2008 Dahlman Rose Energy Supply Chain Conference

Last week’s conference showcased Dahlman Rose’s prowess in their chosen franchise -the energy supply chain. In a two day New York and Boston road show, they presented 29 companies covering the full range of the supply chain including offshore, exploration and production, drilling, offshore construction and shipping to a myriad group of investors. And as much as we appreciated the formal presentations, we really enjoyed the opportunity to sit and talk with the principals who presented their companies, a rare opportunity for us, in the casual atmosphere of the breakout room. The participants could not have been more generous in sharing their time to teach us about their companies and their industry.

The morning began with a keynote address by Mr. Simon Rose. We strongly suggest you beg, borrow or steal a copy of the presentation that distills the energy crisis in a mere 10 slides. The quick answer is that is all about motorization.

Rather than try to cover the conference, which is impossibility, given the breadth and depth, we have chosen instead to highlight discussions we had with Northern Offshore and Omega Navigation.

“Who Are Those Guys?”
Marion Woolie, the President and CEO, of Northern Offshore Ltd. began his short and picture filled presentation with the above referenced quote from the movie, “Butch Cassidy and the Sundance Kid.” For him, it reflected the company’s lack of recognition, which was one of the key issues that he encountered when he joined the company last year. But even in this short period of time, he has put his stamp on the company and the market now knows who they are.

Throwing off the shackles of the corporate world, Mr. Woolie has found his dream job, building a company from scratch. And although he is having fun doing it, it is quite a challenge. After emerging from a re-structuring with three older rigs, with an average age of 30 years, the company entered into an agreement last June with Maersk to purchase and leaseback three North Sea Jack-ups bringing the fleet to six and the average age down to 28. The company was then listed on the Oslo Bors in September 2007. And by the time the fourth quarter arrived, Mr. Woolie’s greatest challenge was to pull together a management team. He reached out to his network and brought together solid managers with whom he worked with for 15 to 20 years and who together have a combined 200 years of experience. And, they, too, are apparently having fun.

Flipping through rig pictures, Mr. Woolie described the employment picture of the fleet. The Energy Driller, a first generation semi-submersible is on a three-year charter to ONGC at $230,000 and operates in a water depth of 600-1,000 feet. The Energy Searcher, a drill ship, is working short-term in Southeast Asia for Total. The Energy Producer is working in the North Sea earning a tariff rather than a day rate. It is paid according to the volumes produced and the price of oil. These are the cash cows. Then there are the Maersk rigs, which are all operating in international waters. The rigs are earning $170,000 per day with two of them off contract in 2008 and the last in September 2009. The good news is that the Maersk Exerter, coming off the contract in May, has found follow-on work for 6 months at $250,000 per day. Given Northern’s past history, this deal was structured to minimize risk for the charterer by requiring a secured performance bond and a cash collateral account and an accelerated debt repayment schedule for the benefit of the bank. Specifically, the new rig debt has to be paid down to 0 in 2010 requiring principal payments of $100 million per year.

The best illustration of where the company was and how it has been transformed was shown in a calculation of uncontracted rig months, which Mr. Woolie describes as a health gauge. As of the fourth quarter 2007, 62% of the total available months were available. With market focus and execution, the new management team brought that figure down to 12.5% in the first quarter 2008. The total current backlog is $616 million, which compares to a market cap of $600 to $700 million indicating that the stock is cheap in management’s view.

The next task this management team faces is how to grow the company. Mr. Woolie doesn’t pull any punches. Organic growth through the placement of new rig orders is unlikely. Rig prices are too high and deliveries, now scheduled for 2011, are too slow. He is targeting existing rigs whether used or newbuildings under construction. It is the latter group that is of particular interest. He does not expect that all of the 150 rigs on order for delivery in 2008 and 2009 will be delivered on time, on budget and with a term contract and therein lies the opportunity. Finally when asked if he is going into deepwater or the jack-up market, his simple response is that it doesn’t matter as long as it adds value.

