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OSG Defends the Flag
In a statement that was eerily reminiscent of an earlier time, OSG announced that the US ownership of its common stock at the close of business on April 15, 2008 was 77 percent. This is the minimum percentage of shares that must be owned by United States citizens in order to preserve the status of OSG as a Jones Act company, in accordance with the Company’s charter and bylaws.
Written by: carisk | Categories: Freshly Minted, The Week in Review | April 17th, 2008 | Add a Comment
TMI?
What a week for investors! Starting with CMA’s annual event, continuing with JPMorgan’s Conference and concluding with the Capital Link Forum, it is conceivable that even the most interested observer of the industry may have suffered from information overload. Thankfully, with Good Friday, many of us had the opportunity to recover with a long-weekend.
Despite the early start, the Capital Link Forum played to a full house. There were company presentations galore interspersed with lively and informative panel discussions. With far too much information to distill, here is a highly selected compendium of our outtakes.
Written by: carisk | Categories: Freshly Minted, Market Commentary | March 27th, 2008 | Add a Comment
TORM Takes Half of FR8
Some people are better than others at sharing, and TORM seems to be right at the top of the list. After purchasing OMI jointly with Teekay this past spring and splitting the assets, TORM announced this week that it had acquired a 50% equity stake in FR8 from Projector for $125 million. The FR8 Group controls 25 vessels including three LR2 newbuildings for delivery in 2008. It owns six modern product tankers, comprising four MR and two LR1 vessels and has long-term charters on three LR2, four LR1 and 11 MR product tankers, with purchase options on three of these vessels. The group also commercially manages one LR2 vessel and has about 30 staff worldwide in Singapore, London and Veracruz. The full fleet list is shown on the next page.
Written by: carisk | Categories: Freshly Minted, The Week in Review | January 24th, 2008 | Add a Comment
Jordan Alliger Makes Waves With Deutsche Tanker Initiation
Jordan Alliger, now of Deutsche Bank, this week initiated coverage on Teekay, OMI and General Maritime, and from what we hear he has gotten a somewhat controversial reaction. Predictions that tanker rates would trend down through 2006 and 2007 due to an increase in supply – which he attributes to a heavy newbuild orderbook, diminished required scrap activity and a more modernized fleet – are hardly a cause for stir. Nor is the assertion that Teekay is a “leader throughout the cycle” and therefore worth holding onto at current rates even if a downturn is imminent.
What probably surprised people more was the somewhat apologetic but very strong sell ratings given to OMI and General Maritime. Lauding the talent of the management and commercial reputations of the both companies, Mr. Alliger nevertheless asserted that both would see shares come down to around 1x 2006 price to book value, which he estimates to be $13 per share for OMI and $30 per share for General Maritime, both of which represent a discount of one third from current prices. At relatively modest premiums of 8% and 14% to NAV respectively, it is not hard to see why the two companies may have been shocked at Deutsche Bank’s drastically lower price targets. The major difference here, of course, is school of thought: are shipping companies worth their asset value, their book value, cash flow – which notably Deutsche Bank used to arrive at their $45 price target for Teekay – or do they have some franchise value? That is a debate that is not new, and one which we will leave for another time.
Betting on Tankers
Last week it was dry bulk. This week, all the fuss seems to be revolving around the tanker market. A Wall Street Journal “Money & Investing” section cover story on the popularity of shorting tanker stocks drew some attention. As did a bearish report from R.S. Platou, a much-talked-about, products-focused IPO from Aries Maritime, positive reports form Jefferies and Banc of America and tanker stock coverage initiations from First Albany. So what, exactly, are the arguments going around, and of what should tanker market players and their financiers be aware? It’s still impossible to predict the future, but we can tell you what some of the competing arguments are.
