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ACLI Receives Platinum Touch
On Monday, American Commercial Lines Inc. announced it had entered into a definitive agreement to be acquired by an affiliate of Platinum Equity, a private equity firm “specializing in the merger, acquisition and operation of companies that provide services and solutions to customers in a broad range of business markets.” The transaction has an enterprise value of $777 million), which implies a 7.4X TEV/EBITDA multiple using a LTM EBITDA of $104.9 million as of June 30th according to John Parker of Jefferies. Continue Reading
Genmar Buys Time – Amends Loan Agreement and Enters Into Bridge Loan
On Tuesday, General Maritime announced it had amended its Credit Agreement dated July 16, 2010 with Nordea Bank and DnB NOR to allow the company an additional year, ending September 30, 2011, in order to raise a minimum of $52.4 million in new equity (the balance needed to achieve 40% of the purchase price), which will be used to partially finance a portion of the purchase price of the last two vessels to be delivered under the Metrostar agreement.
Tinker to Evers to Chance
The shipping version of this famous baseball double play combination is Angelopoulos to Georgiopoulos. Like Eyjafjallajokull, a dormant volcano that was quiet for centuries, Peter G’s companies erupted with news of acquisitions, some known and others new. First, the much-publicized acquisition of five tankers by General Maritime Corporation from Mr. Angelopoulos’ Metrostar Management Corporation was formally announced. Genmar has agreed to acquire five VLCCs, with an average age of 4.2 years, and two Suezmax newbuildings, to be delivered in 4Q 2010 and 2Q 2011 for an en bloc price of approximately $620 million. The seven double hull vessels are expected to be delivered between July 2010 and April 2011 and will effectively increase the size of the fleet in tonnage terms by 50%, while improving the fleet’s age profile. Moreover it increases Genmar’s exposure in the VLCC market from 2 to 7 vessels. Two of the VLCCs have time charters, which expire in the 1Q 2011, with the balance being charter-free upon delivery.
Helping Out the Banks
In his recent sector report, John Parker of Jefferies highlighted a trend that began last year and continues today. Borrowers continue to replace bank debt with a combination of bank debt and high yield bonds. With these transactions, the banks benefit from reduced exposure, higher pricing and fees, while borrowers meet their liquidity needs albeit at a cost. High yield, as we have preached, is now becoming a staple of the balance sheet.
In the latest iteration, Marquette Transportation Company offered $250 million of senior secured notes due in 2017. Rated B3/B-, the notes which bear a coupon of 10.875% are priced at 98.81% to yield 11.125% (equating to a spread of T + 795 bps) slightly under the price talk of 11.25%. The pricing was superior to that offered to American Commercial Lines (B2/B+) in a similar deal done this summer. Those notes were priced to with a YTW of 13.5% (T + 1,013 bps), although they are currently trading at 104% with a YTW of 11.5% (STW 869 bps). The notes will be secured by a 2nd lien on all of the issuers’ and guarantors’ assets that will secure a new credit facility described below. Details of the transaction are provided in the Guts of the Deal.
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Ka-ching for your 401K
Although the financial press is full of articles touting corporate bonds as a great investment, we failed to pay attention. After all, it is hard to unlearn the lessons of the world’s greatest investors who promoted only of the stock market based upon fears of inflation. Well, we know where that got us.
Although recently the market has shown signs of life, a look at the Jefferies High Yield Issues, which regularly appear in this publication, highlights the opportunities for returns that might rival those in the stock market in at least the near term, if not longer. Moreover, the bonds are more secure holding a higher place in the capital structure, and some are even secured by assets.
Paper or Steel?
Meridian 10 and the German KG Market
While in Hamburg, we had the opportunity to meet with the management of Meridian 10 (“M10”) who took the time to explain their business model to us. The opportunity they seek to exploit is in the German KG or closed-end fund market with a particular focus on the secondary market.
The primary market for KG funds is huge. In 2007, for example total placed equity amounted to €12.7 billion. Driven by the exceptional development of the shipping market, placement volumes in shipping reached an all time high that year, growing 38% y-o-y to € 3.6 billion while cumulative placed equity since 1993 amounts to € 30.9 billion.
