Without a doubt, Horizon Lines was in difficult straits. With refinancing risk related to the $330 million of its 4.25% convertible senior notes (“Convertible Notes”) and bank debt, both due in 2012, poor financial performance, anti-trust issues and potential de-listing, the company was fighting fires on all fronts. But after much travail, the company announced that it had reached an agreement with the Convertible Note holders for a complete refinancing of the company’s entire capital structure, eliminating the re-financing risk, while hopefully putting the company on sounder footing going forward.
As of the end of the 2nd quarter, the company had total debt of $600.4 million the bulk of which is classified as current due to non-compliance with covenants. The debt consists mainly of 319.2 million of the Convertible Notes and $272.9 million of bank debt split between a term loan ($84.4 million) and a revolver ($188.5 million), against $1.5 million of total equity.
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Last week, The Wall Street Journal provided another indicator of the shipping slump when they announced the Best on the Street analysts for 2008. Unlike last year, our shipping analysts were conspicuously absent, although the number three slot was taken by Jim Corridore of Standard & Poors, who had rated Horizon Lines a sell during the period in October when the shares fell 77%.
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While the shipping industry enjoys a remarkable period of prosperity, in a tiny corner of the world chaos appears to reign for the moment.
The small chaotic corner we refer to is the U.S. Flag community, where teams of lawyers are as important as a strong balance sheet, and the right shipyard, political and labor relationships are as fundamental to a CEO’s skill set as shipping market expertise.
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It’s all about the arbitrage these days.
What we mean by this, of course, is the fact that ships have a higher value on Wall Street than they do in the shipping markets – and not surprisingly there is a steady stream of people looking to capture the difference.
For proof of this, one need only to look at our Cash Flow Multiples by Vessel Type valuation table and compare it to the “Fair Value” table showing the valuation of shipping companies that trade on the stock exchange. It depends on the age of the vessels, of course, but on average a shipowner can buy a middle-aged vessel at about 4x cash flow and sell it to Wall Street investors at about 6x cash flow – much more if the company is valued based on its dividend yield.
Here’s where the rubber meets the road: by valuing shipping companies using a multiple of their cash flow generation, issuers of equity can effectively sell their vessels for 1.5-2.0x their value in the sale and purchase market. It is a truly remarkable moment in the evolution of shipping and the capital markets – and not surprisingly the Delta flight between Athens and New York is once again being seen as a direct journey to wealth and early retirement for shipping dealmakers.
A Growing Party – Private Equity Funds Enter
In the early stages of this “multiple expansion” (or “bubble” for cynics) process on Wall Street, issuers of equity were largely financially savvy shipping companies that realized that by selling ships, and leasing them back as Stena did with Arlington Tankers, they could extract the premium value of their ships while at the same time maintain commercial control and chartering “upside.”
However, as we move into year three of the shipping bull market, we are beginning to see private equity funds hire some shipping professionals and form new companies for the purpose of buying ships at 4x cash flow and selling them to Wall Street for 6x cash flow – capturing the arbitrage along the way.
Not surprisingly, most of these private equity investors are focusing on the dry bulk sector where the fundamentals are rosy, and more importantly, the valuations are higher, even in situations with external management companies with older vessels.
There are several deals presently preparing or considering coming to market in which the issuer is a private equity fund, or “sponsor” as they are called, looking to capture the value arbitrage, but the first has finally reached the starting line – a newly-formed entity called Eagle Bulk Shipping owned by a private equity fund in New York called Kelso and comprised of former Credit Suisse investment bankers.
