Wall Street We Have a Problem

Like a phoenix arising from the ashes of U.S. Shipping Partners L.P., American Petroleum Tankers Holding LLC (“APT”) has come to the market offering $275 million First Priority Senior Secured Notes due in 2015. The company’s equity sponsors, Blackstone (75%) and Cerberus (25%) intend to use the proceeds of the offering to escrow  $169.9 million for the construction and acquisition of the last two of five 49,000 DWT product tankers ordered at NASSCO, the M/T Empire State and M/T Evergreen State, to refinance the existing senior secured loan facility of $96.6 million and pay $8.5 million in transaction fees and expenses. The notes are rated B1 and B+, highly speculative, by Moody’s and S&P respectively.

The company’s fleet of five product carriers is the youngest in the Jones Act Fleet. The first three vessels, Golden State, Pelican State and Sunshine State, are chartered to major oil companies, BP, Marathon and Chevron respectively with the last two to be delivered upon completion to the Military Sealift Command (“MSC”). The charter terms vary with the Golden State and Pelican State on 7-year and 3-year charters respectively. The Sunshine State is on a 9-month charter and, as is typical with the MSC, the last two vessels are on 1-year charters with annual options to avoid a full five-year commitment. The five-year tenor of the notes likely reflects the charter profile.
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Who Got the Better Deal?

Last week, the settlement agreement, between entities controlled by U.S. Shipping L.P. (“USS”) and Blackstone/Cerberus, with respect to the joint venture to finance, construct, own and manage U.S. flag product carriers, was made public in court filings. We would venture to say that it is impossible to determine whether either company got fair value for its investment, other than to say the settlement was negotiated in good faith with the intervention of a mediator. It is worth noting that the debtor, USS, had little leverage, given its minority interest and bankruptcy status. Moreover, it is currently hard pressed to finalize its reorganization and pre-packaged exit from Chapter XI. The Blackstone/Cerberus parties, on the other hand, have the controlling interest and deep pockets and ended up assuming USS’s interest in the partnership, as we will detail later on.

In the case of Blackstone/Cerberus, the admonition of being careful for what you wish for comes to mind. Substantial dollars have already been invested and lent into the now 100% controlled joint venture which now requires increasing amounts of capital to complete the remaining three ships. Two ships, delivered this year, are currently operating in perhaps one of the worst markets for the Jones Act sector in recent memory and the prospects do not look promising. The third delivers in December and will be followed by the last two in 2010. This could be a veritable money pit.
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Default I

On the last day of the year, U.S. Shipping Partners filed an 8-K with the SEC announcing that it had failed to pay the interest and principal due under its senior credit facility ($332.6 million), which triggered an event of default. As a result of such failure, the lenders (CIBC, Lehman and Keybank) holding a majority-in-interest of the outstanding loans may declare all outstanding amounts immediately due and payable and to pursue their rights and remedies under the agreement. However in this instance the holders of a majority-in-interest had entered into a forbearance agreement the day before with the partnership pursuant to which they have agreed to forbear from taking any action or exercising any remedy permitted under the senior credit agreement as a result of the partnership’s failure to make the December 31st payment. The forbearance agreement terminates on the earliest to occur of: (i) February 10, 2009, (ii) the occurrence of any event of default other than the failure to make the December 31st payment and (iii) the failure to comply with the terms of the forbearance agreement. During this 40-day period, the parties agree to engage in good faith negotiations regarding restructuring and strategic alternatives, which shall include the possible sale of the partnership.  It should however be noted that the lender’s prior waivers relating to covenant defaults for the third and fourth quarters expire on January 31st. Unless waived or amended, the partnership will be in default under the terms of the forbearance agreement as of that date.
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DnB NOR Chief Bullish Expansion Set – Lending Grows

It is always a pleasure to hear from someone with a fresh and confident outlook, and such was the happy occasion when the Norwegian American Chamber of Commerce presented Rune Bjerke the Group Chief Executive of DnB NOR at an early evening, late summer event in New York. Mr. Bjerke joined the Bank leaving the successful Hafslund ASA where he was CEO. And as he noted the switch to banking left some of his friends perplexed it was the sort of challenge that appealed even though his start date approximately coincided with the start of the Sub Prime crisis.

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Suspended – U.S. Shipping Partners L.P. Investors Forego Dividend

After making 14 regular quarterly distributions, totaling $6.14, to its limited partners through the 1st quarter of this year, U.S. Shipping Partners L.P. (“USLP”) announced on Wednesday that it in light of its review of strategic alternatives and its negotiations with its lenders to amend certain financial covenants under its senior credit facility that it will not pay a distribution on its units for the quarter ended June 30, 2008. Payments to the GP and subordinated units have been suspended since the 4th quarter of 2007.

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US Shipping: An Advisors’ Dream!

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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