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“Eleven Thoughts for 2011”
We genuinely appreciate someone putting himself out there by taking a position on the issues of the day. In his Dry Bulk Outlook for 2011, Gregory Lewis of Credit Suisse looked into his crystal ball raised some very interesting questions/ thoughts for the upcoming year and beyond, which we thought were worthy of repetition. We will put these in a time capsule and open them in twelve months and grade him on his performance.
The Doctor Is In!
For us, the news of a companies’ placing new orders for ships was largely background noise. Covering the financial markets is a full-time job, in and of itself, although we do like to take a peek at broker reports when we have a chance. But in the main we get our market news largely distilled from the analysts, all of whom are keen students of the market. And so the news of new orders barely impinged upon our thoughts as we were more focused on the existing orderbook, and the forever unknowns, slippage and cancellations.
That was the case until we had a look at a short précis on the dry bulk market authored by Gregory Lewis of Credit Suisse in which he discussed the current dry bulk orderbook and made the following observations:
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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.
Even the Analysts Wonder
We arrived at work last Friday morning to the rather surprising news that DryShips, clearly seeing the opportunity, had once again gone out into the equity market. The company announced its second ATM Equity Offering through Merrill Lynch for up to $475 million of the company’s common shares. Back in January, DryShips had entered into an earlier agreement to sell up to $500 million, which it completed last month selling a total of approximately 95.7 million shares, generating net proceeds of ~$487.5 million after commissions. An ATM equity offering allows the company to issue common shares at any time and at the company’s discretion.
Rashomon – As We See It
It began with the movie “Rashomon” and evolved into a concept. “The Rashomon effect is the effect of the subjectivity of perception on recollection, by which observers of an event are able to produce substantially different but equally plausible accounts of it.” Or as the movie asks, who is telling the truth and what is the truth?
Our version of the script calls for a look at Seaspan’s first quarter earnings announcement to elicit the main takeaways. We then turned to our favorite shipping analysts, including Natasha Boyden of Cantor Fitzgerald, Gregory Lewis of Credit Suisse, Omar Nokta of Dahlman Rose, Douglas Mavrinac of Jefferies, Urs Dür of Lazard and Justin Yagerman of Wachovia, for their views and calls. This becomes a very interesting exercise because, as the analyts tell us, there is no company that is easier to model given their strategy to lock-in costs and fix revenues for the long-term.
What Do DryShips And The U.S. Government Have In Common?
The answer is they both seem to be issuing lots of paper. Last week, DryShips announced two transactions designed to reduce their future financial commitments. In the first instance, it transferred its interest in three Capesize newbuildings to an unaffiliated entity generating savings of $364 million in exchange for total consideration of $116.4 million. The latter consists of $36.4 million in previously paid deposits, $30 million paid to the purchaser and two additional tranches of $25 million payable to the purchaser within 30 and 60 days respectively. The last two tranches are payable either in cash or, at the option of the company, by issuing 2.6 million shares of common stock for each tranche.
Not surprisingly, the company also unwound the previously announced acquisition of 9 Capesize bulkcarriers from affiliates of Cardiff Marine, George Economou and third parties for $1.17 billion, which was to be paid for with 19.4 million shares of the company’s common shares and the assumption of $478.3 million in debt and future commitments. The consideration to cancel this transaction will consist of the issuance of 6.5 million shares to the unaffiliated entities, subject to a six-month lock-up. The affiliated entities will receive 3.5 million warrants that give the holders the right to purchase one share of DryShips stock. The warrants will be priced at $0.01 and will have strike prices, depending on the relevant tranches of between $20 and $30 per share. Vesting will be over 18 months with an expiry of 5 years.
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Hard Numbers
Moving from the theoretical to the concrete, the following examples illustrate the real cost of today’s crises:
Genco Bites the Bullet
On Tuesday, Genco Shipping & Trading (“Genco”) made the correct but painful decision to cancel the previously announced acquisition of six dry bulk newbuildings, including three Capesize and three handysize vessels, from Lambert Navigation et.al., at an aggregate purchase price of $530 million. As part of the agreement, the sellers will retain the deposits totaling $53 million. The three Capesize vessels and three Handysize vessels are being constructed in the Daehan and Jinse shipyards in South Korea, with deliveries commencing in the 4th quarter 2008 (two Handysize) through 2009.
A Bargain?
The following sales of dry bulk vessels were reported last week in Cleaves Shipbroking’s S&P Market Report:
“ARETHOUSA DWT 171,779, BLT 9/1999 AT HYUNDAI HEAVY ULSAN, SOUTH KOREA, M/E B&W HYUNDAI HEAVY SOLD FOR USD 90 MILL (AFTER BEING RENEGOTIATED FROM USD 133 MILL).
PILION DWT 48,218, BLT 9/1994 AT SHENAVEH, DENMARK, 4 X 25T CRANES, M/E B&W MITSUI TAMANO, B&W SOLD FOR USD 33 MILL (AFTER BEING RENEGOTIATED FROM USD 51.5 MILL).
OCEAN GLOBE DWT 43,246, BLT 8/1995 AT HYUNDAI HEAVY ULSAN, SOUTH KOREA, 4 X 25T CRANES, M/E B&W HYUNDAI HEAVY SOLD FOR USD37 MILL (AFTER BEING RENEGOTIATED FROM USD 53 MILL).”
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Following on Quintana’s Success?
Using current phraseology, Aries Maritime Transport Limited (“Aries”) announced last Friday that its Board of directors has retained Merrill Lynch to assist the company in a review to evaluate strategic alternatives to enhance shareholder value. “These alternatives may include, but are not limited to the sale or merger of the company, other strategic transactions, potential capital raises and the continued execution of the company’s operating plan.” Continue Reading
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