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Same Deal Just a Bit More Opaque For Now
Not to be defeated, Bob Burke’s Ridgebury Tankers is back on its feet shaking off the lukewarm reception from the 144A institutional market. Changing its focus, Ridgebury filed a preliminary prospectus for an IPO after the market closed Friday. Although details for the moment are scarce, the deal structure remains virtually unchanged except for the fact that that the three Teekay Suezmaxes are no longer part of the deal, creating a void that needs to be filled. We expect that specific vessels will be identified prior to the road show.
According to the filing, the company intends to raise a maximum of $250 million, which proceeds will be used to acquire three to four Suezmax tankers, which will be deployed in the Blue Fin Tankers Pool, managed by Heidmar Inc., for a minimum of three years. In addition, a portion of the net proceeds will be used to pay the commitment fee in respect of the credit facility, described below and for working capital. The pool, which is currently the 2nd largest spot market-related Suezmax tanker pool in the world, currently operates a fleet of 18 vessels with 9 different pool partners. The relationship with Heidmar extends beyond these initial tankers with Ridgebury having committed to put any subsequently acquired Suezmax tankers into the pool as well as any other tankers into an appropriate tanker pool operated by Heidmar, also for a minimum of three years. Like Teekay did in the original offering, we would expect Heidmar to purchase shares in the offering as the quid pro quo for this commitment. Third party technical management will be provided by Bernard Schulte Ship Management, a company that currently manages 600 vessels.
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Written by: marinemoney | Categories: Freshly Minted, The Week in Review | July 8th, 2010 | Add a Comment
Shareholder Activism
Last December, we wrote about MMI Investments L.P.’s investment in DHT Maritime. At that time this activist shareholder had purchased approximately 3.95 million shares, representing approximately 8.1% of the outstanding shares for $15.6 million. At the conclusion of our article, we presciently suggested that the company should soon expect a call. This week, with its ownership stake increased to 4.325 million shares now representing 8.9%, MMI fired its broadside.
We have always believed that criticism should always welcome as long as it is given constructively and thoughtfully. Second-guessing from the cheap seats in our estimation is at best unproductive and at worst detrimental to the party it is directed at. In this light, we believe in the role played by shareholder activists, but often wish it were directed in a positive constructive manner in the long-term interests of the shareholders as opposed to an attempt to hike the share price for a quick and profitable exit. We cannot paint all activists with the same brush but do distinguish a Calpers from a Carl Icahn. And in the same vain, there is both good and bad management, necessitating a role for these activists. For the moment, we will withhold our judgment of MMI but their first run at DHT leaves us decidedly unimpressed.
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Written by: carisk | Categories: Freshly Minted, The Week in Review | March 4th, 2010 | Add a Comment
Earnings Season Continues
We continue to admire our analyst friends, who four times a year have to pore through the company financial reports, analyze them and update their models to fine tune their calls. With the greater disclosure there is much work to be done during these periods and we are happy to leave it to them. We, on the other hand, prefer to give the earnings releases a quick review in search of items of interest to us, which we think provide broader general insights both to the companies themselves as well as the industry. What follows is a selection of these items.
Eagle Amends
Within its 2nd quarter earnings release, Eagle Bulk Shipping (“Eagle”) disclosed that it had amended its revolving credit facility and entered into a management agreement with its former main shareholder.
In its third Amendatory Agreement to its credit facility, Eagle and Royal Bank of Scotland (“RBS”) have agreed to reduce for the second time the amount of availability under the facility. Originally the facility was for $1.6 billion which amount was reduced in December 2008 to $1.35 billion. With the current amendment, it has been further reduced to $1.2 billion. The facility, which matures in July 2014 continues to be interest only until July 2012, when availability begins to decline with the commencement of four semi-annual reductions of $56.25 million with the balance due at maturity. The facility currently accrues interest at LIBOR + 2.50%, with undrawn portions bearing a commitment fee of 0.7%. The cost of interest has become expensive, having nearly doubled from prior periods. It now represents ~22% of EBITDA up from 13%.
Written by: carisk | Categories: Freshly Minted, Market Commentary | August 13th, 2009 | Add a Comment
WKSI No More
Perhaps one of the least painful but aggravating aspects of the share price collapse of the shipping stocks is the loss of one’s “well-known seasoned issuer” or WKSI qualification. When the company’s market cap falls below $700 million, the company no longer is a universal filer but must register as you go. For perspective, as of Tuesday, only Teekay, Teekay LNG, Nordic American Tankers, Diana Shipping and Alexander & Baldwin were qualified. OSG just missed at $641 million.
