Memories and a Miscalculation

The Good News
We wonder whether in preparing his keynote address for our Hamburg conference entitled Memories, a view of what happened to and where the industry is heading, Mr. Arntzen had a memory of his own and thought, “Wasn’t there a time when OSG accessed the capital markets?” Seizing on the thought and the opportunity, Mr. Arntzen jumped on the Lexington Avenue Express and headed down to Wall Street to arrange a follow-on offering of OSG’s shares. Given the high repute and credit standing of his company, Mr. Arntzen knew the investment banks were hungry and would compete heavily for his deal. There was no need for an overnight or marketed transaction so he simply arranged an auction among the banks (more than 5 but less than 10) for 3.5 million of OSG shares.
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Paying the Bill

On Tuesday, after the market closed, Aegean Marine Petroleum Network announced that it would utilize its recently effective shelf registration to issue 3,906,000 shares of its common stock in an underwritten public offering. The closing price of the shares was $32.45, which would equate to an equity raise of approximately $126 million on a gross basis. The next day, in a market roiled by news of restricted lending in China, the shares traded up $0.23 to $32.72.
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A Silver Lining in the Bond Market

For the fortunate few, there lies the silver lining in the bond market. Records were shattered in 2009 in the Asian shipping bond arena with over USD 7.26 billion in new issuances. This is a historical high which represented an over 350% increase from USD 1.59 billion in 2008. Clearly, the need for capital has never been stronger as companies grit their teeth against the harsh operating environment.

Transactions in the Asian shipping bond market ran the gamut from the simplicity of straight unsecured issues to the complexity of Islamic debentures. Korean shipping companies top the list, by issuing bonds with 1-3 year maturity and interest rates of 7-8%. Hyundai Merchant Marine, Hanjin Shipping, STX Pan Ocean, SK Shipping, Korea Line and EUKOR Car Carriers have all tapped the bond market more than once this year, having raised over USD 2.9 billion in total. Top Korean issuer HMM raised KRW 1.06 trillion (USD 899.9 million) through eight bond issuances between February to November this year. Continue Reading

Co-Investing

Yesterday, Euroseas Ltd. announced that it has entered into a letter of intent with Eton Park Capital Management (“Eton”), on behalf of one or more funds managed by it, and Rhone Capital III (“Rhone”) to form a joint venture to pursue investment opportunities in shipping. Euroseas will contribute $25 million to the venture with Eton and Rhone expected to contribute $75 million each.

The agreement includes an option for Eton and Rhone, exercisable at any time after two years, to exchange all or part of their interest in the joint venture for equity in Euroseas at a price to be based upon the comparable values of the company and joint venture at the time of exercise.
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CIMC Begins Full Acquisition of Yantai Raffles

China International Marine Containers Group (“CIMC”) has appointed Goldman Sachs (Singapore) for the full acquisition of Singapore’s Yantai Raffles Shipyard (“Yantai Raffles”). This move by CIMC comes as the next step in its bid to takeover the remaining Yantai Raffles’ shares, of which CIMC already owns 18.27% through its wholly owned subsidiaries CIMC HK and Sharp Vision Holdings.    Continue Reading

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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A Noble Breed

Last week, our sister publication Freshly Minted reported on Maersk’s successful EUR 750 million (USD 1.3 billion) five-year bond. This was the shipping conglomerate’s first bond issuance, following a recent equity offering of USD 1.7 billion. In Asia, commodity trading house Noble Group has likewise found tremendous success in raising funds, suggesting that investors and bankers are getting warmed up to investing cash again. Continue Reading

Whither the Banks?

While we, in shipping, focus daily on the macro picture, primarily the world economy and micro data, such as commodity prices, steel production, oil prices, charter rates, etc, in order to gauge what is happening, it may well be that the health of our industry is, for the moment, more directly correlated to the condition of the banking industry, particularly in light of the supply side issue. While the capital markets have filled a void in the availability of capital in the interim, the question remains as to whether the banks will be back and if so when?

In his excellent report, What We Have Learned from the Large Financial’s Results, Paul Miller of FBR Capital Markets provides insights into the earnings and the credit and financial condition of a select group of the largest U.S. banks including Bank of America, JPMorgan, Citigroup and Goldman Sachs based upon their most recent quarterly reports. We believe the results of these company’s are indicative of the general condition of the banking world. His key takeaways are as follows:
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Hornbeck Seizes Opportunity

Last Thursday, Hornbeck Offshore Services (“Hornbeck”) announced that it agreed to sell $250 million aggregate principal amount of its 8% Senior Notes due 2017 in a private placement pursuant to Rule 144A. Based upon demand, the offering was upsized by $50 million from the original transaction size announced the day prior. J.P. Morgan, Wells Fargo, Jefferies and Goldman Sachs were the joint lead book runners. Capital One, Comerica, DnB NOR and Fortis were also involved.

The net proceeds of approximately $237.3 million from the sale will be used to repay debt under the company’s revolving credit facility, which amounts may be re-borrowed. The remaining net proceeds will be used for general corporate purposes, which may include the retirement of other debt.

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The Inevitable – Taxes and Restructuring

President Obama’s Proposed International Tax Changes – Will They Truly Achieve Economic Stimulation
Tamara Moravia-Israel of Ernst & Young was forthright in views of the President’s proposed changes in international tax law. It is not good for shipping. And there is a question as to whether it will in fact create jobs, stimulate the economy and increase competitiveness as is suggested. First, the “check the box” regime is proposed to be reformed in that foreign eligible entities with a single owner could be disregarded for federal US tax purposes only if: (1) they are organized in the same country in which the owner is organized or created, or (2) a US person wholly owns them (except for tax avoidance cases). The implications of this are potential conversion of first-tier (for tax avoidance) and second-tier (or lower) foreign disregarded entities (FDEs) to corporations that may have US tax implications. Ms. Moravia-Israel suggests that the current check the box regime allows US multinationals to be on somewhat of a level playing field with its foreign competitors. An additional proposed change by the Obama Administration is the deferral of deductions. That is, there will no longer be allowed a deduction for foreign expenses on the US return unless the foreign source income associated with said foreign expense is recognized for US tax purposes. However the biggest threat comes from the Levin Bill, which Congress is potentially currently considering. In effect, the bill puts forth that a foreign corporation is treated as managed and controlled in the US if substantially all of the executive officers and senior management of the corporation who exercise day-to-day responsibility for making decisions involving strategic, financial, and operational policies of the corporation are located primarily within the US. If the foreign corporation is considered to be managed and controlled in the US, it is treated as a domestic corporation for US tax purposes. This goes against the traditional determination of nexus, which has historically been the location of board meetings.

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