structured to protect the bondholders. In addition to tight financial covenants, the company has various undertakings including a negative pledge and covenants that restrict funds flow within the group as well as dividends. More detail is provided in the Guts of the Deal attached.
Ocean Rig is a pure play ultra-deepwater driller, with a superior asset base, including two harsh environment semisubmersible drilling rigs and, by the end of the year, four premium drillships with options for four more.
In its credit analysis of the company, Nordea highlights as credit positives:
- Modern and competitive fleet of ultra-deepwater units
- Experienced deepwater driller and harsh environment operator, which has operated in 12 countries over the past nine years.
- Strong market outlook
- Modest credit profile
Credit challenges include:
- Exposure to a highly cyclical industry
- High newbuilding activity
- Limited cash flow visibility
- Significant committed capital expenditures as well as the possibility of the exercise of the options
- Risk of increased leverage.
On a preliminary basis, the company was given shadow rating of “B+” with the bonds one notch lower at “B.”
The global coordinator and lead manager was Pareto Securities and the joint lead managers were Fearnley Fonds and Nordea Markets .
Busy Week in the Capital Markets
Congratulations to a Whole Host of Principals and Professionals!
If there is one clear trend that is emerging in the evolution of shipping in the capital markets these days, it is the increasing role of experienced, serial issuers who control multiple companies in different market sectors. This week alone we have Ms. Frangou’s Navios on the road with a high yield bond, Mr. Fredriksen’s Golar on the road with an IPO and Mr. Georgiopoulos’ General Maritime recapitalizing its balance sheet with offerings of both debt and equity. Danaos and DryShips rounded out the week’s activities.
Skillfully blending fresh equity and debt with a generous term out of its current debt facilities, the team at General Maritime announced two transactions this week that successfully achieved the desired result; raising ample liquidity to ensure the company’s financial health with minimal dilution to its existing common shareholders. A transaction of this sensitivity, scale and complexity requires the skill and cooperation of a broad team of people.
The same can be said for any one of this week’s deals, so we would like to extend our congratulations to the key players: Nordea, DnB, Jefferies, Dahlman Rose, Citi, BoA Merrill Lynch, Morgan Stanley, Deutsche, Evercore, S. Goldman, Credit Suisse and, of course, long time General Maritime supporter Oak Tree, who all worked hard to make this one week a week to remember.
Marine Money upcoming conferences, please visit www.marinemoney.com for more details:
Houston, May 4
Istanbul, May 11
Oslo, May 26
Marine Money Week, New York City, June 21-23
Name Change Needed – DRYS Goes Wet
It should come as no surprise that George Economou’s DryShips was in the news. First, there was the announcement that the private placement of shares in Ocean Rig UDW was successfully closed with total gross proceeds of $500 million raised. Not only was it a success from the perspective of the capital raise, the company achieved a superior market valuation, both in terms of the rigs themselves as well as in relation to its peers, according to Scott Burk of Oppenheimer. But perhaps more importantly, the company now has a balance sheet which is self-sustaining.
This news was immediately followed by the company’s announcement that the Board of Directors had approved a share purchase program for up to $25 million of common stock of Ocean Rig for the first quarter of 2011. The maximum share purchase price is capped at $17.50, the offering price of the shares.
But why stop there? In furtherance of its diversification strategy, the company announced that it had entered into agreements with Samsung to purchase twelve high specification newbuilding tankers at a cost of $770 million. The order consists of six Aframax tankers, of which four will deliver in 2011 and two in 2012, and six Suezmax tankers, of which one will deliver in 2011, two in 2012 and three in 2013. Given the delivery dates involved, the majority of these were clearly re-sales, which is further affirmed by the favorable payment terms of approximately 70% of the contract price per vessel due at delivery. On the other hand, as Erik Nikolai Stavseth of Arctic Securities points out Samsung is involved in the construction of its drillships and the tanker order must be viewed in the context of the total relationship with the shipyard. The company has paid in $120 million from its cash as the down payment on the tankers and intends to finance the balance from cash on hand and bank debt. Ultimately, the intention is to position the company for a spin-off or IPO.
The deal has engendered much discussion among the analysts, particularly with respect to the price paid and the original contracting party. DryShips tried to head off discussion of the former by describing the vessels as having high specification and over $3 million in extras per vessel. Nevertheless, Pareto, Oppenheimer and Morgan Stanley suggest that the company paid a premium of $11 million, $38 million and $50 million respectively for the entire package based upon their analyses. The bigger question arose when the observant analysts noted that Mr. Economou’s private company, Cardiff Marine, had a similar order in place, raising the question as to whether the vessels were in fact purchased from Cardiff or were purchased directly from Samsung. Management made it clear that the transaction was done directly with the shipyard.
While speculation on such a move initially centered on containers, DryShips’ need to resolve Ocean Rig’s financing and the speedy recovery in the container space foreclosed that opportunity. While near-term prospects for tankers do not look bright, most analysts believe, as does Mr. Economou, in an improving medium and long-term outlook. In the interim, DryShips is a diversified holding company with interests in dry bulk, crude oil tankers and offshore drilling.
Mr. Economou’s Successful Week
The week started with news that Ocean Rig UDW, a wholly owned subsidiary of DryShips, entered into a two well contract with Borders & Southern Petroleum for two exploratory wells offshore the Falkland Islands. The contract, which is valued at $77 million, commences in 4Q 2011, upon expiry of the current contract and is expected to last 90 days. There are options for a further three wells which could extend the contract by 135 days.
A Look at the Numbers – “You got to know when to hold ‘em, know when to fold ‘em”
By George Weltman
One does not often hear public companies these days speaking about going private. And why should they? In today’s world of limited bank lending, access to capital is paramount, with liquidity a close second. The world has changed immeasurably from the past when public shipping companies worried about the lack of recognition or respect that their shares received, what perhaps could be called the Rodney Dangerfield syndrome.
Years ago, shipping shares were on no one’s radar and China had yet been admitted to the WTO. Other than OSG, TK and NATS among others in the U.S., shipping shares were mainly traded on international exchanges, where shipping held some importance.
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“DryRigs”
We began the week reading Ole Slorer’s initial research note on DryShips. Morgan Stanley’s shipping analyst upgraded the shares based upon his assessment that:
“A firmer tone in the ultra-deepwater drilling market recently may allow DRYS to scale down its risky and under-capitalized rig expansion…We believe the sale of two rigs would remove the financing overhang from the $1.4bn estimated capex for DRYS’s four unfunded newbuilds that still lack contracts. Assuming DRYS completes its announced $350m ATM offering, such an asset sale could put an end to our concerns of further dilution from further offerings related to the drillships. Despite the potential book loss in excess of $440m and the negative impact on the company’s projected EPS (by 15% in 2011 and 27% in 2012), a sale at around $600m per drillship could allow the stock to appreciate 30-40% in the near term.”
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