DnB Nor, Jefferies Score Huge Success for

Kvaerner Philadelphia

When DnB NOR and Jefferies were mandated to raise $75 million in equity so that Kvaerner could place its two orphaned US flag newbuildings OceanBlue, a Kvaerner sponsored enterprise, to compete with Matson, we held our breath. And then we wrote an article entitled: “Will Hawaii Become the Next Puerto Rico?” referring to the fact that a price war might erupt with the addition of another player in what is already a fragile market. Although we understand that DnB NOR and Jefferies have been having success in placing the equity, we were very pleased to learn recently that Kvaerner has in fact entered into contracts to sell the vessels to Matson, who had bought the first two vessels, for $290 million. The new ships are expected to be delivered to Matson and placed into the company’s Guam service in July 2005 and June 2006. “The contract with Matson confirms that Kvaerner Philadelphia has made a successful transition to become a highly efficient Jones Act shipbuilder,” said Dave Meehan, President at the yard, which we now imagine has set its sights on building 10 highly sought-after US flag product tankers.

Is Hawaii the Next Puerto Rico?

As we have seen in the Puerto Rico market since the demise and withdrawal of Navieras, a little bit of extra capacity in a captive market can really pollute rates and destroy capital. Competition in the Hawaii market will be further exacerbated by the coming arrival a new Pasha-owned ro/ro working on the trade lane between Los Angeles and Hawaii. If there is a bright spot here, it is that the Hawaiian economy has been strengthening and might even be able to handle the added capacity.

Using Equity to Finance a Debt Deal

The debt financing of these vessels will be another interesting facet of the OceanBlue deal. We highly doubt that Caterpillar will be involved in ships that will compete against those in which they have already taken a considerable amount of risk. Moreover, with the vessels essentially operating in a “start up” business and with book values that make them totally uncompetitive in the international market should the startup not work, we think bank debt will be low. Therefore we would expect to see this deal financing with at least 50% equity and quite possibly more. This would give the lenders the ability to get out whole should they need to remarket the vessels on the international market.

Ocean Blue and the Need to Beef Up

One challenge associated with raising equity for OceanBlue will be the fact that the exit strategy is unclear unless DnB and Jefferies are able to make investors comfortable with the idea that OceanBlue will be able to beef up its business through newbuildings or acquisitions and then go public at a multiple of its book value. But where will they look to expand? With the supply demand balance of Jones Act markets extraordinarily tight, it will be both difficult and expensive to find good assets. If they are able to sell this story, though, then the IPO of Horizon Lines will come at a very good time by creating a comparable valuation that will get potential OceanBlue investors excited. The challenge therefore, is that OceanBlue is really a debt deal that needs equity – but at the end of the day, we have little doubt that the new Kvaerner ships will end up being consolidated into Matson or Horizon. There have been rumors that Alexander and Baldwin has been thinking of selling off Matson Navigation, though Horizon is the more logical choice in light of the age of their fleet and the fact that they are raising fresh equity. After all, Horizon Lines will need the ships at some point, and the economics of these ships is actually pretty reasonable. Moreover, Kvaerner might well shut down after the obligation to deliver these final vessels is fulfilled, which would make it very difficult for Horizon to find large ships at a comparable price.

As we have seen in the Puerto Rico market since the demise and withdrawal of Navieras, a little bit of extra capacity in a captive market can really pollute rates and destroy capital. Competition in the Hawaii market will be further exacerbated by the coming arrival a new Pasha-owned ro/ro working on the trade lane between Los Angeles and Hawaii. If there is a bright spot here, it is that the Hawaiian economy has been strengthening and might even be able to handle the added capacity.

The debt financing of these vessels will be another interesting facet of the OceanBlue deal. We highly doubt that Caterpillar will be involved in ships that will compete against those in which they have already taken a considerable amount of risk. Moreover, with the vessels essentially operating in a “start up” business and with book values that make them totally uncompetitive in the international market should the startup not work, we think bank debt will be low. Therefore we would expect to see this deal financing with at least 50% equity and quite possibly more. This would give the lenders the ability to get out whole should they need to remarket the vessels on the international market.

One challenge associated with raising equity for OceanBlue will be the fact that the exit strategy is unclear unless DnB and Jefferies are able to make investors comfortable with the idea that OceanBlue will be able to beef up its business through newbuildings or acquisitions and then go public at a multiple of its book value. But where will they look to expand? With the supply demand balance of Jones Act markets extraordinarily tight, it will be both difficult and expensive to find good assets. If they are able to sell this story, though, then the IPO of Horizon Lines will come at a very good time by creating a comparable valuation that will get potential OceanBlue investors excited. The challenge therefore, is that OceanBlue is really a debt deal that needs equity – but at the end of the day, we have little doubt that the new Kvaerner ships will end up being consolidated into Matson or Horizon. There have been rumors that Alexander and Baldwin has been thinking of selling off Matson Navigation, though Horizon is the more logical choice in light of the age of their fleet and the fact that they are raising fresh equity. After all, Horizon Lines will need the ships at some point, and the economics of these ships is actually pretty reasonable. Moreover, Kvaerner might well shut down after the obligation to deliver these final vessels is fulfilled, which would make it very difficult for Horizon to find large ships at a comparable price.