Written by: carisk | Categories: Freshly Minted, The Week in Review | March 5th, 2009 | Add a Comment
NATS Completes Follow-on, TBSI Goes into the Market
Following successful follow-on offerings by Seaspan, Teekay LNG, and Double Hull Tankers and a placement by Pacific Basin, Nordic American Tankers has seen it fit to raise equity to repay borrowings in the immediate future and for expansion in the longer- term, per its business model. NAT has sold 4,000,000 common shares in the offering and underwriters’ have exercised their option for a 310,000 share over-allotment, raising $173 million in gross proceeds. Morgan Stanley led the offering while Dahlman Rose acted as co-manager.
Written by: carisk | Categories: Freshly Minted, The Week in Review | May 15th, 2008 | Add a Comment
Sentiment Turns
In a welcome turn of events, the market was resoundingly upbeat this week. The pace of transactions picked up notably across sectors, and we can’t help but view this as a positive sign for the financing market going forward.
On the M&A front Excel and Quintana successfully closed their merger. Each issued and outstanding share of Quintana common stock was converted into the right to receive $13.00 in cash and 0.3979 Excel Class A common shares. The merger creates a combined company that operates a fleet of 47 vessels with a total carrying capacity of approximately 3.7 million DWT and an average age of approximately eight years. Stamatis Molaris stepped into the role of CEO of the combined company, while Hans Mende, Corbin Robertson III and Paul Cornell joined its board of directors. We were happy to hear that the deal was executed smoothly. Moreover, Nordea and the underwriting team were successful in syndicating the debt levels required to make the deal possible – without needing to bring market flex provisions into play.
Written by: carisk | Categories: Freshly Minted, The Week in Review | April 17th, 2008 | Add a Comment
Eagle Bulk: Coming to Market at 200% of Net Asset Value
In what we think is a truly defining moment in history of shipping and the capital markets, Eagle Bulk Shipping began its roadshow this week to raise approximately $255 million of equity against a fleet of 11 handymax bulk carriers. We don’t mean to be histrionic here, but we think the valuation of Eagle will strongly influence the dozen other dry bulk deals queued up to come to market.
What we find fascinating about the deal is that Eagle Bulk is using its circa 14% dividend to come to market at approximately 2x net asset value at a time when the comparables are trading closer to 1x net asset value.
According to our calculations, the net asset value of the fleet is about $221 million. We arrive at this figure using our fleet value of $339 million (which includes 3 vessel to be acquired) against liabilities of about $130 million (which includes $97 million on those 3 new vessels and $30 million drawn from the company’s credit facility) and cash of $12 million. Based on the 26 million fully diluted shares (by which we mean the 13.25 million sold to the public and the balance allocated for the green shoe and retained by the sponsor) Eagle Bulk has a net asset value of $221 million, or $8.50/share versus an offering price of $16-$18 per share.
With the serious institutional shipping buyers very savvy in their ability to value shipping companies these days, we can only assume this deal will be sold into the retail market where buyers will be attracted to the yield. Another possibility is that the underwriters have put a very high number of the cover of the prospectus knowing that it will be negotiated down by the investors in today’s choppy IPO market. Eagle Bulk could effectively price its offering more than 50% below the mid price of the range and still capture a premium.
The Opportunity
Aside from the high valuation, small enterprise value and lack of vessel diversification, we think the Eagle Bulk deal provides a well-structured opportunity for investors to participate in the handymax dry cargo market. We say it’s well structured because commercial management is inside and technical management is in the hands of third party V Ships. Moreover, the charters are good, the ships are modern, the company has a large credit facility and the vessels operate in the handymax sector – which enjoys the best supply/demand fundamentals of all the dry cargo markets.
If this deal is successful, the real credit goes to whoever at Eagle (or, perhaps, credit facility provider Royal Bank of Scotland!) decided to put medium term charters on the ships while the market was still strong. Although charter default risk exists in a weakening market, as you can see from our calculations the cash flows generated by these vessels for the next 18 months are presently higher than what could be achieved in the market today and will improve the EBITDA and net asset valuation of the company.