We’d like to take a moment to discuss why this deal has filed. For those readers less familiar with the S.E.C, there are two kinds of registration forms used for equity – the F-1 and the S-1 – the former of which is used by foreign-based filers and the latter by U.S.-based filers. The documents are virtually the same except for one critical difference: foreign filers using form F-1 are permitted to submit their initial prospectus filing confidentially while U.S. filers are not. That is why companies such as TBS Shipping, Horizon Lines and now Eagle Bulk Shipping have documents accessible to the public while foreign filers such as DryShips and Diana do not have their registration statements made public until they have finished with the SEC comment period and are ready to print red herrings and go out on the road. But we digress…
The first financial sponsor deal, Eagle Bulk, is hoping to raise up to $250 million through a listing on the Nasdaq under the ticker symbol EGLE. Start-up companies use the NASDAQ because it does not have the same requirements for previous years of existence and profitability that the NYSE imposes. Joint bookrunners on the deal are UBS Investment Bank and Bear, Stearns & Co. – a pair of that seems to have either officially or unofficially teamed up to underwrite shipping deals. Legal advice is being provided by Simpson, Thacher & Bartlett for the underwriter and Seward & Kissel for the issuer.
What is unique about this IPO is that the company did not actually own any vessels at the time it filed its S-1 with the SEC. A quick look at the balance sheet shows that virtually all of the company’s net worth is associated with the deposits paid to secure vessels delivering in April to June 2005. We’re sure that some of the vessels have been delivered by now and there is nothing inherently wrong with this, but it is clear that the issuer has been formed for the express purpose of the IPO.
Although we will refrain from getting into valuation issues, Eagle’s fleet will consist of 11 modern handymax dry bulk vessels, nine of which have been acquired and two of which are to be delivered in June 2005, as shown in the accompanying chart. The vessels range in size from 40,000 to 60,000 dwt and have an average age of six years, as compared to the global handymax fleet average age of 15 years. In a small industry where nothing is secret, management did a good job hiding their purchases from the market and industry publications such as Tradewinds. It is still true that if the sellers know you have plans or money, the price goes up.
Management
The management team is lead by 39-year old Sophocles Zoullas, and Alan Ginsberg, a former editor of Marine Money, will serve as CFO. The rest of the directors are drawn from private equity fund Kelso, which is sponsoring the deal, and Norlands Shipping. This team will focus on strategic and commercial management, while technical management will be done by V. Ships.
The company’s pitch is that by focusing on handymax dry bulk vessels, they will have advantages that include reduced volatility in charter rates, a smaller newbuilding orderbook, increased operating flexibility, the ability to access more ports, the ability to carry a more diverse range of cargoes, and a broader customer base.
Strategy: Buy With Debt, Backfill with Equity
There’s a whiff of Diana Shipping and Nordic American to the Eagle deal, thanks to the fact that Bear Stearns is involved in all three. The company is planning to use the proceeds of the IPO to paying off existing debt and will enter into a new 10-year $330 million credit facility to refinance other existing debt, acquire additional vessels and fund general corporate purposes. Eagle plans to keep lower than industry average levels of debt. The company has not committed to a specific dividend and will leave the decision to the discretion of the company’s board of directors.
Written by:
carisk | Categories:
Equity,
Freshly Minted | April 7th, 2005 |
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It appears as if the equity in Horizon Lines will be turned over yet again – for the third time in as many years. Leading Jones Act container shipping and logistics company Horizon Lines has filed an S-1 with the U.S. SEC in its bid to raise up to $287.5 million through its initial public offering. The company is looking to be listed on the NYSE under the symbol HRZ. Joint bookrunning lead managers on the deal are Goldman, Sachs & Co. and UBS Investment Bank, while co-managers are Bear, Stearns & Co., Deutsche Bank Securities and JP Morgan. The deal comes as private equity firm Castle Harlan, which purchased Horizon Lines in July 2004, seeks to cash out on some of its massive $663.3 million investment while maintaining a controlling stake in the company, which is well-positioned strategically in all three of the non-contiguous U.S. Jones Act markets as well as Guam. Castle Harlan extracted about $80 million of its original investment in the company through the issuance of a zero coupon bond in late 2004, and this deal will likely represent a total return of invested equity.
A Little Something for Everyone
By way of review, the Carlyle Group of Washington, D.C. had bought Horizon from CSX Lines for around $375 million in 2002 before selling the company to Castle Harlan for over $650 million in 2004. While the trade press reported that Carlyle nearly double its money, that statistic refers to the enterprise value of the company and assumes the firm used its own money. In actual fact, assuming Carlyle put up 20% of the equity on the original deal, then the private equity firm would have turned its $75 million initial investment into $350 million, or a return of about 460% on its equity.