With respect to oil prices, his views remain traditional. He joked that oil prices are changing so quickly oil companies cannot keep up. He acknowledges a fundamental change but argues prices will remain cyclical. The trading range is certainly higher with lots of volatility. To Mr. Woolie, it is not the price but the direction. All of which is clouded for the moment by lots of emotion.

So, if anyone comes up to you and asks you “who are those guys,” the correct response is Northern Offshore’s posse. Watch your back!

Deferred Equity and Other Interesting Insights
We were also intrigued by a number of points in Omega Navigation Enterprises, Inc.’s (“Omega”) presentation including, in particular, the structuring of its yard financing.

Timing and creativity are crucial aspects of financing in general and we found both of these evident in Omega’s newbuilding financing. Omega had signed shipbuilding contracts, in 2007 with Hyundai Mipo, to construct five 37,000 DWT product/chemical IMO II/III tankers for $44.2 million each for a total cost of $221 million. The vessels are scheduled for delivery between March 2010 and February 2011.

Currently the shipyard is quoting the identical vessel for $47.5 million with delivery in 2011. However, market sources indicate the current value of the vessels is closer to $50 million particularly the earlier deliveries.

Financing for both the progress payments and post delivery is in place.  Our focus, however, is on the former, which minimizes the use of Omega’s cash flow while allowing the payment of dividends. To accomplish this, the progress payments are highly levered in the beginning with increasing amounts of equity required, as subsequent installments are due as follows:

The benefits of this structure are best illustrated in the chart that shows the sources of the progress payments through 2009.

Ultimately, as the process is reversed and more equity is injected and the capitalized interest is paid, the overall financing at delivery is 75%. The post-delivery financing benefited from being negotiated just before the credit crisis and is extremely competitive at a rumored LIBOR + 80 bps. All of this was made possible by the timely placement of the orders as well as the quality of the vessels and the shipyard and the company’s employment strategy.

Among other interesting insights provided at the presentation was Omega’s employment strategy. When it comes to time charters, they believe that 3 years is ideal as anything beyond that is steeply discounted. When feasible, upside protection is obtained through profit sharing agreements. Currently, 6 of their 8 vessels have such arrangements. Their fleet is currently time chartered to Norden, Torm and with Glencore. In the case of Norden and Torm, the vessels are operated in pools. Although all three are first-class, they find that Glencore is more creative and flexible as a consequence of their trading mentality.

On the other hand, Omega faces challenges. The company is frustrated by the fact that asset values and charter rates are disjointed making it difficult to do an accretive acquisition. And investors are concerned about the lack of liquidity of the company’s shares. Float is small with only 12 million shares trading making it difficult for an investor to take a position.

And, finally, financing of growth may be somewhat more difficult as it is already moderately leveraged with a net debt to capital of 63% and its shares carry a low valuation. Some relief will come from its re-structured debt facility, which is expected to close in Q1 2008. Both junior and senior facilities will be non-amortizing until the final repayment date in April 2011.

Despite these issues, the company is extremely well positioned to take advantage of evolving worldwide trading patterns resulting from roughly 5 million barrels per day of new refining capacity in the Middle East and India starting up by the end of the decade. These trades will involve longer hauls and therefore increased demand. To service this trade, Omega will have one of the youngest fleets with an average age of less than 2 years, which will be almost equally divided between the MR and LR1 sizes upon delivery of the newbuildings.

This pure play product company may just have gotten it right. With an established market position, fixed employment and carefully structured debt, the company’s dividend is protected in the interim while waiting for the market to catch-up.

In the interest of full disclosure and perhaps as an indication of the quality of the conference, we must confess that we were sufficiently intrigued by a number of presentations to buy shares in two companies, but not in the shipping sector, of course. We are certain that our investment was not quite what Mr. Rose hoped for but we expect that others, with more meaningful dollars to deploy, either took new positions or increased their holdings.

