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.

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Pure Play or Mixed Fleet?

Is it time to diversify to diminish risk? Mr. Fredriksen clearly thinks so or perhaps sees more opportunities with his companies being more closely aligned. Previously, Knightsbridge Tankers ordered two newbuilding Capesize bulkcarriers. This week they added a third acquiring the M/V Golden Future, delivered from Zhoushan Jinhaiwan Shipyard in February 2010, from the Golden Ocean Group, a related company, for a purchase price $72 million. The vessel is employed a 3-year time charter at a gross rate of $31,500 per day. The transaction is subject to the approval of Knightsbridge’s lenders.

This was an opportunity for Golden Ocean to diversify, which it did by taking partial payment in shares of Knightsbridge. Knightsbridge will pay $25 million of the purchase price by issuing to Golden Ocean 1,464,515 restricted common shares and will finance the balance through a senior secured credit facility, although it will evaluate other alternatives. The shares were priced at $17.07/share a 4.2% discount to the prior day’s closing price.
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Game Changers?

In their 4th quarter earnings release, Golden Ocean Group Limited announced that its application for a secondary listing in Singapore had been approved by the Singapore Exchange (“SGX”). The company already has an operational presence in Asia and saw the opportunity offered by the July 2009 Memorandum of Understanding between SGX and the Oslo Bors (“OSE”), which facilitated a simplified and accelerated dual listing process between the exchanges. This will be the first secondary listing by a Norwegian firm under the new accords.

From our perspective, this is an interesting transaction. Not only is this an example of a western company seeking equity capital in the East, it also raises the question of whether the market would follow the trendsetter, John Fredriksen, who was the first to bring his company to the U.S markets. The successful listing of Golden Ocean will blaze the trail for more to follow and strengthen Singapore’s position as a maritime and financial hub. Continue Reading

In-N-Out

Those of you who may have traveled in the western United States may have come across a fast food chain called In-N-Out Burger, which was California’s first drive-thru hamburger stand. The image is rich, particularly these days. Can you imagine an In-N-Out investment bank with clients pulling up and leaving with boatloads of cash? But in this instance, the In-N-Out refers to the Golden Ocean Group convertible bond offering that was announced Tuesday morning and pulled later that same day.

The deal put forth was for $100 million in principle amount of five-year senior unsecured convertible bonds. Pricing was somewhat aggressive, in terms of recently completed deals, with an expected annual coupon in the range of 4.375%-4.875% and a conversion premium of 27.5%-32.5%. Proceeds were to be used to fund the existing shipbuilding program, improve the company’s ability to react to market opportunities and for general corporate purposes.
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Pipavav Shipyard

This week, we are impressed to see another shipyard finding success in the IPO market. This makes India’s Pipavav Shipyard the third successful shipbuilder to raise equity following Taiwan’s China Shipbuilding Corporation and Malaysia’s TAS Offshore since the beginning of this year.

Pipavav Shipyard will soon be listed on the Bombay Stock Exchange and National Stock Exchange upon the completion of its book building. The private shipyard has offered its shares at a price band of Rs 55 – 60 a piece and plans to raise between Rs 4.7 billion (USD 98 million) and Rs 510 billion (USD 106 million). This amount is significantly lesser than the USD 200 million it had previously planned when the shipyard registered its IPO during the first quarter of 2008. Out of the 85.45 million shares on offer, 2.6 million shares have been set aside for the employees. We have provided a summary of the transaction in the Guts of the Deal table that follows. JM Financial Consultants, Citigroup Global Markets India, Enam Securities and SBI Capital Markets are the appointed bookrunners for this IPO. Continue Reading

Learning From the Master – Part II

On the other hand, Mr. Fredriksen’s investment in Golden Ocean Group (“GOGL”) is not faring as well, but is well on its way to a cure as Messrs Fredriksen and Troim continue to work their magic. It appears that they have restructured the company’s obligations while restoring the balance sheet back to health. And there was nothing mystical about it as all the players contributed by enduring pain in the short-term, hopeful of a recovery in the long-term.

With the assistance of Fearnley Fonds, DnB Nor Markets, Nordea Markets, First Securities, Platou Securities, Arctic Securities, and ABG Sundal Collier, the company issued 180 million (upsized from 165 million due to demand) new shares at a subscription price of NOK 4.10 per share resulting in gross proceeds of approximately $110 million of new equity. The offering was underwritten by Mr. Fredriksen’s Hemen Holdings, which was allocated 72 million shares. Post-offering, Hemen’s interest will remain basically unchanged at 40%.

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Waivers And More Waivers

Not unsurprisingly, the difficulties in the marketplace are becoming more evident as the number of waivers of covenants increases in the public sphere. However, we understand that it is on the private, or dark side if you will, where the heavy lifting, at least in terms of restructuring, is taking place. The appropriate analogy might be the bare-knuckle storm below the calm sea of the public genteel discussions. Nevertheless, these exercises may be nothing more than band-aids should the market not improve. We certainly understand the cautious approach taken with respect to the public companies given the ramifications. The question remains as to what impact the private discussions might have on the public. We watch and wait as the parties stake out their positions.
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Golden Ocean Sale-Leaseback

Golden Ocean Group (“GOGL”) this week reported the sale of one of its Kamsarmax newbuildings scheduled to be delivered in the 3rd quarter 2009 and currently under construction at the Jinhaiwan Shipyard in China. Upon delivery to the buyers, the vessel will commence a 10 year bareboat charter with GOGL at a rate of $21,975 per day. The transaction provides for annual purchase options beginning in year 4. the purchase price after 10 years is $40 million. At delivery, the seller will net $21 million cash. The IRR is approximately 10% for the full term.

Accountants Run Wild

In an environment where it’s all about the “trade”, it is not surprising to us that the accountants are starting to leave footprints here as well as everywhere else. With the sub-prime mess omnipresent, everyone is on tenterhooks and everything is suspicious. The first signs of the profession’s interest appears in Golden Ocean Group’s “Preliminary Fourth Quarter and Financial Year 2007 Results” where the company, to be conservative, disclosed that it was in discussions with its auditors regarding the accounting for its newbuilding contracts.

Normally, newbuilding contracts are booked as an asset on the balance sheet as construction in progress and incorporate amounts expended to date (i.e. historic cost). Pretty straightforward until you put in the mix that Golden Ocean, during 2007 and 2008, sold ten of the vessels that it has contracted as newbuildings raising red flags for the accountants. Instead of accounting for them at cost, the accountants are instead suggesting that it may be “…appropriate to account for certain of its newbuilding contracts as financial instruments and, as such, record them at fair value.”

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