The Challenges – Overcoming Diana
The successful execution of the Eagle Shipping IPO will not be without some challenges, at least if it is sold to institutions. For one thing, the deal is being brought to market by the same pair of bookrunners that brought out the similarly structured Diana Shipping – UBS and Bear Stearns. Citigroup was also added on the cover recently (they did not appear on the original S-1 filing), perhaps to broaden the distribution, and CSFB is the sole co-manager.
Although the high dividend yield structure has created extraordinary premium valuations for tankers companies such as Nordic American Tankers, Knightsbridge Tankers and Arlington Tankers and has clearly inspired replicas in other sectors, the model has not yet successfully translated into dry cargo. Take for example, Diana Shipping, a first rate, high quality company that was the first deal of this sort in the dry bulk space, which has suffered mightily since it began trading in March. It trades at a premium of about 1.3x net asset value and was priced at about 1.4x net asset value before falling in the aftermarket.
Market sources indicate that there were some mistakes made with the execution of Diana, such as who it was sold to, high pricing and a premature exercise of the green shoe, but to be fair to everyone involved the fact that the dry cargo market began falling immediately after the offering was probably the underlying culprit. That said, the unpleasant fact remains that buyers of the Diana IPO have suffered losses – which is why we assume from the high pricing on this deal that it will sold into a new market that puts a greater emphasis on yield than underlying value – retail. Although many within the shipping industry have been astounded by the valuation of companies like Nordic American Tankers, the fact remains that they have delivered very good returns to investors who bought them and held the, over the years.
The Valuation
As is our editorial policy, we will not tell you what we think Eagle Bulk is worth. We will, however, attempt to help you make sense of the information that is presented in the prospectus. As mentioned earlier and outlined in the accompanying figures, the Price/Net Asset Value appears to be high relative to comparables. The key to achieving this high valuation will derive from the healthy dividend that the company is able to pay from free cash flow. As you can see from our calculations, Eagle will generate close to $80 million of EBITDA per year of which about $60 million will be returned to shareholders through a dividend, which will equate to 13.5% yield.
Quintana – Wall Street Mining Wall Street
A few weeks ago, we wrote an article in these pages called “Eagle Bulk – All About the Arbitrage.” The article outlined the recently filed S-1 for an IPO of handymax bulk carriers being offered by New York private equity fund Kelso. In this article, we discussed the concept of private equity funds buying ships just prior to, or even concurrent with, IPOs so that they could capture the arbitrage that exists between the value of ships in the private and public markets.
Although much of this premium has been drained away during the last six weeks due to choppiness in both the equity markets and the shipping markets, we believe it is likely to return in the very near future and look for shares back in the range of 1.5x net asset value. The transaction concept is one with which private equity funds are comfortable: buy a company cheap, then sell enough of it to the public to get their money out with a return through a dividend, and then keep a slug of shares in the company that has the potential to result in a real home run.
With the economics of the shipping markets fitting this bill, the concept is spreading, and we are seeing more and more non-shipping company issuers in the shipping markets. The way to think of this is that Wall Street wants products and is willing to pay a certain price for them, and in response a variety of experienced financiers are creating these products and attempting to bring them to market. There is nothing necessarily wrong with this; in fact companies created for the sole purpose of equity offering might offer cleaner management structures and fewer conflicts of interest than old-line companies.
This week, we saw the filing of an IPO called Quintana Maritime, which is backed by Corby Robertson, whose family sold the Quintana oil field in Texas to Exxon many years ago, and who has since made investments in commodities such as coal mining. Robertson has teamed up with First Reserve of Greenwich (who have been plotting an entry into shipping ever since their agreement to purchase OMI shares at about $1.50 each a few years ago failed amidst bad feelings) and American Metals & Coal International, also of Greenwich. Stamatis Molaris, former CFO of Stelmar, is serving as CEO and President of Quintana. Citigroup and Morgan Stanley, who lent the company the money it needed to acquire its fleet, are acting as joint bookrunning managers.
A Short History
Quintana does not have the storied history that many recent and future issuers have. They cannot point to hundreds of years of experience or their origins from an island – except perhaps Long Island. In fact, they were formed on January 13th, 2005, and began operations in the following April, in other words last month. As of March 31, 2005, Quintana had not taken delivery of any of the identified panamax vessels, though the company did take delivery of three such vessels in April, and expects to take two more in May and the remaining three in July, August and September.
