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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.
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.
Not to Be Missed
Despite the difficult environment, a veritable who’s who of the shipping community descended on the Jefferies 5th Annual Shipping, Logistics & Offshore Services Conference on Tuesday and Wednesday.
We must confess that walking in at the uncivilized hour of 8 AM to a sparse crowd and seeing Jefferies Magic Eight Balls gave us pause. Was Hamish making a market statement or was he merely giving investors a new forecasting tool? Our conclusion was probably both.
Capital Market Strength Makes Winners all around in ATB GMR Transaction
In a market in which issuing new equity at or above net asset value is nearly impossible, and at a time when high payout shipping companies are struggling to grow, General Maritime’s all stock acquistion of Arlington Tankers not only makes perfect economic sense – the cashless and symbiotic nature of the deal is probably a blueprint for a few more transactions to come.
BUY! BUY! BUY! Results to Please Just About Anyone
It’s been earnings season the past two weeks and if there were ever a question about whether shipping could avoid a hit due to the sub- prime crisis, well, this should answer it.
For fun, here are a few analyst comments on recent returns… From Dahlman Rose:
Dahlman/Eagle Bulk Shipping – 1Q Operating Results Stronger Than Expected; In Solid Position to Re-Charter Vessels as Rates Continue Pushing Higher
We believe Eagle’s aggressive approach to re-chartering its vessels will payoff as the market has exceeded our expectations. During the past few weeks we have seen several long-term time fixtures as charterers look to secure vessels in the face of a rising market. We maintain our Buy rating and $33/share target, based on a 10% 2009 CF yield, ahead of the earnings call this morning.
Eagle’s share price jumped more than 10% following their conference call!
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