On the surface, the deal looked reasonably priced even from Castle Harlan’s perspective at 7.3x. However, significant deductions for drydocking expenditures brought the multiple to 11-13x, placing the purchase at the upper end of the reasonable range, but still not shocking considering how sacrosanct the Jones Act is. But then, using the metrics behind the $140 million price Kvaerner Philadelphia newbuildings fetched from Matson with a 40-year amortization period, Horizon Lines’ vessels can be valued at about $35 million each, reasonably closer to what Castle Harlan paid for them before even considering the steady stream of earnings the vessels bring. Less than a year later, Castle Harlan has already extracted $80 million from Horizon through a bond offering and stands ready to issue almost $290 million worth of shares.
Horizon –a Cash Cow for Goldman Sachs
But when you look at risk adjusted returns, the sure winner is the investment bank that has been involved every step of the way, Goldman Sachs. Horizon has been a true cash-cow for the firm as they bought the company for Carlyle, then sold the company to Castle, then did two bond offerings for the company for Castle and are now bookrunner on the equity offering.
What’s Left?
Like most deals, there are “pros and cons” to the Horizon transaction. The “pros” are that the company has a privileged position in a U.S. Jones Act trade, which limits competition to companies that have U.S. built ships that are owned at least 75% by Americans, fly the U.S. flag and have U.S. crews. Horizon is one of only two providers of its services in the Hawaii and Guam markets and the largest such provider in Guam – two stable and growing, albeit slowly, markets.
And then there are the “cons”, Horizon has been bounced between two private equity firms who have extracted a lot of equity over the last three years and have not replaced any of the company’s 28-year-old vessels. The proceeds of this deal will pay back the founders and reduce debt, which will theoretically create buying power assuming they can arrange like kind debt facilities, but at some point there will be some major capital expenditures to be made even though the company states that each of its ships has a 45-year useful life.
The story is not exciting, but it is solid. So long as the sacrosanct U.S. Jones Act is not altered and the maintenance and replacement of the company’s fleet does not prove to be a problem. And it certainly makes sense for Castle Harlan, who has no particular need to maintain much more than a controlling stake in the company, and who also can hardly hope to follow in the footsteps of Carlyle and watch the company double in value once again over the next two years.
Written by:
carisk | Categories:
Equity,
Freshly Minted | March 10th, 2005 |
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UBS Prices American Commercial Lines Bonds at 9.5%
As yet another startling example of the excessive amount of liquidity currently splashing around in the high yield bond market, formerly bankrupt American Commercial Lines (NASDAQ: AMCOV.PK) priced $200 million of bonds at 9.5% last Wednesday. Initial “price talk” for the deal was 9-5/8-9-7/8, but demand was so strong (6x oversubscribed) that the B3/B- rated transaction priced at 9.5%. Sole bookrunner on the deal was UBS (who also provided the company with its credit facility) and Bank of America served as co-manager.
Like the entire universe of marine-related high yield deals, ACL is already trading at 104, which brings the yield to worst down to 8.8%. The new bonds have a 10-year tenor and are non-callable for 5 years. Other extraordinary examples of successful shipping bond issuance and post transaction price tightening include CSFB’s deal for Ultrapetrol, Jefferies’ deal for Trailer Bridge, Jefferies/
Goldman Sachs deal for Hornbeck and UBS’ deal for Horizon Lines. Although the equity market has been receiving all of the headlines in recent months, largely due to where we are in the shipping cycle, the fact remains that high yield, especially when used to fund 100% acquisition cost, remains an incredibly cheap source of equity that, with today’s yield, is competitive compared to the German tax leasing market. Even deals with a CCC, or “triple hooks” rating, are getting done at phenomenally low rates.
