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.
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More Equity On the Way?

Speaking of the markets, one, in particular, has done well lately, which has certainly cheered both investors and investment bankers. Yes, the stock market, as measured by the DJIA, has increased about 40% from its low of 6627 on March 6th to its close on Thursday of 9256. While we do not pretend to be market seers, the rise is as mysterious to us as how quickly the stimulus appears to have worked in China. Rather than try and understand it, we intend to sit back and enjoy it.

With the stock market at these levels, there should continue to be more follow-on offerings as soon as everyone returns from vacation. With the bank market somnolent, the equity markets appear to have a monopoly on capital raising. While we remain unflagging in our belief in the return of high yield, raising equity to de-lever and repair balance sheets seems like a useful exercise in the interim.

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Delay Or Not to Delay

This week Excel Maritime joined TBS International in choosing to delay its earnings release and conference call for the 4th quarter and year-end 2008 results pending receipt of the necessary waivers. Although it raises some uncertainty, particularly with respect to the status of negotiations, shareholders should take comfort that this conservative approach is appropriate as it avoids the formality of the bank debt being treated as current, resulting in the borrower being unable to meet its obligations and, ultimately, the auditors giving a “going concern” opinion. This domino effect gives the banks a great deal of leverage.

According to a report by Omar Nokta of Dahlman Rose the situation is at best difficult. “Excel’s $1.4 billion credit facility, led by Nordea, has several financial covenants that are either in violation or could be in violation in the coming months. These covenants include fair market value-to-loan, interest coverage, net debt-to-EBITDA and minimum net worth, among others.” The breach of the balance sheet covenants is no surprise given today’s valuations although Mr. Nokta foresees a substantial breech of the net worth covenant as Excel marks to market the Quintana fleet it acquired last year. It does not seem so long ago that the fleet’s value was depressed as a consequence of its below market charters and hence very few showed interest in acquiring the company.

Perhaps of greater concern are the possible breaches of its cash flow covenants. Mr. Nokta suggests that the couunterparty defaults have led breaches of its interest coverage and net debt to EBITDA covenants. Cash balances as of the 3Q 2008 were $225 million and if that level of cash remains the company will have some breathing room although the banks’ assistance, in terms of restructuring the debt, will be required.

Don’t Throw the Baby Out with the Bath Water or How I Learned to Stop Worrying and Love the Fundamentals (with thanks to Stanley Kubrick)

With a full house, Simon Rose began Dahlman Rose’s 1st Annual Global Transportation Conference confessing that despite Wall Street’s having spent years educating investors as to the difference between period and spot business they have largely been ineffective. We disagree with this assessment believing the current market reflects a herd instinct and an avoidance of betting against the tape. The companies presenting at the conference are all clearly differentiated from spot players, with visibility of earnings and cash flows yet their shares have also been pummeled as the BDI continues its decline. Mr. Rose exhorted the crowd to take advantage of this anomaly, take a reality check and not to trade on fear.
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Oceanaut Takes Out Its Checkbook

With little time and no specificity in its investment guidelines, other than it be in shipping, Oceanaut Inc., Excel Maritime’s sponsored SPAC, announced, on Monday, that it had found its deal and will follow the footsteps of its sponsor and invest in drybulk but with a difference. It is the intention of the parties that Oceanaut will serve as Excel’s exclusive long-term charter dry bulk vehicle focusing on charters of 4 to 10 years.

The company has entered into definitive agreements to purchase four drybulk vessels from Irika Shipping S.A. for a total consideration of $352 million.  The acquired vessels, which aggregate approximately 279,000 DWT, include three Panamax vessels and one Supramax vessel, which are described above together with their prospective employment.

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Courting Quintana

Like many closely watched deals, especially those of the public variety where publicly reported information is strictly regulated, the headlines that came out over the past months regarding Quintana’s future were sometimes conflicting and often confusing. And with good reason; many insiders could not have said in early January what the future of the company would be, nor were they at liberty to share information about the details of the sale process. That said, we considered it worthwhile to take a deeper look at Quintana’s sale process, the offers the company received, and other alternatives they considered, as well as the valuations calculations and assumptions that formed the basis for Quintana’s ultimate decision to recommend Excel Maritime’s cash and share offer. Details have been made available to the public in advance of Quintana’s April 14 shareholder vote. Continue Reading

Re-Inventing Oneself

Last week, Cao Deambrosio, Head of Business Development, of GE Transportation Finance (“GETF”) sat down with us to discuss its purchase of a minority interest in Aegean Baltic Bank (“AB Bank”), which closed on March 3rd. AB Bank is a specialty bank­ing institution serving the Greek based and global shipping indus­try. Based in Athens Greece, AB Bank is a leading arranger and provider of financing with $2.2 billion of loans under management. And as we know, loan management is highly remunerative in terms of fees and other income.

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Consolidation: Just the Beginning?

Villy Panayotides, Chairman of Excel Maritime, told the Financial Times this week that further consolidation “is looming” in dry bulk shipping and specifically that publicly listed shipowners were obliged by their fiduciary duties to “at least to consider takeover offers.” Mr. Panayotides called the Excel-Quintana merger “pioneering” in that it is unusual to find such high-quality companies up for sale. He said that Excel’s strategy going forward would be to “be a major consolidator in the shipping market” in the coming years. He cited as proof of the need for consolidation in dry bulk that Greeks control about a quarter of the world’s dry fleet, amounting to about 4,400 ships, which are in turn controlled by about 1,100 different companies.

What is particularly interesting to watch for in that, as a result of the fact that vessel prices are stickier than share prices, in the current market public companies are in a position where their fleets are available at a discount to private fleets. Even if their management teams are aware of this disconnect, they are as Mr. Panayotides noted still obligated to consider takeover offers that come at a premium to their share price, even if it is a discount to the value of their vessels.

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