Links
Risk Off? – Frontline Closes within its Self-Imposed Deadline
While not a joyous conclusion to the year, the announcement of the successful completion of the restructuring of Frontline does at the very least bring a sigh of relief to all the parties involved. While we have covered the details of the transaction in prior issues, we would highlight the following key elements.
The newly formed “risk” tanker company, Frontline 2012 acquired five VLCC newbuilding contracts, six modern VLCCs, including one time charter and four modern Suezmax tankers from Frontline for $1.121 billion based upon fair market values. In addition, the new company assumed $666 million in debt associated with the vessels and newbuilding contracts as well as $325.5 million in remaining newbuilding commitments. Based upon a year-end book value of $1.428 billion, Frontline will incur a book loss of $307 million.
Restructuring – Continuing Progress
Global Ship Lease LTV Waiver
Last week, Global Ship Lease Inc. reached agreement with its banks to waive until November 30, 2012 the requirement to conduct loan-to-value (“LTV”) tests. Under the terms of the agreement, the ratio of outstanding borrowings under the credit facility to the charter free market value of the vessels at this time was not to exceed 75%, which could not be met. The quid pro quo for the waiver was an increase in the margin to 3.50%, a restriction on dividends and the use of cash flow to prepay borrowings under the facility. With respect to the latter, cash in excess of $20 million will be the prepayment amount in December and with payments made quarterly thereafter.
Connecting the Dots – Frontline to DHT
Last week, we reported on DHT Holdings Inc.’s acquisition of a 2002 built VLCC. In fact, the deal had another layer of complexity, which is not surprising given the involvement of John Fredriksen. The vessel involved was the Front Eagle, which Frontline Ltd was chartering from a German KG. To consummate the transaction, the company exercised its purchase option and simultaneously sold the vessel to DHT for $67 million, while agreeing to charter back the vessel for two years at a rate of $32,500/day. The vessel is expected to deliver and go on charter in the 2nd quarter. For Frontline, the transaction will generate $10 million in cash and will reduce its capital lease obligations by approximately $37.3 million.
A Rude Wake-up Call
Market hearsays turned into wide-spread panic as news of Korea Line’s bankruptcy filing hit the industry on Tuesday. The South Korea’s second largest bulk carrying line filed for a court receivership after its failure to renegotiate a number of loss-making charter arrangements concluded prior to the financial crisis. Alarm bells were also ringing as far away in the United States where several public listed companies have their ships chartered to the beleaguered company.
Among them, probably the most exposed was New York listed Eagle Bulk Shipping. The company has 13 out of its 48 ships on time charter to Korea Line, lasting between six to ten years. In a statement to the stock exchange, the company described its exposure to Korea Line as modest because the vast majority of the charters were fixed at close to current market rates. “To date, none of our charters with Korea Line have been restructured,” it added. In his latest report, DnB NOR’s analyst Glenn Lodden expects many of these time-charter contracts will be renegotiated and the most expensive might be breached. However, he believes that it is unlikely that Korea Line will be liquidated because the company remains “an important part of South Korean infrastructure (iron ore, coal, LNG imports).” Continue Reading
Not a Shell Game But a Good Outcome – Fredriksen Re-jiggers his Orderbook
We refer to a shell game not in a pejorative sense but only in that Mr. Fredriksen arrived with something, left with something different and was richer for it. Like most of Mr. Fredriksen’s dealings, this was not simple. It involves two of his companies, Frontline and Golden Ocean Group (“GOGL”) and two shipyards, one Chinese and the other Korean.
J.P.Morgan Predicts Tanker Sector Recovery
J.P.Morgan forecasts a tanker market recovery that should begin in the 4th Quarter of 2010 and continue through 2011. The firm reports that current low tanker stock price levels will result in favorable risk/reward outcomes for investors as the market recovers. Thus, J.P.Morgan has shifted their ratings preference to Beta. According to the firm, the companies with the highest forecasted returns are those with the most earnings leverage to spot rates, notably General Maritime and Frontline, which have been upgraded to “Overweight” ratings. Their ratings were previously Neutral and Underweight, respectively.
J.P.Morgan predicts that an increase in demand for OPEC petroleum and an increase in fleet utilization will be the likely causes for increases in tanker stock prices. Further, an expected materially active hurricane season and recent incidents in the Gulf of Mexico and Port of Dalian could also result in increased prices, yet the impact of these types of events on market prices is difficult to predict.
Shareholder Activism
Last December, we wrote about MMI Investments L.P.’s investment in DHT Maritime. At that time this activist shareholder had purchased approximately 3.95 million shares, representing approximately 8.1% of the outstanding shares for $15.6 million. At the conclusion of our article, we presciently suggested that the company should soon expect a call. This week, with its ownership stake increased to 4.325 million shares now representing 8.9%, MMI fired its broadside.
We have always believed that criticism should always welcome as long as it is given constructively and thoughtfully. Second-guessing from the cheap seats in our estimation is at best unproductive and at worst detrimental to the party it is directed at. In this light, we believe in the role played by shareholder activists, but often wish it were directed in a positive constructive manner in the long-term interests of the shareholders as opposed to an attempt to hike the share price for a quick and profitable exit. We cannot paint all activists with the same brush but do distinguish a Calpers from a Carl Icahn. And in the same vain, there is both good and bad management, necessitating a role for these activists. For the moment, we will withhold our judgment of MMI but their first run at DHT leaves us decidedly unimpressed.
Continue Reading
A Scent of Spring
Ever proactive, as one must be these days, Ole Hjertaker and the Ship Finance team recently tackled the refinancing of its syndicated loan related to the 26 vessels on charter to Frontline. The timing was propitious as the loan matures in February 2011 meaning that the outstanding amount would become a current liability as of this month. Although it had received underwritten offers, Ship Finance chose to go directly to its lenders. This gave them the opportunity to not only meet directly with all 30 of its active banks and, in particular the credit people who have the final say, as well as avoid the premium associated with an underwritten transaction.
Continue Reading
Symbiotic Relationship
Watching the interrelationship between Ship Finance and Frontline is always interesting, particularly when it comes to the disposal of vessels. Earlier this month, Ship Finance agreed to sell the 1998 built VLCC Front Vista to a subsidiary of Frontline for $58 million. After the repayment of the associated debt, Ship Finance will receive net proceeds of $22.1 million and will record a book gain of $1.8 million. While not an exciting deal from Ship Finance’s perspective, it does lock in a gain and eliminates any residual risk.
The deal is much more interesting for Frontline who have sold the vessel concurrently to a third party, which has fixed the vessel on a 10 year time charter to a national oil company at a gross rate of $43,500/day. The transaction has been structured as a conditional sale over 10 years, matching the term of the charter. The effect of the deal is to take a vessel which has been trading spot and converting it to fixed financial long-term revenue stream against a national oil company credit. From this side too, the residual risk is removed. Not a bad deal at all.
Constructing & Destructing Balance Sheets
With earning’s season reporting upon us, companies are disclosing the steps they are taking to bolster their balance sheets as well as recording the destructive efforts of the accountants. Companies are trying to strengthen their balance sheets in light of macro events, weak markets, leverage as well as future capex obligations. On the other hand, investments by shipping tycoons have also proved unsuccessful leading to mark to market write downs proscribed by accountants which diminish equity although they are non-cash charges. In no specific order, we highlight the following:
The Official Guide To Marine Finance Providers
Shipping Index
