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Top Tankers in $300 Million Convertible
The highly acquisitive, and therefore capital-hungry, Top Tankers announced last night that it intends to privately place up to $300 million aggregate principal amount of Series A Cumulative Convertible Preferred Stock, convertible into shares of the company’s common stock. Top also plans to grant to the initial purchaser of the convertible preferred stock an option to purchase up to an additional $45 million aggregate principal amount of preferred shares. Top’s “house” investment bank Cantor Fitzgerald has been mandated on the deal.
Use of Proceeds – Ships and Delta Hedge
The company intends to use $250 million of the proceeds to fund vessel acquisitions, including the $475 million acquisition of the Nomikos fleet and another $95 million to acquire two double-hulled tankers.
Top will also use $50 million of the proceeds to buy common stock while Kingdom Holdings, which owns about 15% of the company’s shares and is controlled by members of the Pistiolis family, has agreed to purchase another $20 million of the common stock.
This total of $70 million will likely be acquired by the purchaser of the convertible preferred securities, who would then short the stock to create a “Delta Hedge.” This is not unlike what OMI did when it used a corporate share repurchase program to facilitate its recent convertible bond issued through Jefferies.
Although shares held by Evangelos Pistiolis, through an entity called Sovereign Holdings, are locked up until July 18, 2005, the lock-up for shares held by Kingdom Holdings expired on January 19, 2005.
DVB Joins Royal Bank of Scotland
In addition to the proceeds of this deal, in March 2005 Top entered into a credit facility with DVB Bank, for a total of $56.5 million, to finance the purchase of two suezmax tankers, the M/T Stopless and the M/T Stainless. The loan is payable in 28 varying quarterly installments, beginning on July 29, 2005, and a balloon payment of $10.2 million, payable together with the last installment. The interest rate on the DVB credit facility is 125 basis points over LIBOR. Beginning on the date of the credit facility and ending on the final drawdown date, Top will pay the lender a quarterly fee of 0.25% of the average undrawn amount of the loan for the quarter.
Why They Did It
So why did Top Tankers move into the world of financial exotica rather than simply issuing another round of common stock? There are several reasons. For one thing, the continued issuance of equity used for dilutive acquisitions ultimately erodes shareholder value and therefore is not popular among holders, though we do not intend to suggest that this is the case here. Although investors can understand that sometimes a premium must be paid for certain transformational transactions, they don’t like to see it done over and over. That’s why we thought Top would turn to the highly attractive high yield bond market to finance the Nomikos acquisition.
Pricing
The dividend rate and conversion rate are to be determined by negotiations between Top and the initial purchaser of the convertible preferred stock. These deals are generally executed very quickly, often on an overnight basis, so look for pricing details shortly. Although these have not yet been announced, the table showing last year’s convertible issuance that accompanies this article should give you an idea of what to expect. In an industry like shipping, it is typical to see a deal priced with a 7% dividend convertible at a premium of around 25% – known in Wall Street parlance as a “7 Up 25”. Another rule of thumb is that the conversion premium should be about 3.5x the coupon.
The Valuation – 110% NAV and 4.3x EBITDA
As for the valuation of the Top acquisitions, they appear to be very attractive. Nomikos has agreed to sell its fleet of vessels for $475 million and then lease them back for 24 months at an aggregate charter rate of $357,000 per day – $24,000 per ship per day. Using an average operating cost of $4,000, Top will generate about $110 million of cash flow per annum on the vessels, creating a purchase price of 4.3x EBITDA. Nomikos has also agreed to provide credit support for the charter hire. Based on our valuation of the fleet, Top is paying just 3.5x 24 months of contracted cash flows and only a slight premium over current NAV for the vessels on a charterfree basis.
Written by: carisk | Categories: Freshly Minted, The Week in Review | April 28th, 2005 | Add a Comment
OMI in $320m Facility with ING
OMI has a new $320 million, 10-year facility in syndication, for which ING is acting as bookrunner, DnB NOR as agent, and NIB Capital, Deutsche Schiffsbank and Nordea as lead arrangers. The new facility, which is reported to be pricing at just 67.5 basis points over Libor, is set to replace an older $348 million facility on which OMI paid 125-150 basis points. However, market rumors suggest OMI has already paid down a significant portion of the older loan, meaning that this new one would provide the company with some significant free cash.
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.
CMA Hosts Connecticut Shipping 2005
The Connecticut Maritime Association this week hosted in Stamford, CT its most successful tradeshow yet. Over 1,200 shipping professionals from around the country and around the world signed up for the event; we can only imagine that even more attended. From exhibitor booths to panel discussions led by experts in a myriad of shipping fields to business meetings, luncheons and cocktail receptions, there was certainly something for everybody.