Horizon & Ocean Blue –

Battle of the Equity Prospectuses

Concurrent with the preparations for Horizon’s public equity offer, a new competitor is in the marketplace with a private equity transaction that will compete against Horizon in the Puerto Rico market. Since the autumn of 2004, Kjell Inge Rokke’s Philadelphia Kvaerner shipyard decided to become a principal in the US flag market through the startup of “OceanBlue,” a liner service that will compete with Matson Navigation and Horizon Lines in the Hawaii market. The company has engaged DnB Nor and Jefferies to raise about half of the $288 million delivered cost (and working capital) – a price many believe will make them the lowest cost per slot in the market.

The OceanBlue situation must be a real disappointment for Castle Harlan, who probably purchased Horizon Lines under the assumption that competition and the supply of tonnage would remain tight. It will also be interesting to see how each of the companies describes the fundamentals for the market, the competition and the economics.

Nothing New Under the Sun

The genesis of the rather unusual situation is the fact that in exchange for about $400 million in state and Federal subsidies, Rokke’s Kvaerner’s Philadelphia shipyard agreed to build a minimum of four vessels. The first two ships, which were 2600 TEU containerships, went to Matson in 2002-2003 in deals construction financed by Caterpillar Finance, but no one has committed to buying the next two vessels and they are getting closer to being delivered.

Although this scenario may seem novel to many of us, the situation is very similar to one we saw in the early 1970s. During those years, Sun Oil’s Sun Shipyard built trailer ships, and when they were able to find a buyer, the yard put them in the Alaska Trade and operated the ships themselves – and later sold the business to the Saltchuk partners in Seattle who have been running the liner service under the brand “Tote.”

Like the Sun ships, the $120 million Kvaerner vessels are not competitive in the international market, so they need to be employed in the Jones Act. The only two Jones Act markets that can ostensibly support the economic requirements of ships with such specifications are Hawaii and Alaska – Rokke has chosen the former by planning a route from Oakland to Los Angeles to Honolulu and hired Brad Mulholland, the deposed king of Matson, to run the business along with John Graykowski, the former head of the Philadelphia Shipyard and the maritime commissioner under President Clinton.

In a very basic sense, we at Marine Money like the concept of shipyards owning vessels; such a structure would finally align the interests of shipyards with the market they pollute with overcapacity, but that really is beside the point. The majority of people we have spoken with think that the announcement from Rokke is simply a powerful marketing approach engineered to remind the management of Horizon and Matson that if they do not work with the new ships, they will be working against the new ships.

Concurrent with the preparations for Horizon’s public equity offer, a new competitor is in the marketplace with a private equity transaction that will compete against Horizon in the Puerto Rico market. Since the autumn of 2004, Kjell Inge Rokke’s Philadelphia Kvaerner shipyard decided to become a principal in the US flag market through the startup of “OceanBlue,” a liner service that will compete with Matson Navigation and Horizon Lines in the Hawaii market. The company has engaged DnB Nor and Jefferies to raise about half of the $288 million delivered cost (and working capital) – a price many believe will make them the lowest cost per slot in the market.

The OceanBlue situation must be a real disappointment for Castle Harlan, who probably purchased Horizon Lines under the assumption that competition and the supply of tonnage would remain tight. It will also be interesting to see how each of the companies describes the fundamentals for the market, the competition and the economics.

The genesis of the rather unusual situation is the fact that in exchange for about $400 million in state and Federal subsidies, Rokke’s Kvaerner’s Philadelphia shipyard agreed to build a minimum of four vessels. The first two ships, which were 2600 TEU containerships, went to Matson in 2002-2003 in deals construction financed by Caterpillar Finance, but no one has committed to buying the next two vessels and they are getting closer to being delivered.

Although this scenario may seem novel to many of us, the situation is very similar to one we saw in the early 1970s. During those years, Sun Oil’s Sun Shipyard built trailer ships, and when they were able to find a buyer, the yard put them in the Alaska Trade and operated the ships themselves – and later sold the business to the Saltchuk partners in Seattle who have been running the liner service under the brand “Tote.”

Like the Sun ships, the $120 million Kvaerner vessels are not competitive in the international market, so they need to be employed in the Jones Act. The only two Jones Act markets that can ostensibly support the economic requirements of ships with such specifications are Hawaii and Alaska – Rokke has chosen the former by planning a route from Oakland to Los Angeles to Honolulu and hired Brad Mulholland, the deposed king of Matson, to run the business along with John Graykowski, the former head of the Philadelphia Shipyard and the maritime commissioner under President Clinton.

In a very basic sense, we at Marine Money like the concept of shipyards owning vessels; such a structure would finally align the interests of shipyards with the market they pollute with overcapacity, but that really is beside the point. The majority of people we have spoken with think that the announcement from Rokke is simply a powerful marketing approach engineered to remind the management of Horizon and Matson that if they do not work with the new ships, they will be working against the new ships.