Distinguishing Deals
One of the challenges borne of the incredible torrent of deals heading to market is differentiation. What we mean is that there is nothing particularly compelling about this deal compared to others currently or soon to be trading in terms of asset type, employment, age, deal size, management or structure. Like Eagle Bulk, Quintana has signed MOAs and placed deposits on the eight modern panamax bulkers outlined in Figure 1.
Although we expect valuations to improve, the company shows strong asset and structural similarity to Diana Shipping, which suffered from bad timing in both the shipping and equity markets that may have been exacerbated by the fact that it was fully priced and sold into the wrong types of accounts. This must be a little unnerving for the sponsors, and we fail to understand how this deal will ever be judged on anything other than how much of discount it is offered at relative to Diana. Although Quintana does not indicate that it will use the model of a dry cargo version of Nordic American Tankers as Diana did, the company does plan to repay its debt in full upon consummation of the offering.
Perhaps there will be enough buyers to go around. There is nothing inherently wrong with the Quintana deal, but the sponsors will need to see valuations improve and have one heck of a good roadshow. That said, with the firepower of Citigroup and Morgan Stanley behind them, who likely do lots of other business with the sponsors of this deal, it is unlikely that it will be sold into the accounts of hedge fund “flippers” as the Diana deal seems to have been.
Of Bridge Loans and Mezzanine
As we also wrote in our article about Eagle Bulk, these kinds of deals are not without risk to the sponsors as we cruise along a high point in the cycle. In fact, they involve a lot of risk. Unlike the Top Tankers IPO, in which the purchase of the Sovcomflot fleet was contingent upon a successful equity offering, both Eagle and Quintana involve the sponsors buying ships first and hoping they can get a premium in the future. In this case, the joint bookrunners have provided both secured debt and mezzanine facilities to result in 85% financing. This structure is not dissimilar in concept to the highly leveraged facility that Citigroup and Nordea provided to soon-to-be-public Genco, sponsored by yet another private equity firm, Oak Tree Capital.
Quintana entered into a $150 million bridge loan facility, dated as of May 3, 2005, with Morgan Stanley Senior Funding, Inc., not a regular player in the world of ship finance. In addition, the company entered into a new six-year three-month $262 million secured delayed-draw term loan facility, dated as of April 29, 2005, with Citigroup. The term loan facility consists of Tranche A, in an aggregate amount equal to the lesser of $213 million and an amount equal to 65% of the fair market value of the vessels, and a Tranche B, in an aggregate amount equal to the lesser of $49,210,500 and 15% of the fair market value of the vessels. The aggregate principal amount applied in respect of any vessel acquisition must not exceed 80% of the fair market value of the vessel. According to the filing, interest on amounts drawn will be payable at a rate of 1.625% per annum over LIBOR in respect of Tranche A and 2.50% over LIBOR in respect of Tranche B, for interest periods of 1, 2, 3 or 6 months or, if agreed by all lenders with commitments, 9 or 12 months. In the event the Tranche B term loans are not syndicated within 45 days, Tranches A and B will collapse into a single tranche and interest will be payable at a rate of 1.75% per annum over LIBOR.
Quintana – Wall Street Mining Wall Street
A few weeks ago, we wrote an article in these pages called “Eagle Bulk – All About the Arbitrage.” The article outlined the recently filed S-1 for an IPO of handymax bulk carriers being offered by New York private equity fund Kelso. In this article, we discussed the concept of private equity funds buying ships just prior to, or even concurrent with, IPOs so that they could capture the arbitrage that exists between the value of ships in the private and public markets.
Although much of this premium has been drained away during the last six weeks due to choppiness in both the equity markets and the shipping markets, we believe it is likely to return in the very near future and look for shares back in the range of 1.5x net asset value. The transaction concept is one with which private equity funds are comfortable: buy a company cheap, then sell enough of it to the public to get their money out with a return through a dividend, and then keep a slug of shares in the company that has the potential to result in a real home run.
With the economics of the shipping markets fitting this bill, the concept is spreading, and we are seeing more and more non-shipping company issuers in the shipping markets. The way to think of this is that Wall Street wants products and is willing to pay a certain price for them, and in response a variety of experienced financiers are creating these products and attempting to bring them to market. There is nothing necessarily wrong with this; in fact companies created for the sole purpose of equity offering might offer cleaner management structures and fewer conflicts of interest than old-line companies.