Northern Offshore Finds Norwegian Solution

Continue Reading

Deal of the Year – 2002 Restructuring

You got to know when to hold ‘em, know when to fold ‘em, know when to walk away, know when to run.” These words, sung by the legendary Kenny Rogers and written by Lionel Ritchie, are a startlingly accurate description of restructuring shipping deals. As the country ballad suggests, there is no single blueprint for achieving a successful restructuring. What you do depends on cards you’ve been dealt.

This year’s Restructuring Award goes American Marine Advisors of New York for their role in two very different deals– deals that we think typify AMA’s ability to engage in a dirtunder-the-fingernails dogfight and also execute the disposal of a business franchise. In our view, it is this combination of skills that has allowed the merchant bank to earn its dominant role in this critical niche. So long as the maritime industry remains highly leveraged and volatile, restructurings will occur and AMA has proven itself to be a “first call” for stakeholders in deals that go bad.

In the first broken deal, AMA represented the bondholders in their action against reefer turned containership owner/operator Enterprises Shipholding. The Enterprises deal was, without a doubt, the most contentious of all the maritime high yield restructurings we have seen in recent years. More than just a case of the Asian Crisis pushing over leveraged bond-issuing companies into financial restructuring, Enterprises bondholders began preparing for battle 18 months before the company actually missed its coupon payment, decrying that the company “stole” bondholder value by fraudulently selling new- building container ships to affiliated companies at bargain prices. Adding insult to injury, Enterprises management offered to assist the bondholders by selling the vessels, for a fee of $20m after they had defaulted.

What impressed us about this deal was that AMA was able to use its understanding of how shipping and shipowners operate to put commercial pressure on Enterprises shareholders. From understanding the disposal of the newbuildings, to managing the media, to piercing the veil of ostensibly unaffiliated companies, to affecting arrest of the containerships in the ports around the world even though they represented unsecured creditors, AMA was able to make trading partners and vendors so nervous that Enterprises reached into its pocket for a $0.50 settlement. If there was any disappointing element of the deal to AMA and its bondholders, it was that during the nine months that it took to conclude the deal, the container market had a precipitous drop and values plunged making the financial recovery lower than it might have been.h The second transaction includes AMA’s work on selling the Delta Queen steamboat business owned by bankrupt American Classic Voyages.

For those of you for whom the details are fuzzy, AMA was mandated for this assignment by the US Maritime Administration when Sam Zell controlled American Classic Voyages defaulted on about $800m of Title XI bonds. After canvassing the market, AMA developed a list of about 100 potential buyers. When the day of the auction finally came, seven interested parties spent an entire day bidding in an open outcry fashion led by AMA’s Paul Leand; the auction commenced with a stalking horse bid of $3.75m and moved in $150,000 increments to its final price of about $80m.

The winning bidder was a company called Delaware North, a global leader in hospitality, retail and food service, whose holdings include the Fleet Center in Boston. Delaware North paid $80m, 4x 2000 EBITDA, for the business. To put this in context, Morgan Stanley indicated that financing for LBOs fell to 3.8x at the time AMA sold the company. How AMA was able to take a company that had ceased operations (very damaging for a company that depends on confidence of consumers, credit cards companies, travel agents, etc.) and sell it to a substantial company for the kind of healthy valuation generally assigned to a going concern, is nothing short of astounding.

Honorable Mention

Amer

What do you get when you combine Coco Vroon, Kristian Siem, Ravi Mehrotra, Alan Ginsberg, Gary Wolfe, Jim Lawrence, Greg Petrick and Judge Arthur Gonzales of the US bankruptcy court? A heck of a good holiday party, for one thing, but also one of the most mutually beneficial of all the shipping high yield restructurings. This entire restructuring, while certainly acrimonious, was a bit like “the gang that couldn’t shoot straight,” with both sides making one tactical and procedural gaff after the next. But in the end, the final deal was negotiated principal to principal and with very good results for both sides.

We estimate that the circa 30% return achieved by Vroon/Siem (they bought their 68% slug of the Amer for $0.52 and sold it for $0.68 one year later) bonds was the highest since CSFB and Alpha Shipping – a friendly deal between David Matlin and George. The result was equally good for the company; commercial and technical operations of Amer Reefer went uninterrupted at all and the company’s major shareholder, Mr. Ravi Mehrotra, retained 100% ownership, thanks to a loan facility from Nordea, some credit support from Lauritzen’s Cool Pool and the cash that accumulated in the company during the 18 months that the bonds didn’t pay interest – a win/win for the final parties involved.

