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.

Taking Care of Business

While we know the capital markets are abuzz with activity, there are still the mundane but important things that must be taken care of. On Tuesday, General Maritime amended its $750 million credit facility with Nordea, DnB NOR and HSH Nordbank, as joint lead arrangers and joint bookrunners (the “Credit Facility”) to permit the incurrence of indebtedness under the new $372 million credit facility being utilized for the acquisition of the Metrostar vessels.
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Meeting Its Obligations

In order to satisfy its obligations under the registration rights agreement, General Maritime announced yesterday that it had commenced an exchange offer to exchange up to $300 million principal amount of newly issued 12% Senior Notes due 2017 (“Series B Notes”), registered under the Securities Act of 1933 for a like principal amount of its privately placed outstanding 12% Senior Notes due 2017 sold in November 2009 (“Series B Notes”). The notes are identical in all material respects except that the Series B notes have been registered with the SEC and will not contain terms that restrict transfer or registration rights. The offer will not affect debt levels nor will the company receive any proceeds from the exchange.

Volatility and Uncertainty? Where?

Any concerns the market or we had with respect to volatility and uncertainty in the markets were put to rest last Thursday when General Maritime priced its follow-on offering.  While being an established company was key, we also noted the positive trend in the share price as both the vessel acquisition and follow-on offering were announced. The result was in our estimation remarkable. Described as a blowout, the deal was over 2 times oversubscribed with all the shares purchased by institutional buyers Due to demand, the deal was upsized by 20% and yet no one received their full allocation.  Moreover, from a pricing perspective, the shares were discounted by the typical 4.5% from the day’s closing price. While the transaction was accretive and positive in the long run, the results were a strong vote of confidence in Peter G. and his entire team.

Like the earlier high yield offering, it had to be done and the whole world knew it (the downside of transparency), not a favorable position for any seller. Yet Genmar’s team of bankers together with management clearly overcame that problem raising net proceeds of $195.6 million (exclusive of the green shoe), which when combined with the proceeds of the credit facility provided available financing totaling $567.6 million and therefore a funding gap of $52.4 million based upon the agreed purchase price of $620 million. However given the demand for the shares it is a near certainty that the green shoe will be exercised generating further gross proceeds of ~$31million making the gap easily manageable.
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No Pressure Just a Must Deal

General Maritime pulled out all the stops retaining a litany of Wall Street’s bankers to assist in the sale of its common stock needed to complete the financing of five VLCCS and two newbuilding Suezmax tankers from Metrostar. Debt financing is in the process of being arranged, with Nordea and DnB NOR, in the amount of $372 million, representing 60% of the purchase price. The facility is conditioned upon a successful equity offering to make up the remaining balance of $248 million plus any working capital needed. In this period of volatility in the markets, this is no simple deal. Adding further complications was S&P’s recent downgrade of the company’s debt to a B rating. This rating however needs to be put in the context of S&P’s overall view of shipping, which considers Teekay and OSG as BB and BB- rated respectively a few notches above Genmar’s.
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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.
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Can’t See the Forest for the Trees

Late Friday, the news came out that General Maritime had successfully priced its 144a private placement of $300 million of senior unsecured notes due in 2017. Like the NCL deal that was competing with it, the Genmar bonds were priced in a soft and volatile stock market. Rated B3/B, the notes, with a 12% coupon, were priced at 97.512% to yield 12.5%, a spread of 922 bps over like term Treasuries.

Market noise suggested it was a hard sell, that buyers had issues with the dividend and covenants and, finally that it was expensive. But was it really? While it does look expensive when compared to the NCL and Navios’ offerings, one must not forget that this was done on an unsecured basis. And, although the premium for unsecured was perhaps higher than they anticipated, the company got what it wanted – quasi-equity. The bond provides the cushion that the banks were looking for. And while the $36 million in interest cost is expensive, the impact of that amount, if it had instead been income, appears less costly on an EPS basis based upon a new hypothetical share count (currently 57.9 million shares) which would have included an incremental +/- 33 million shares at $7, that would have had to been issued to meet the minimum requirement of its banks.

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All Eyes Are On Genmar

We know that General Maritime’s dynamic duo, Messrs Georgiopoulos and Pribor are on the road marketing their $300 million senior unsecured notes offering due in 2017 and so, while they are busy selling we thought we would take a read of the high yield market.

Earlier this week, Navios Maritime Holdings closed its successful $400 million private offering of first priority ship mortgage notes due in 2017. Rated BB-/Ba3, the coupon on the notes was 8.875% and was priced to yield 9.125%. The company escrowed $105 million of the proceeds to provide additional financing to complete the purchase of two new vessels with the balance used to repay existing credit facilities.
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The Not So Invisible Hand

In the midst of its 3rd quarter earnings report, General Maritime disclosed that it had entered into a broad amendment of its 2005 credit facility led by Nordea this week. It would appear based upon these disclosures, that the banks are perhaps becoming more proactive in protecting their interests. The time of waiting and seeing what will happen has passed. Simple waivers, if this is an indicator of future trends, will not be granted. Amendments will require reduction of exposure, tighter covenants, and higher costs. But it is the quid pro quo for the amendment that makes this one particularly interesting. The amendment is contingent upon a re-capitalization of the balance sheet through the offering of non-amortizing senior unsecured notes (but with subsidiary guarantees) with a minimum term of five years. The offering must be consummated by November 30th and provide at a minimum net proceeds of $230 million.
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Managing Expectations

By their nature all public companies are focused on their shareholders, but General Maritime’s behavior, at times, seems compulsive. And that is a good thing. Back in 2007, the company recapitalized itself, adding debt so it could pay out a special dividend of $11.19 (adjusted) per share, when there were no opportunities that met the company’s investment criteria. To management, it was appropriate to return the capital to the shareholder.

Today the world is different. The tanker market has weakened straining cash flows on one hand but offering up investment opportunities on the other. In response, management has changed the dividend policy to pay out a fixed annual dividend of $0.50 per share, which is a visible and consistent payout supported by Genmar’s current contracted revenue stream. Jeff Pribor, Chief Financial Officer, commented, “… The adoption of our new dividend target is the result of our Board’s voluntary reassessment of our dividend policy based on current market conditions. We believe it will enable General Maritime to continue its tradition of distributing cash to shareholders during a challenging market environment. By implementing a more conservative payout ratio, we believe we have also strengthened our financial flexibility to enter into future value creating transactions and take advantage of strategic growth opportunities…”

Here, too, credibility goes a long way.