This week, we saw the filing of an IPO called Quintana Maritime, which is backed by Corby Robertson, whose family sold the Quintana oil field in Texas to Exxon many years ago, and who has since made investments in commodities such as coal mining. Robertson has teamed up with First Reserve of Greenwich (who have been plotting an entry into shipping ever since their agreement to purchase OMI shares at about $1.50 each a few years ago failed amidst bad feelings) and American Metals & Coal International, also of Greenwich. Stamatis Molaris, former CFO of Stelmar, is serving as CEO and President of Quintana. Citigroup and Morgan Stanley, who lent the company the money it needed to acquire its fleet, are acting as joint bookrunning managers.
A Short History
Quintana does not have the storied history that many recent and future issuers have. They cannot point to hundreds of years of experience or their origins from an island – except perhaps Long Island. In fact, they were formed on January 13th, 2005, and began operations in the following April, in other words last month. As of March 31, 2005, Quintana had not taken delivery of any of the identified panamax vessels, though the company did take delivery of three such vessels in April, and expects to take two more in May and the remaining three in July, August and September.
Distinguishing Deals
One of the challenges borne of the incredible torrent of deals heading to market is differentiation. What we mean is that there is nothing particularly compelling about this deal compared to others currently or soon to be trading in terms of asset type, employment, age, deal size, management or structure. Like Eagle Bulk, Quintana has signed MOAs and placed deposits on the eight modern panamax bulkers outlined in Figure 1.
Although we expect valuations to improve, the company shows strong asset and structural similarity to Diana Shipping, which suffered from bad timing in both the shipping and equity markets that may have been exacerbated by the fact that it was fully priced and sold into the wrong types of accounts. This must be a little unnerving for the sponsors, and we fail to understand how this deal will ever be judged on anything other than how much of discount it is offered at relative to Diana. Although Quintana does not indicate that it will use the model of a dry cargo version of Nordic American Tankers as Diana did, the company does plan to repay its debt in full upon consummation of the offering.
Perhaps there will be enough buyers to go around. There is nothing inherently wrong with the Quintana deal, but the sponsors will need to see valuations improve and have one heck of a good roadshow. That said, with the firepower of Citigroup and Morgan Stanley behind them, who likely do lots of other business with the sponsors of this deal, it is unlikely that it will be sold into the accounts of hedge fund “flippers” as the Diana deal seems to have been.
Of Bridge Loans and Mezzanine
As we also wrote in our article about Eagle Bulk, these kinds of deals are not without risk to the sponsors as we cruise along a high point in the cycle. In fact, they involve a lot of risk. Unlike the Top Tankers IPO, in which the purchase of the Sovcomflot fleet was contingent upon a successful equity offering, both Eagle and Quintana involve the sponsors buying ships first and hoping they can get a premium in the future. In this case, the joint bookrunners have provided both secured debt and mezzanine facilities to result in 85% financing. This structure is not dissimilar in concept to the highly leveraged facility that Citigroup and Nordea provided to soon-to-be-public Genco, sponsored by yet another private equity firm, Oak Tree Capital.
Quintana entered into a $150 million bridge loan facility, dated as of May 3, 2005, with Morgan Stanley Senior Funding, Inc., not a regular player in the world of ship finance. In addition, the company entered into a new six-year three-month $262 million secured delayed-draw term loan facility, dated as of April 29, 2005, with Citigroup. The term loan facility consists of Tranche A, in an aggregate amount equal to the lesser of $213 million and an amount equal to 65% of the fair market value of the vessels, and a Tranche B, in an aggregate amount equal to the lesser of $49,210,500 and 15% of the fair market value of the vessels. The aggregate principal amount applied in respect of any vessel acquisition must not exceed 80% of the fair market value of the vessel. According to the filing, interest on amounts drawn will be payable at a rate of 1.625% per annum over LIBOR in respect of Tranche A and 2.50% over LIBOR in respect of Tranche B, for interest periods of 1, 2, 3 or 6 months or, if agreed by all lenders with commitments, 9 or 12 months. In the event the Tranche B term loans are not syndicated within 45 days, Tranches A and B will collapse into a single tranche and interest will be payable at a rate of 1.75% per annum over LIBOR.
Diana Shipping – Sailing Toward a Successful IPO
Diana Shipping –
Sailing Toward a Successful IPO
Simeon Palios and Fortis-owned Diana Shipping began its roadshow in London this week to raise $241 million through the sale of 14.2 million shares of common stock, which will trade on the New York Stock Exchange under the ticker “DSX”. Bear Stearns is sole bookrunner on the deal, and co-managers include Jefferies & Company, UBS Investment Bank and Fortis Securities, which immediately prior to the offering will own 25% of Diana through its private equity fund Maas Capital Investments.
