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Bear Stearns Breaks into Shipping Analysis
Concurrent with its Global Transportation Conference held today in New York, Bear Stearns has made a much-awaited break into the world of shipping analysis through the work of Justin Yagerman. Bear Stearns’ coverage initiation includes Diana Shipping, on whose IPO the firm served as underwriter, OMI, Nordic American, OSG and Teekay. Mr. Yagerman uses clever slogans to sum up the capabilities of each of the companies, citing Nordic American as “yielding results through a simple plan,” Teekay as having “a diversified growth portfolio,” and OSG as “sailing on many seas,” and he initiates all three of these companies with a relatively neutral “Peer Perform” rating. OMI, described as “putting the tanker market into focus,” wins the only “Outperform” rating of the tanker group for virtues including growth and favorable charter rates across its asset classes, strong company-specific chartering performance, and a modern, double hull fleet.
Diana Shipping, the only dry bulk company included, was also awarded an “Outperform” rating with the slogan “a great time to buy dry.” Mr. Yagerman cites Diana as having undervalued shares and thin research coverage in an industry with solid fundamentals. Additionally, the fleet’s age averages only 13 years and the revenue outlook is steady, with all currently owned vessels fixed on time charters. The $20 year-end price target Bear Stearns has for Diana represents a 34% upside from current levels based on 10x 2006E EPS estimate of $1.99. Unfortunately for Diana, neither this nor a positive report issued last month by Jefferies have had much of a strengthening effect on the company’s stock price to date, which at press time sits notably below the $17 offering price at $14.40. Investors looking for value in a seasonally week period may do well to take note.
Eagle Bulk Shipping – All About the Arbitrage
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.
Marine Money Launches Tanker Index
Recently we got a callfrom a loyal reader of Freshly Minted (FM) noting that while the data regarding the “New York Liquid Bulk Peers Share Performance” chart that has appeared in most editions of FM of late and has evolved over the year to include more and more data, was interesting but “What does it really mean”. Well, that reader knows who they are and in fact most weeks we get a call from this person and we love and encourage further feedback.
The initial response to the question of what the data means was one akin to “Make of it what you will.” We have produced estimates on a range of tanker companies and were hoping to give a basic knowledge of some of the share performance of the companies noted. However this combination comment/question resonated. While each contingent part of the data has relative and varying degrees of importance with each company, and is therefore a valuable piece of information, why have all the data and not at least try to benchmark it? Continue Reading
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