The other element of this deal that we found noteworthy was the approach taken by the bankruptcy judge. Although many speculated that Siem and Vroon initially bought into the Amer deal to take over the company, Judge Gonzales (who is currently handling the Enron bankruptcy) maintained a staunch company- friendly approach during the year in bankruptcy, encourageing the parties to settle and keep the company intact.

The Cost of Restructuring

New York law firm Thatcher Profitt and Wood filed a motion for payment of their legal bills associated with their defense of Millenium Seacarriers during the handysize bulk owner’s bankruptcy. The documents filed in the Southern District of New

York covered only the period January 15 to April 30, 2002. The total amount of compensation sought was $914,079.70 and the document also requested $71,599.09 in reimbursable expenses. Deirdre Dillon at the firm was the top biller at $181,150. She was closely followed by Chris Graham who billed $178,165, Jonathan Forstot at $120,911, Nicole Reninger who billed $117,928 and Louis Curcio who billed $103,235.

Interestingly, Mr. Curcio worked the most hours 540.7 and had the lowest blended hourly billing rate at $190.93. Chris Graham took the high honors on the Blended rate at $555.73. Chris and Jonathan were the partners on the case.

Low biller was Gary Silverstein who charged $167.50, for half an hour’s work. Brendan Zahner billed a total of $95,559 and his admission to the Bar was pending at the time. Overtime meals cost $5,496.

Save the Date! Restructurings for 2003

American Commercial Barge Line

A quick perusal of the American Commercial Barge Lines 3Q02 filing shows a company that’s heading back under the knife for some more restructuring in the coming months. In fact, restructuring advisors out there might be interested to know that ACBL has agreed to propose a restructuring plan to its senior lenders prior to December 28, 2002. ACBL was already restructured once this year in a deal whereby Sam Zell-controlled Danielson Holdings (AMEX: DHC) contributed $58.5 million of their bonds as equity and crammed down the company’s equity holders in exchange for $9m worth of DHC stock and then paid down $25m in bank debt.

Precious Shipping

The dry bulk owner looks set for another restructuring in early 2003 when the company’s redeemable convertible debentures are converted into PSL shares at a price equivalent to 95% of PSL’s closing market price in the month preceding the conversion. According to our calculations, RCD holders may be entitled to about 56m shares unless someone runs up the stock between now and then – which is likely. Since the current capital of Precious is 52m shares, the various European and Asia financial institutions that own the bonds may gain control of the company through the conversion –but then what?

Northern Offshore

In November 2002, John Fredriksen controlled Northern Offshore appointed US investment bank Houlihan Lokey Howard & Zukin to advise it in restructuring talks with bondholders, after warning it will again miss its interest-payment deadline and default on its $340m, 10% notes. Northern has some

$ 57m in short-term debt coming due but very little cash.

Navigator

“The more the merrier,” is an expression that is generally not used in the context of debt restructurings. That’s why the long awaited reorganization of this deal, which was dead on arrival but has been surviving on the life support of escrowed funds and a CSFB credit line, is going to be so messy.

Cenargo

According to Cenargo’s most recent 6k filing, the company will not make it’s 12/31/02 coupon payment. Wayland Advisors, which now controls the former Millennium Seacarriers fleet, is one of Cenargo’s biggest bondholders. Based on the speed with which Wayland Investments skinned the equity interests at Millenium Seacarriers, Cenargo should be getting fit for armor right about now.

Restructuring Quotables

Victor Restis ” I will do everything to protect myself from.. .these vultures which have destroyed my company.” Lloyd’s List

Kostas Koutsoubelis “The buyers were two French companies and the shareholders in those two companies will fight, I am sure. But we don’t know who was the buyer…we just spoke to the broker and the lawyers.” Reuters