Full House in Athens – Part 2

By Kevin Oates

…in the longer term shipping should correct but quality, transparency and financial strength are key to survival.

Despite the tough market and the general lack of ship finance, Marine Money’s Greek Ship Finance Forum again filled the seats in Athens.  With 310 delegates and speakers and some 40 more for the TEN Ltd lunch, there was plenty gossip and exchange of views at the 11th Annual conference held on the 8th of October 2009.

The event had started with a speaker’s dinner the previous night co-hosted by Navios Maritime Holdings and was to end in the early hours of the following morning at the Capital Party co-hosted by Capital Product Partners LP at a well-known Athens nightclub.  Even if the market is tough, we still know how to enjoy ourselves.

Back at the conference, our day began with Guy Verberne, a leading economist at Fortis Bank (Nederland) telling us that the economic recovery has come and it may well be sustainable.  China, he says, has plenty foreign reserves to prolong it’s stimulus package for as long as it needs and he sees no meaningful cutbacks from the stimulus packages of western governments, at least through 2010.  A risk is a double dip in 2011 if we get too bogged down in debt.
Continue Reading

Top Tankers to Return to Equity Markets?

Top Tankers in $300 Million Convertible

Use of Proceeds – Ships and Delta Hedge

The company intends to use $250 million of the proceeds to fund vessel acquisitions, including the $475 million acquisition of the Nomikos fleet and another $95 million to acquire two double-hulled tankers.

Top will also use $50 million of the proceeds to buy common stock while Kingdom Holdings, which owns about 15% of the company’s shares and is controlled by members of the Pistiolis family, has agreed to purchase another $20 million of the common stock.

This total of $70 million will likely be acquired by the purchaser of the convertible preferred securities, who would then short the stock to create a “Delta Hedge.” This is not unlike what OMI did when it used a corporate share repurchase program to facilitate its recent convertible bond issued through Jefferies.

Although shares held by Evangelos Pistiolis, through an entity called Sovereign Holdings, are locked up until July 18, 2005, the lock-up for shares held by Kingdom Holdings expired on January 19, 2005.

DVB Joins Royal Bank of Scotland

In addition to the proceeds of this deal, in March 2005 Top entered into a credit facility with DVB Bank, for a total of $56.5 million, to finance the purchase of two suezmax tankers, the M/T Stopless and the M/T Stainless. The loan is payable in 28 varying quarterly installments, beginning on July 29, 2005, and a balloon payment of $10.2 million, payable together with the last installment. The interest rate on the DVB credit facility is 125 basis points over LIBOR. Beginning on the date of the credit facility and ending on the final drawdown date, Top will pay the lender a quarterly fee of 0.25% of the average undrawn amount of the loan for the quarter.

Why They Did It

So why did Top Tankers move into the world of financial exotica rather than simply issuing another round of common stock? There are several reasons. For one thing, the continued issuance of equity used for dilutive acquisitions ultimately erodes shareholder value and therefore is not popular among holders, though we do not intend to suggest that this is the case here. Although investors can understand that sometimes a premium must be paid for certain transformational transactions, they don’t like to see it done over and over. That’s why we thought Top would turn to the highly attractive high yield bond market to finance the Nomikos acquisition.

Pricing

The dividend rate and conversion rate are to be determined by negotiations between Top and the initial purchaser of the convertible preferred stock. These deals are generally executed very quickly, often on an overnight basis, so look for pricing details shortly. Although these have not yet been announced, the table showing last year’s convertible issuance that accompanies this article should give you an idea of what to expect. In an industry like shipping, it is typical to see a deal priced with a 7% dividend convertible at a premium of around 25% – known in Wall Street parlance as a “7 Up 25”. Another rule of thumb is that the conversion premium should be about 3.5x the coupon.

The Valuation – 110% NAV and 4.3x EBITDA

As for the valuation of the Top acquisitions, they appear to be very attractive. Nomikos has agreed to sell its fleet of vessels for $475 million and then lease them back for 24 months at an aggregate charter rate of $357,000 per day – $24,000 per ship per day. Using an average operating cost of $4,000, Top will generate about $110 million of cash flow per annum on the vessels, creating a purchase price of 4.3x EBITDA. Nomikos has also agreed to provide credit support for the charter hire. Based on our valuation of the fleet, Top is paying just 3.5x 24 months of contracted cash flows and only a slight premium over current NAV for the vessels on a charterfree basis.