R.S. Platou analyst Erik Andersen drew a lot of attention with his bearish report on shipping, particularly tankers. According to Mr. Andersen, the seasonality justification for low spot rates – which brokers say have dropped into the upper teens for VLCCs on some routes – is badly overblown. He notes that from 1997-2004, the average second quarter rate was about 37.5% lower than the average fourth quarter rate, completely out of order with the drop in rates from $147,000 in the fourth quarter of 2004 to $41,000 so far in the second quarter of 2005. However, this is still above the 8-year average second quarter rate of $35,000 – albeit with higher bunker prices – suggesting that perhaps the $147,000 was more of an anomaly than the $41,000 is a sign of a crash. Still, tanker fleet annualized growth figures of 6-7% compared to a comparable rate of 1% annually over the decade from 1993-2003 are somewhat ominous. Citigroup Smith Barney analyst Charles de Trenck noted how the current weak rates are making the tanker market the first among the shipping sectors to experience the pricing pressures derived from growing capacity. But on the bright side, Mr. Andersen did write that he does not believe tanker markets will weaken so much as to create a weak year for owners.
Analysts Magnus Fyhr and Douglas Mavrinac at Jefferies & Company have a much different take on the current market situation. They said in a report issued to reiterate their buy rating on Ship Finance International that they expect tanker demand to be firm on increasing OPEC production. Importantly, the analysts believe that incremental fleet growth of 21 MMdwt scheduled through the end of the year is likely to be absorbed by increased tanker demand.
Evincing similarly positive sentiments, analysts Daniel Barcelo, Philippe Lanier and Pierre Sargeant of Banc of America Securities issued a report on oil tankers optimistically titled “Hold On for the Summer Heat.” They note that a 5% tanker stock pullback over the past two weeks has been related more to Arabian Gulf VLCC market conditions than to the tanker industry as a whole, much of which has remained fairly strong. Additionally, they point out that the 450 vessel global VLCC fleet has grown by only two vessels so far in 2005, implying that softened rates could not be explained by supply buildup, but rather are a product of a reduction in Arabian Gulf export volume and a temporary buildup of available tonnage in the gulf. Analyst Craig Irwin of First Albany appears to agree, having this week initiated coverage on General Maritime, OMI and Arlington Tankers with a Buy rating. And a group of Asian investors that market sources say recently put their money into a very expensive $140 million VLCC newbuilding have put their money where their mouth is when it comes to predicting a strong VLCC market for years to come.
Much of Wall Street, however, seems to have sided with R.S. Platou on the more bearish side of the debate, as a widely disseminated article titled “Shorts Expect Tankers to Take On More Water” strongly suggests. Teekay, OMI, Knightsbridge and General Maritime are all being subjected to this phenomenon, with Frontline leading the pack. Investors are brazenly betting that tanker stocks will keep falling. Whether or not this will happen is hard to tell, though the practice certainly is not encouraging for those hoping to see their tanker investments appreciate.
Top Finally Gives up on Convertible Offering
After nearly a month in the market, a change of underwriters and several changes to pricing, Top Tankers officially withdrew its $300 million convertible preferred stock deal this week citing market conditions. Proceeds of the offering were to be used to acquire the 15-vessel bulk carrier fleet of Greek owner AM Nomikos, and the deal has since been called off as a result of the failed offering.
No matter what you think of the company or the deal, one thing is for sure – both Top and its advisors clearly worked tirelessly to make this deal happen.
So what happened? Like most unfortunate outcomes, the inability of Top to conclude its deal resulted from a combination of factors that are both specific to the deal and general to the markets. First off, there was the shipping market. Although most investors and analysts we speak to agree that the drop in dry cargo freight rates is little more than a temporary blip, Top’s plan to acquire a fleet of dry cargo ships was not ideally timed to say the least – especially as charter rates have declined while ship values have remained the same or even firmed for some vessel classes.
The second factor that went against the deal regarded the underlying market for convertible securities. As some readers may know, the convertible market has tipped in favor of issuers in recent years, with transactions for companies like OMI and Seacor pricing at thin yields of 2.75% and lofty conversion strike prices of about 45%. This imbalance of supply and demand for convertible products has resulted from the growing number of hedge funds that use the structure to create “riskless” returns. For those who aren’t familiar with this form of black box investing, the way it works is that funds go long the convert and short an equal quantity of the stock so that they are effectively insulated from any change in the underlying stock price. In this scenario, funds earn their return by collecting the coupon on the debt and often leveraging their capital to enhance that yield. Issuers like the market because it either very cheap debt (if the stock doesn’t reach its conversion price) that is non-dilutive or fully priced equity (if the stock does convert).
