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Transocean goes All-In Raising $1.08 billion in Equity and $2.5 billion in Debt
During the last days of November, Transocean Ltd re-jiggered its balance sheet through an equity follow-on offering and the issuance of serial bonds. First up was the follow-on offering for 26 million shares with a green shoe of a further 3.9 million shares. The offering was priced, through an accelerated bookbuilding process, at $40.50/share (based upon an exchange rate of CHF 0.9215/USD), a discount of 11.8% from the prior day’s closing price when the offering was announced. Proceeds of the share offering will be used to partially re-finance the company’s acquisition of Aker Drilling ASA, which was originally financed from cash and assumption of Aker’s outstanding debt. The replenished cash will be applied to the expected repurchase of approximately $1.7 billion of its 1.5% Series B Convertible Senior Notes due 2037 that holders may require it to re-purchase in December 2011. Barclays Capital and Credit Suisse acted as joint book-running managers of the offering.
Like a Good Neighbor, MSC Is There
The power of relationship cannot be overstated. Mediterranean Shipping Company S.A. (“MSC”) and Costamare Inc. have worked together for years and have developed the archetypical relationship between tonnage supplier and liner company. It is a symbiotic relationship with each party benefitting, Costamare provides tonnage as needed, while MSC provides the long-term time charter which provides an additional backstop to the build to order vessel.
At Long Last, the Spin-off (Partial and Private) of Ocean Rig
After announcing the successful completion of its $350 million ATM offering on Friday, DryShips announced that its wholly owned subsidiary, Ocean Rig UDW, intends to offer through a private placement approximately $500 million worth of Ocean Rig’s common shares in exchange for a 20% to 22% stake. The transaction has an extremely short time-line with the deal expected to close this month. The offering will be made to Norwegian private investors, and other qualified investors outside of the U.S. In addition there will be a concurrent private placement in the U.S. under 144A to qualified institutional buyers. Nevertheless, based upon the choice of managers, DnB NOR, Fearnley Fonds and Pareto, and the tight time frame, we expect the focus to largely be in Norway, where the “offshore” is part of investors’ DNA. The net proceeds of the offering are expected to be used to finance the construction costs of the four drillships under construction in Samsung, to exercise the recently announced options to construct a further four UDW drillships, and general corporate purposes.
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“DryRigs”
We began the week reading Ole Slorer’s initial research note on DryShips. Morgan Stanley’s shipping analyst upgraded the shares based upon his assessment that:
“A firmer tone in the ultra-deepwater drilling market recently may allow DRYS to scale down its risky and under-capitalized rig expansion…We believe the sale of two rigs would remove the financing overhang from the $1.4bn estimated capex for DRYS’s four unfunded newbuilds that still lack contracts. Assuming DRYS completes its announced $350m ATM offering, such an asset sale could put an end to our concerns of further dilution from further offerings related to the drillships. Despite the potential book loss in excess of $440m and the negative impact on the company’s projected EPS (by 15% in 2011 and 27% in 2012), a sale at around $600m per drillship could allow the stock to appreciate 30-40% in the near term.”
Appetizer
Being somewhat disloyal to the team, we shirked our set-up responsibilities for Marine Money Week and snuck off to participate in Morgan Stanley’s 3rd Annual Shipping Conference, with its superb cast, for part of the morning. Wiley Griffiths set the stage by asking questions, which he hoped by the end of the day, would be answered. Where are we in the cycle? Where will investors find returns? He noted that banks were making loans selectively and the return of bonds and IPOs. But volatility remains a concern. He termed this a period of uncertainty, however there is a sense of optimism as fundamentals remain positive. Then there is the old standby saw intimating hope: no news is good news.
Ole Slorer then took the stage to introduce the master of PowerPoint, who also happens to be President and CEO of OSG, Morten Arntzen. Mr. Arntzen as always was right on point and this time provided an encore to Barbara Streisand’s The Way We Were, previewed at our Hamburg conference, with Bob Dylan singing The Times They Are a Changin’. While both were entertaining, they made very serious points. The lyrics of the former were a reminder that the banking world had changed and there is no turning back. The latter was a reference to the Deepwater Horizon intimating again that our world was going to change as a result and much quicker than anyone expects. Whereas in the past he conceded to requests to remove the technical management slide from the deck that would no longer be the case. Investors and lenders need to focus on the technical capabilities of the companies they invest in for to do otherwise is suicidal.
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The Doctor Is In!
For us, the news of a companies’ placing new orders for ships was largely background noise. Covering the financial markets is a full-time job, in and of itself, although we do like to take a peek at broker reports when we have a chance. But in the main we get our market news largely distilled from the analysts, all of whom are keen students of the market. And so the news of new orders barely impinged upon our thoughts as we were more focused on the existing orderbook, and the forever unknowns, slippage and cancellations.
That was the case until we had a look at a short précis on the dry bulk market authored by Gregory Lewis of Credit Suisse in which he discussed the current dry bulk orderbook and made the following observations:
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Complications Unwound. How DRYS Got There.
Last week, DryShips announced that it had agreed to acquire, from George Economou and other third party interests, the remaining 25% minority interest in Primelead Shareholders, Inc., the holding company and operating platform for DryShips ultra deepwater drilling rig assets including two owned and operational ultra deepwater semisubmersibles and 4 newbuilding drillship contracts as well as the commercial operating company, Ocean Rig ASA.
The transaction was structured to minimize the cash outlay and leverage with the price being dilution. Consideration for the transaction included $50 million in cash and the issuance of $280 million in face value of mandatorily convertible preferred stock, based upon a price per share of $5.36, the weighted average seven day trailing price. At the offering price, this equates to 52.2 million shares. The shares are manditorily convertible in four equal installments at $6.83 per share (a 27.5% premium) upon delivery of each of the four newbuilding drillships.
Morgan Stanley II
Despite a pressing deadline, we couldn’t pass up the opportunity to get out of the office and attend Morgan Stanley’s 2nd Commodities and Shipping Conference. In these difficult times how could one possibly forego the opportunity to hear what Ole Slorer and his team have to say with the added benefit of gleaning some insights on the capital and lending markets. All interspersed with company presentations and lessons from Morgan Stanley’s commodities and freight trading experts. It is a rare opportunity for us to receive an invitation to these investor only meetings and we are most appreciative. Putting on an investor hat for a moment, we can confirm that if one is interested in the space there is no better way to get an education and gather information about this sector than attending these conferences. And, we did not even benefit from having a one-on-one meeting.
Wiley Griffiths, the Head of Global Shipping, and his team started us off with a view of what was happening in the market. Continuing historic trends, the markets as always remain interesting.
Out of Favor
Last week, The Wall Street Journal provided another indicator of the shipping slump when they announced the Best on the Street analysts for 2008. Unlike last year, our shipping analysts were conspicuously absent, although the number three slot was taken by Jim Corridore of Standard & Poors, who had rated Horizon Lines a sell during the period in October when the shares fell 77%.
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.
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