Testing the Waters – Preliminary Marketing of DOF Subsea Bond Issue

With joint managers, Arctic Securities, First Securities, Nordea and Pareto leading the process, DOF Subsea, which is indirectly owned by DOF ASA (51%) and energy focused private equity firm, First Reserve (49%), began marketing a senior unsecured bond issue consisting of floating and fixed rate tranches. Indicative terms for the offering assume a maximum amount of NOK 1,000 million with a minimum of NOK 650 million with a tenor of 3.5 years. Pricing on the FRN is proposed at 3-month NIBOR + 650 to 700 bps with the coupon on the fixed rate at 9.80% to 10.30%. Proceeds will be used to refinance the NOK 500 million outstanding under DOFSUB01 due March 2011 with the excess for general corporate purposes. The Guts of the Deal for this transaction also contained herein provides a closer look at the terms.

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Norwegian Bonds Following the Pattern

History does repeat itself. In the latest Corporate Credit Report by Nordea’s Lars Kirkeby, we noted an interesting relationship between spreads and default rates, which Mr. Kirkeby was kind enough to expound upon.

High yield industrial credit spreads have declined sharply from their highs earlier this year. The single B spreads have declined from 1300 bps to 762 bps, while BB declined from nearly 700 bps to 300 bps. This is reflected also in the iTraxx 5-year crossover Index of high yield CDS, which has declined from an all-time high of 1,150 bps in March to an average of 601 bps in August. The trend appears to be continuing as the August average spread represents a 15% tightening from July’s 704 bps.

While spreads are in decline, defaults are on the rise. So far in 2009, 201 public rated high yield issuers have defaulted, affecting debt worth $453 billion. This compares to the full year 2008 in which 126 issuers defaulted affecting debt worth $433 billion.

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DOF Bond

Despite increasing default rates, corporate issuance of bonds in the primary market has been increasing in Norway and this activity has been extended to high yield, which now represents about 5% of total corporate issuance. For perspective, total issuance of corporates year to date amounts to NOK 19.2 billion compared to NOK 14.6 billion for the full year 2008.

This week Nordea Markets and Pareto Securities brought to market a 2-year senior secured floating rate note for DOF ASA, a leading offshore company, which operates 70 vessels. The notes bear interest at NIBOR + 9% and are secured by a first priority pledge in the shares of Norskan AS, DOF’s Brazilian subsidiary. Norskan owns 12 vessels all of which operate in Brazil with top-rated blue chip counterparties. The pledge provides strong collateral coverage as the outstanding amount under the issuance represents less than 50% of the NAV of the pledged assets. More details on the structure are contained here in the Guts of the Deal table.
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Debt Markets – Unchanged

The Norwegian Bond Market remains a microcosm of the debt markets and even in that small world, there is no good news to report according to Nordea’s August Monthly High Yield Report by Lars Kirkeby. Although ratings changes were generally positive, the average spread of high yield CDS as measured by the iTraxx 5-year crossover index increased 4% from last month. High yield spreads to Euribor have increased with the exception of BB rated debt.
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A.P. Moller – Maersk A/S and Brostrom AB Announce Engagement

Yesterday, Brostrom AB, one of the leading logistics companies serving the petroleum and chemical industry, announced that A.P. Moller-Maersk A/S (“APM”), through its wholly owned subsidiary, Maersk Product Tankers AB (MPT”), had made a public offer to the shareholders of Brostrom to sell their shares for cash consideration of SEK 57 per share, a premium of 23.6% relative to the volume weighted average closing price of the B-share for the three month period prior to today’s date and a premium of 10.1% relative to Tuesday’s closing price. The offer values the share capital of the company at approximately SEK 3.62 billion. The offering price will be increased by 6% per annum from the date occurring two months after the announcement until the offer is declared unconditional.
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Price of Admission

Everyone involved in shipping knows how hard it is to make money and how easy it is to lose it. Shipowners must deal with volatile markets, government regulations, operational problems as well as other risks too numerous to mention. One merely has to look at the 20 or so pages at the beginning of a SEC public filing. And now in an industry renown for not paying taxes, there is tax risk, at least in one country. We have written frequently about the retroactive tax law change to the tonnage tax regime in Norway but the discussion was mainly theoretical. With the 4th quarter reporting season, we are beginning to see the real cost in concrete examples, and it is not a pretty sight.
Many years ago on our first trip to Oslo, we were fortunate enough to have the opportunity to meet with Bergesen d.y., ASA in its beautiful headquarters, Bergehus on Drammensveien. The company, as well as its headquarters building, was an intrinsic part of the fabric of Norwegian shipping, an historic and solid presence. Norwegians were proud of their country and their merchant marine and even flew the national flag on some of their vessels. No, this wasn’t the Ice Age; it was in fact the early 1980s. And despite the heavy costs of remaining in Norway, companies like Bergesen chose to remain there and keep up the tradition. Eventually, the government saw the light and the value of a merchant marine and created the 1996 tonnage tax regime. This made it feasible for companies to stay and compete with companies that chose to fly flags of convenience. The companies opted into the plan, which forgave taxes in exchange for the company’s foregoing the payment of dividends. Earnings were re-invested in the business otherwise they would remain fallow earning little interest.
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Norwegian Bond Update

Thanks to Lars Kirkeby of Nordea Markets, we have a glimpse into what the New Year might hold in store for this important segment. The year started off in reasonable fashion with the issuance of 6 new primary corporate bonds, 2 commercial paper issues and 1 tap. Total issuance year to date amounts to NOK 0.9 billion compared to NOK 8.7 billion for the same period in 2007. However to keep this data in context one must recall the steep fall-off in issuance during the second half of last year. Other trends worth noting, although clearly early in the year, include:

•High yield rating classes account for 56% of total issuance in 2008 (2007:83%). Lower activity within the high yield rating classes is anticipated.

• Covertible bonds have increased in relative size and constituted approximately 47% of total issuance in the second half of 2007. No straight high yield bonds have been placed in 2008, only convertibles. Continue Reading