Although Top had already been marketing the deal for a couple of weeks, the hedge fund community was stunned when GM and Ford’s debt fell in value when it was downgraded to junk status at the same time the company’s stock rose thanks to a Dutch auction bid from Kirk Kerkorian. What this meant was that hedge funds that were long the bonds and short the stock, a logical hedge strategy for a deteriorating credit, were punished when the company’s equity value rose as its debt sank. The losses incurred from the unusual scenario forced many funds onto the sidelines just as Top was trying to price.
The structure itself may have presented another challenge. When the deal was initially brought to market, we understand the yield was 5.75%. Although this is a relatively high yield, one challenge may have been that Top itself pays a dividend of about 5%. This means that the difference between what investors would have to pay on the stock they are short and what they would earn on the convertible was pretty small. In response to market push back, sources tell us that Top improved the economics to 6.75% with a conversion price up 20%, but perhaps by that time the market had gotten too choppy.
Another potentially problematic issue may have been the size. As we go to press, Top Tankers has a $450 million market cap, and it was in the market for a $300 million convertible in a market that generally sees convertibles that are around 25% of the issuing company’s size.
Nothing Ventured, Nothing Gained
Although we imagine that the company, its advisors and AM Nomikos are disappointed with the outcome, shareholders are none the worse. According to a statement made by the company, Top will not forfeit any deposits that may have been lodged when the MOA was signed, and the so the only major cost here was that of opportunity.
President and CEO Evangelos Pistiolis stated, “We carefully considered the possible acquisition in light of various financing alternatives available in the market, but concluded that proceeding with the acquisition of this fleet would not be in the best interests of our shareholders at this time.” Reading between the lines, Pistiolis probably feels that the net asset value of the company’s stock is in excess of its current $16 share price – something that should give investors comfort at current levels.
Written by: carisk | Categories: Freshly Minted, The Week in Review | May 26th, 2005 | Add a Comment
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.
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.
Barcelo and Lanier Resurface – at Bank of America Securities
The dynamic duo energy/tanker analyst duo Dan Barcelo and Phillipe Lanier have resurfaced recently in a new post at Bank of America Securities. The addition of these two affable experts is welcome news to an industry that continues to need broader research coverage. The two are also an important addition to the B of A — formerly Fleet — ship finance team, which is headed up by Victor Garcia in Boston.
As to substance, the new Bank of America analysts are bullish, expecting increasing ton-mile demand to support a multiyear growth period. For ton-mile demand itself, the forecast growth of more than 5% for 2005 when considering both 2% oil demand growth and the growing prevalence of long-haul tonnage. Mr. Barcelo and Mr. Lanier look for OPEC production to reach 30 million barrels per day in the fourth quarter, leading to VLCC rates as high as $140,000 per day. Additionally, the analysts call for imbalances in global refinery capacity to lead to a dynamic product market, from which product-leveraged companies including OMI and OSG are expected to benefit.
Their report also evinces a break from thought patterns of many other established shipping research firms with the recommendation of OMI and Ship Finance as the two premiere shipping stock picks, with respective target prices of $24 and $21.55. The analysts cite OMI’s leverage to suezmax and product rates and Ship Finance’s stable yield combined with growth and profit potential as the grounds for their recommendation.
Written by: carisk | Categories: Freshly Minted, Market Commentary | April 28th, 2005 | Add a Comment
Early Earnings Solid, Led by the Newly Public
The first round of 2005 earnings has come in, and the results are solid overall. While tanker companies General Maritime and Teekay did not see revenues quite as strong as 1Q04, the results were certainly nothing at which to balk. OMI, International Shipholding and Kirby all posted increases across the board, with OMI’s results particularly strong, and consistent in the revenue, net income and EBITDA categories, as shown in the accompanying table. The real over-performers so far, not surprisingly, were the companies who have gone public and expanded their fleets substantially in the past year. DryShips saw revenue, net income and EBITDA all increase by more than 70% based on 1Q04, while Top Tankers saw returns more than quintuple in each of these three categories.
Written by: carisk | Categories: Freshly Minted, The Week in Review | April 28th, 2005 | Add a Comment
The Official Guide To Marine Finance Providers
Shipping Index