What is particularly impressive about the deal is the valuation. Although ACL is leveraged 4x EBITDA, the fleet is comprised of barges that are toward the send of their useful lives. Therefore, the company will have to be very successful and aggressive in renewing their fleet or growing their business in order to meet the bullet refinancing that will occur in 10 years. The bonds are not the only instruments that are trading well. The company’s newly listed stock, which trades on the pink sheets, is trading at about $30, giving it a market capitalization of about $300 million.
As yet another startling example of the excessive amount of liquidity currently splashing around in the high yield bond market, formerly bankrupt American Commercial Lines (NASDAQ: AMCOV.PK) priced $200 million of bonds at 9.5% last Wednesday. Initial “price talk” for the deal was 9-5/8-9-7/8, but demand was so strong (6x oversubscribed) that the B3/B- rated transaction priced at 9.5%. Sole bookrunner on the deal was UBS (who also provided the company with its credit facility) and Bank of America served as co-manager.
Like the entire universe of marine-related high yield deals, ACL is already trading at 104, which brings the yield to worst down to 8.8%. The new bonds have a 10-year tenor and are non-callable for 5 years. Other extraordinary examples of successful shipping bond issuance and post transaction price tightening include CSFB’s deal for Ultrapetrol, Jefferies’ deal for Trailer Bridge, Jefferies/Goldman Sachs deal for Hornbeck and UBS’ deal for Horizon Lines. Although the equity market has been receiving all of the headlines in recent months, largely due to where we are in the shipping cycle, the fact remains that high yield, especially when used to fund 100% acquisition cost, remains an incredibly cheap source of equity that, with today’s yield, is competitive compared to the German tax leasing market. Even deals with a CCC, or “triple hooks” rating, are getting done at phenomenally low rates.
What is particularly impressive about the deal is the valuation. Although ACL is leveraged 4x EBITDA, the fleet is comprised of barges that are toward the send of their useful lives. Therefore, the company will have to be very successful and aggressive in renewing their fleet or growing their business in order to meet the bullet refinancing that will occur in 10 years. The bonds are not the only instruments that are trading well. The company’s newly listed stock, which trades on the pink sheets, is trading at about $30, giving it a market capitalization of about $300 million.
Written by:
carisk | Categories:
Bonds,
Freshly Minted | February 17th, 2005 |
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Is Hawaii the Next Puerto Rico?
As we have seen in the Puerto Rico market since the demise and withdrawal of Navieras, a little bit of extra capacity in a captive market can really pollute rates and destroy capital. Competition in the Hawaii market will be further exacerbated by the coming arrival a new Pasha-owned ro/ro working on the trade lane between Los Angeles and Hawaii. If there is a bright spot here, it is that the Hawaiian economy has been strengthening and might even be able to handle the added capacity.
Using Equity to Finance a Debt Deal
The debt financing of these vessels will be another interesting facet of the OceanBlue deal. We highly doubt that Caterpillar will be involved in ships that will compete against those in which they have already taken a considerable amount of risk. Moreover, with the vessels essentially operating in a “start up” business and with book values that make them totally uncompetitive in the international market should the startup not work, we think bank debt will be low. Therefore we would expect to see this deal financing with at least 50% equity and quite possibly more. This would give the lenders the ability to get out whole should they need to remarket the vessels on the international market.
Ocean Blue and the Need to Beef Up
One challenge associated with raising equity for OceanBlue will be the fact that the exit strategy is unclear unless DnB and Jefferies are able to make investors comfortable with the idea that OceanBlue will be able to beef up its business through newbuildings or acquisitions and then go public at a multiple of its book value. But where will they look to expand? With the supply demand balance of Jones Act markets extraordinarily tight, it will be both difficult and expensive to find good assets. If they are able to sell this story, though, then the IPO of Horizon Lines will come at a very good time by creating a comparable valuation that will get potential OceanBlue investors excited. The challenge therefore, is that OceanBlue is really a debt deal that needs equity – but at the end of the day, we have little doubt that the new Kvaerner ships will end up being consolidated into Matson or Horizon. There have been rumors that Alexander and Baldwin has been thinking of selling off Matson Navigation, though Horizon is the more logical choice in light of the age of their fleet and the fact that they are raising fresh equity. After all, Horizon Lines will need the ships at some point, and the economics of these ships is actually pretty reasonable. Moreover, Kvaerner might well shut down after the obligation to deliver these final vessels is fulfilled, which would make it very difficult for Horizon to find large ships at a comparable price.