A Dry Bulk Version of Nordic American Shipping
We see absolutely no reason why this offering will not be wildly successful. As we’ve seen in the last 12 months, every new shipping deal that comes to market brings with it a slightly different structure, fleet and philosophy that suits both the selling shareholders and, ideally, investors – and Diana is no exception.
For example, proceeds from the Diana IPO will be used to reduce the net debt on the company’s post-IPO fleet of 10 bulk carriers to zero while the company has pledged to pay out all of its free cash. Sound familiar? It should; this technique is reminiscent of Nordic American Tankers, which not coincidentally is the brainchild of underwriter Bear Stearns – NATS enjoys the strongest valuation in its peer group.
According to our own 2004 pro forma of the company’s financial performance (and assuming no reserve), Diana would have been able to pay a dividend of $1.94, which equates to a whopping 11% yield based on the anticipated offering price, although this is before whatever amount the management feels it should keep on hand for working capital and growth. When the opportunities arise, the unleveraged Diana will simply borrow against its unpledged assets and go shopping. The prospectus notes that “in times when we have debt outstanding, we intend to limit our dividends per share to the amount that we would have been able to pay if we were financed entirely with equity.”
As the fleet list indicates, Diana owns a fleet of seven modern panamax vessels with an average age of just 3.1 years, which should make the fleet very attractive to investors so long as the price can be justified. As the fleet is indeed focused, it is not diversified, meaning investors will be exposed to one of the most volatile segments of the dry bulk business. According to the Form F-1 filed with the SEC, during the nine month period ended September 30, 2004, the company’s vessels achieved daily time charter equivalent rates of $25,269. To give you a sense of just how volatile this business is, the company also said that “during 2001, 2002 and 2003 and the nine months ended September 30, 2004, we recorded net income (loss) of ($0.4) million, $0.1 million, $9.5 million and $28.5 million, respectively.”
Diana’s plan is to grow the business with modern units, and the company recently entered into newbuilding contracts with a Chinese shipyard for the construction of two additional 73,000dwt panamaxes. The company also signed an MOA with Louis Dreyfus Armateurs to purchase a secondhand capesize vessel. All of the new ships should be in the fleet and earning money by the first half of 2005.
Use of Proceeds
As mentioned above, one of the novel features of the Diana transaction is the fact that the company will use the proceeds of the offering to eliminate debt. Of the $182 million proceeds, after fees and expenses, the company will use $15.0 million to fund the final installment due on the new panamax dry bulk carrier that it expects to be delivered to the company in April 2005 and the remaining $166.4 million to repay all of seven of its outstanding credit facilities that mature between June 2013 and November 2015 and bear interest at LIBOR plus 1.125% to LIBOR plus 1.3%.
Although the company’s ships are managed by an affiliate, another interesting feature of this deal is the fact that Diana has agreed to buy the ship management company, Diana Shipping Services (DSS), in the future. According to the filing, “We have entered into an agreement with the stockholders of DSS pursuant to which the DSS stockholders may sell all, but not less than all, of their outstanding shares of DSS to us during the 12 month period following the consummation of this offering for $20.0 million in cash. Under the terms of the agreement, if the DSS stockholders do not sell their outstanding shares to us prior to the one-year anniversary of this offering, we may purchase the DSS shares from them for the same consideration at any time prior to the second anniversary of this offering. We expect the DSS stockholders to sell their outstanding shares of DSS to us during the 12 months following the offering and intend to exercise our option if they do not do so. We intend to finance our expected acquisition of our fleet manager with borrowings under our new credit facility and to refinance the acquisition related debt with the net proceeds of future equity issuances. Upon our acquisition of DSS, DSS will become our wholly-owned subsidiary and we will conduct the strategic, commercial and technical management of our fleet in-house.”
According to the filing, DSS charges Diana $15,000 per month to manage its soon to be 10 ships – giving DSS revenue of $1.8 million. DSS also charges Diana a 2% commission on all revenue generated by the company’s ships. Using the figure of $25,000 per day, each of the 10 vessels will generate $9.1 million, or $91 million on a fleet basis. Using the 2% commission structure, DSS will earn another $1.8 million on the revenue, lifting DSS’ gross revenue, from Diana alone, to $3.6 million. Although we have no idea what sort of overhead the company will have, we would estimate that running 10 ships from Greece would cost in the order of $1 million – leaving net income of $2.6 million. Therefore, according to the purchase price to be paid by the public company, DSS will fetch 13x earnings.