Secondary Opportunity
The German Ship Finance Forum followed last years’ pattern of commencing with a half-day seminar. This year’s topic was focused on opportunities in secondary markets. Chairman Michel Bourgery of DVB started things off with a brief overview of the markets. Based upon his successful prognostications in the past, we listened carefully as he suggested that listed companies would be taken private. He bases this upon the fact that there is no re-cycling of equity and they are locked-in loss making position. Moreover, limited visibility and overall pessimism are also factors. For those who have no fear, he suggested taking a position in the tanker market was too early as the one-year t/c rate is greater than the three year. For bulkers, the time to go shopping will be this summer.
Dr. Albrecht Gundermann of Salomon Invest took the audience through the secondary market in KG funds, which is relatively new. Historically, once you joined the party you could not leave it. Trading remains limited but there is a real market with real prices. Right now it is a buyers’ market. With a total market of EUR 30 billion, only 4% has been traded.
Pareto’s Peter Wallace next gave his insights into the IS/SPC (formerly the K/S) market. The size of the market is approximately $15 billion and is split evenly between shipping and offshore. The basic structure is a limited partnership which has both paid-in and uncalled capital. No longer tax-driven, this product is extremely flexible and can be designed in any form that makes economic sense to the participants. It is an ideal alternative when public equity is difficult or expensive or when the asset is trading below NAV. Investors like it because:
• There is no management risk
• You can pick the asset you want
• The structure is transparent
• A trigger clause allows the holders of 15-25% to cause a sale
• There is a liquid secondary market
• The price to put the project in the market is relatively cheap at 3-4% of the cost of capital
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Jefferies High Yield Confab
Last Friday, we had the good fortune to be invited to Jefferies High Yield Research 3rd Quarter Sector Outlook Presentation. We opted for the second session, which was held at the beautiful l’Escale Restaurant in Greenwich on a beautiful sunny day. A wealth of material was provided, including industry outlooks as well as investing opportunities, including interesting paired trades, a new concept for us. More importantly, it is always interesting to get the credit perspective, which was given to a packed room.
For us in shipping, our primary focus was on John Parker’s presentation on maritime transport, Evan Templeton’s on the oil sector and Brett Levy’s on metals and mining. Naturally, these all contained good news. Unfortunately, good news for these sectors equated to bad news for the Industrial, Restaurant, Food & Consumer, and Automotive sectors that also presented. Some of the key takeaways for us are included herein.
For Brett Levy, it’s “nothing but net” for the Metals Sector. All his graphs point in one direction – up – and prospects continue to be excellent. Of key interest was his note on scrap, the price of which has now increased to $520 per ton, representing up to 75% of mini-mills COGS. And with prospects remaining strong in the shipping sector, scrapping does not appear on the horizon just yet. Our guess is that the analogous situation is jet fuel to the airline industry. With the outlook bullish, Brett spent most of his allotted time on trading ideas.
We are certainly not envious of Evan Templeton, who covers the energy sector. As he pointed out with the industry running at 99% capacity anything can happen on a normal day, no less with sabers rattling in the background. Prices are up and inventories are down and although demand may be slackening here it is more than offset by growing demand in Asia. In a series of graphs, Evan reminded us that prices are not solely demand driven as the costs of equipment rentals are ballooning too. The good news is that oil field activity is increasing as the search for new supply continues. We forgot that in the bond markets positive news translates to less perceived risk and hence a tightening of spreads.
John Parker spoke to our favorite subject and noted that both the dry and wet markets remain strong, although the latter will begin to feel the pressure of supply growth in 2009. Orderbooks for both are at record levels, although the dry side has exhibited near exponential growth with 1,773 vessels ordered in 2007 up from 618 in 2006. Year to date orders show some slowing at 454 vessels. Financing is the critical path these days and John showed a graph from Dealogic, which showed a sharp decline in deal value and number of deals in the 1st quarter. In both categories, these were the lowest levels since the 4th quarter 2004. As a good credit person, John focused on companies with strong balance sheets and conservative charter policies and included as his picks Ship Finance and Navios Maritime.
Both minds and bodies were well fed. Our thanks to the Jefferies High Yield Team.
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