As we have seen in the Puerto Rico market since the demise and withdrawal of Navieras, a little bit of extra capacity in a captive market can really pollute rates and destroy capital. Competition in the Hawaii market will be further exacerbated by the coming arrival a new Pasha-owned ro/ro working on the trade lane between Los Angeles and Hawaii. If there is a bright spot here, it is that the Hawaiian economy has been strengthening and might even be able to handle the added capacity.
Using Equity to Finance a Debt Deal
The debt financing of these vessels will be another interesting facet of the OceanBlue deal. We highly doubt that Caterpillar will be involved in ships that will compete against those in which they have already taken a considerable amount of risk. Moreover, with the vessels essentially operating in a “start up” business and with book values that make them totally uncompetitive in the international market should the startup not work, we think bank debt will be low. Therefore we would expect to see this deal financing with at least 50% equity and quite possibly more. This would give the lenders the ability to get out whole should they need to remarket the vessels on the international market.
Ocean Blue and the Need to Beef Up
One challenge associated with raising equity for OceanBlue will be the fact that the exit strategy is unclear unless DnB and Jefferies are able to make investors comfortable with the idea that OceanBlue will be able to beef up its business through newbuildings or acquisitions and then go public at a multiple of its book value. But where will they look to expand? With the supply demand balance of Jones Act markets extraordinarily tight, it will be both difficult and expensive to find good assets. If they are able to sell this story, though, then the IPO of Horizon Lines will come at a very good time by creating a comparable valuation that will get potential OceanBlue investors excited. The challenge therefore, is that OceanBlue is really a debt deal that needs equity – but at the end of the day, we have little doubt that the new Kvaerner ships will end up being consolidated into Matson or Horizon. There have been rumors that Alexander and Baldwin has been thinking of selling off Matson Navigation, though Horizon is the more logical choice in light of the age of their fleet and the fact that they are raising fresh equity. After all, Horizon Lines will need the ships at some point, and the economics of these ships is actually pretty reasonable. Moreover, Kvaerner might well shut down after the obligation to deliver these final vessels is fulfilled, which would make it very difficult for Horizon to find large ships at a comparable price.
Written by:
carisk | Categories:
Equity,
Freshly Minted | February 10th, 2005 |
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Horizon Lines IPO
Freshly Minted understands that that US liner company Horizon Lines is interviewing prospective underwriters for an upcoming IPO. Horizon Lines, formerly CSX Lines, was purchased by Carlyle Group in late 2002 for $375 million and sold just over a year later to private equity fund Castle Harlan for $675 million – thanks to a hungry LBO market, lower interest rates and improved EBITDA. Castle Harlan took about $100 million out of the company through a zero coupon bond last month and is set to extract its remaining equity (and a phenomenal return) through the IPO while likely maintaining a large stake in the business. Look for the coterie of Horizon Line service providers such as Goldman Sachs, UBS and ABN on the deal along with Jefferies, who has the most powerful research franchise in the business.
Freshly Minted understands that that US liner company Horizon Lines is interviewing prospective underwriters for an upcoming IPO. Horizon Lines, formerly CSX Lines, was purchased by Carlyle Group in late 2002 for $375 million and sold just over a year later to private equity fund Castle Harlan for $675 million – thanks to a hungry LBO market, lower interest rates and improved EBITDA. Castle Harlan took about $100 million out of the company through a zero coupon bond last month and is set to extract its remaining equity (and a phenomenal return) through the IPO while likely maintaining a large stake in the business. Look for the coterie of Horizon Line service providers such as Goldman Sachs, UBS and ABN on the deal along with Jefferies, who has the most powerful research franchise in the business.
Written by:
carisk | Categories:
Equity,
Freshly Minted | January 20th, 2005 |
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