Dilution
Any shipping deal that comes to market with assets on its balance sheet that are less than current market values plus the premium to NAV currently assigned to shipping companies will result in dilution to the new shareholders – and Diana is no exception. Moreover, as we saw in the case of DryShips, this dilution is increased when the selling shareholders extract cash from retained earnings from the balance sheet prior to the offering. In this case, here is how it works: “As of November 30, 2004, on an adjusted basis giving effect to the payment of a $34.0 million cash dividend in December 2004, the declaration of a $14.0 million dividend in February 2005 (payable in April 2005 to stockholders of record in February 2005) and a $19.5 million preferential deemed dividend (representing the portion of the consideration to purchase our fleet manager that exceeds the carrying value of our fleet manager’s net assets as of September 30, 2004) that we expect to record in connection with our acquisition of our fleet manager, we had net tangible book value of $20.7 million, or $0.75 per share. After giving effect to the sale of 12,375,000 shares of common stock at an assumed initial public offering price of $16.00 per share (representing the midpoint of the price range shown on the cover of this prospectus), our pro forma adjusted net tangible book value as of November 30, 2004, would have been $202.8 million, or $5.07 per share. This represents an immediate appreciation in adjusted net tangible book value of $4.32 per share to existing stockholders and an immediate dilution in adjusted net tangible book value of $10.93 per share to new investors.”
Based on the ready comparison between DryShips and Diana, it is very difficult to imagine that investors will not love this deal. Although we are certainly closer to the top of the shipping cycle than the bottom, the reality is that modern ships with minimal leverage will survive even the nastiest of market corrections and be around for the next turn of the cycle. In our view, this transaction is proof that underwriters, investors and shipping companies have learned from the unfortunate high yield bonds issued in the late 1990s and have created structures that capture all of the value that shipping has to offer.
Simeon Palios and Fortis-owned Diana Shipping began its roadshow in London this week to raise $241 million through the sale of 14.2 million shares of common stock, which will trade on the New York Stock Exchange under the ticker “DSX”. Bear Stearns is sole bookrunner on the deal, and co-managers include Jefferies & Company, UBS Investment Bank and Fortis Securities, which immediately prior to the offering will own 25% of Diana through its private equity fund Maas Capital Investments.
A Dry Bulk Version of Nordic American Shipping
We see absolutely no reason why this offering will not be wildly successful. As we’ve seen in the last 12 months, every new shipping deal that comes to market brings with it a slightly different structure, fleet and philosophy that suits both the selling shareholders and, ideally, investors – and Diana is no exception.
For example, proceeds from the Diana IPO will be used to reduce the net debt on the company’s post-IPO fleet of 10 bulk carriers to zero while the company has pledged to pay out all of its free cash. Sound familiar? It should; this technique is reminiscent of Nordic American Tankers, which not coincidentally is the brainchild of underwriter Bear Stearns – NATS enjoys the strongest valuation in its peer group.
According to our own 2004 pro forma of the company’s financial performance (and assuming no reserve), Diana would have been able to pay a dividend of $1.94, which equates to a whopping 11% yield based on the anticipated offering price, although this is before whatever amount the management feels it should keep on hand for working capital and growth. When the opportunities arise, the unleveraged Diana will simply borrow against its unpledged assets and go shopping. The prospectus notes that “in times when we have debt outstanding, we intend to limit our dividends per share to the amount that we would have been able to pay if we were financed entirely with equity.”
As the fleet list indicates, Diana owns a fleet of seven modern panamax vessels with an average age of just 3.1 years, which should make the fleet very attractive to investors so long as the price can be justified. As the fleet is indeed focused, it is not diversified, meaning investors will be exposed to one of the most volatile segments of the dry bulk business. According to the Form F-1 filed with the SEC, during the nine month period ended September 30, 2004, the company’s vessels achieved daily time charter equivalent rates of $25,269. To give you a sense of just how volatile this business is, the company also said that “during 2001, 2002 and 2003 and the nine months ended September 30, 2004, we recorded net income (loss) of ($0.4) million, $0.1 million, $9.5 million and $28.5 million, respectively.”
Diana’s plan is to grow the business with modern units, and the company recently entered into newbuilding contracts with a Chinese shipyard for the construction of two additional 73,000dwt panamaxes. The company also signed an MOA with Louis Dreyfus Armateurs to purchase a secondhand capesize vessel. All of the new ships should be in the fleet and earning money by the first half of 2005.
Use of Proceeds
As mentioned above, one of the novel features of the Diana transaction is the fact that the company will use the proceeds of the offering to eliminate debt. Of the $182 million proceeds, after fees and expenses, the company will use $15.0 million to fund the final installment due on the new panamax dry bulk carrier that it expects to be delivered to the company in April 2005 and the remaining $166.4 million to repay all of seven of its outstanding credit facilities that mature between June 2013 and November 2015 and bear interest at LIBOR plus 1.125% to LIBOR plus 1.3%.
Although the company’s ships are managed by an affiliate, another interesting feature of this deal is the fact that Diana has agreed to buy the ship management company, Diana Shipping Services (DSS), in the future. According to the filing, “We have entered into an agreement with the stockholders of DSS pursuant to which the DSS stockholders may sell all, but not less than all, of their outstanding shares of DSS to us during the 12 month period following the consummation of this offering for $20.0 million in cash. Under the terms of the agreement, if the DSS stockholders do not sell their outstanding shares to us prior to the one-year anniversary of this offering, we may purchase the DSS shares from them for the same consideration at any time prior to the second anniversary of this offering. We expect the DSS stockholders to sell their outstanding shares of DSS to us during the 12 months following the offering and intend to exercise our option if they do not do so. We intend to finance our expected acquisition of our fleet manager with borrowings under our new credit facility and to refinance the acquisition related debt with the net proceeds of future equity issuances. Upon our acquisition of DSS, DSS will become our wholly-owned subsidiary and we will conduct the strategic, commercial and technical management of our fleet in-house.”
According to the filing, DSS charges Diana $15,000 per month to manage its soon to be 10 ships – giving DSS revenue of $1.8 million. DSS also charges Diana a 2% commission on all revenue generated by the company’s ships. Using the figure of $25,000 per day, each of the 10 vessels will generate $9.1 million, or $91 million on a fleet basis. Using the 2% commission structure, DSS will earn another $1.8 million on the revenue, lifting DSS’ gross revenue, from Diana alone, to $3.6 million. Although we have no idea what sort of overhead the company will have, we would estimate that running 10 ships from Greece would cost in the order of $1 million – leaving net income of $2.6 million. Therefore, according to the purchase price to be paid by the public company, DSS will fetch 13x earnings.
Dilution
Any shipping deal that comes to market with assets on its balance sheet that are less than current market values plus the premium to NAV currently assigned to shipping companies will result in dilution to the new shareholders – and Diana is no exception. Moreover, as we saw in the case of DryShips, this dilution is increased when the selling shareholders extract cash from retained earnings from the balance sheet prior to the offering. In this case, here is how it works: “As of November 30, 2004, on an adjusted basis giving effect to the payment of a $34.0 million cash dividend in December 2004, the declaration of a $14.0 million dividend in February 2005 (payable in April 2005 to stockholders of record in February 2005) and a $19.5 million preferential deemed dividend (representing the portion of the consideration to purchase our fleet manager that exceeds the carrying value of our fleet manager’s net assets as of September 30, 2004) that we expect to record in connection with our acquisition of our fleet manager, we had net tangible book value of $20.7 million, or $0.75 per share. After giving effect to the sale of 12,375,000 shares of common stock at an assumed initial public offering price of $16.00 per share (representing the midpoint of the price range shown on the cover of this prospectus), our pro forma adjusted net tangible book value as of November 30, 2004, would have been $202.8 million, or $5.07 per share. This represents an immediate appreciation in adjusted net tangible book value of $4.32 per share to existing stockholders and an immediate dilution in adjusted net tangible book value of $10.93 per share to new investors.”
Based on the ready comparison between DryShips and Diana, it is very difficult to imagine that investors will not love this deal. Although we are certainly closer to the top of the shipping cycle than the bottom, the reality is that modern ships with minimal leverage will survive even the nastiest of market corrections and be around for the next turn of the cycle. In our view, this transaction is proof that underwriters, investors and shipping companies have learned from the unfortunate high yield bonds issued in the late 1990s and have created structures that capture all of the value that shipping has to offer.
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