The Westin Hotel in Stamford was definitely the place to be this week. Faithful exhibitors set up booths where one could learn about everything from ship registries to environmental consulting to high-speed, affordable offshore internet access. It certainly would have taken more than the three days’ time available to get to each one.
But you wouldn’t want to spend your whole time just wandering around and taking it all in – aside from developing new business contacts and meeting up with old friends, there were presentations and panel discussions running almost continuously that featured distinguished leaders of the global shipping industry and dealt with a variety of the important issues that are facing shippers today.
Not surprisingly, there was a great deal of speculation about the future in regards to how long the current market can last, if and how far it will have to come down off its highs, and how China, and eventually India, will impact the market as they continue to evolve. Some time was also spent taking in the current shipping environment. Dr. Arlie Sterling of Marsoft observed happily “This market has exploded, and it’s done so with great style,” while Gary Vogel of VOC Shipholding noted more cautiously “the more things change, the more they stay the same.” Frederick Chavalit Tsao of IMC Holdings and INTERCARGO had a different take on the changing world, telling his audience that one must be proactive in managing change in order to achieve sustainability.
And the owners who spoke sounded up to the challenge. Rather than speculate on the future, a number of speakers, including Giuseppe M. Rizzo of Bottiglieri di Navigazione SpA and Robert Bugbee of OMI, discussed strategies to sustain their companies, come what may in the markets. For three days, often in multiple sessions at once, shipping and other professionals discussed issues ranging from safety to crewing to currency and FFAs.
At night time, there were dinners, parties, and of course the Greenwich Marine Club. Three exhilarating days were capped off with CMA’s annual Gala dinner, where Fort Schuyler cadets entertained with their songs and Ole Skaarup regaled the audience with tales of life, death and past commodores. Peter Georgiopoulos handed his commodore hat to Sean Day, and then Peter Drakos presented a donation on behalf of the CMA to the Seamen’s Church, who returned graciously that the CMA would be presented with the Seamen’s Church’s own Silver Bell award in June.
Written by: carisk | Categories: Freshly Minted, Market Commentary | March 24th, 2005 | Add a Comment
Shipowners Present at Deutsche Small Cap Equity Conference
Shipowners Present at Deutsche Small Cap Equity Conference
It’s no coincidence that investor conferences are being held in closer to the equator during these chilly months. This week, Deutsche Bank, which recently hired investment banker Craig Fuehrer from JP Morgan and veteran transportation analyst Jordan Alliger from Lazard (formerly with Goldman Sachs), held an event at the Ritz Carlton on the beach in Naples, Florida. Shipping companies that presented include: Kirby Corporation (NYSE: KEX), OMI (NYSE: OMM), General Maritime (NYSE: GMR), TEN (NYSE: TNP), Stolt Nielsen, S.A. (NASDAQ: SNSA) and Maritrans (NYSE: TUG). As you can see from the share price graphs for the last five days, with fundamentals as good as the shipping industry, it’s always a good idea for companies to get out on the road and tell their story to investors.
It’s no coincidence that investor conferences are being held in closer to the equator during these chilly months. This week, Deutsche Bank, which recently hired investment banker Craig Fuehrer from JP Morgan and veteran transportation analyst Jordan Alliger from Lazard (formerly with Goldman Sachs), held an event at the Ritz Carlton on the beach in Naples, Florida. Shipping companies that presented include: Kirby Corporation (NYSE: KEX), OMI (NYSE: OMM), General Maritime (NYSE: GMR), TEN (NYSE: TNP), Stolt Nielsen, S.A. (NASDAQ: SNSA) and Maritrans (NYSE: TUG). As you can see from the share price graphs for the last five days, with fundamentals as good as the shipping industry, it’s always a good idea for companies to get out on the road and tell their story to investors.
With Trøim at Carnivale in Rio, Shipping Deals Slow Down
With Trøim at Carnivale in Rio, Shipping Deals Slow Down
Navios Selling, Selling Navios
There’s been a lot of buzz in the ship finance world this week about Lazard’s auction of Connecticut-based Navios Corporation. For those that missed it, Navios major shareholders, which are comprised of the company’s management, the Leventis Group of Greece and Saltchuk of Seattle, together hired investment bank Lazard Freres to sell the asset-light dry bulk owner operator a few months ago, and as bids came in late last week the market was aflutter with speculation and excitement.
Many of the shipping investment banks were representing bidders on the deal, which saw valuations range from $450 million to over $550 million. The deal also piqued the interest of many of the dominant consolidators and traders like OMI, Restis and Fredriksen, along with Goldman Sachs and George Economou‘s recent, oversubscribed and cash-laden DryShips. As we go to press tonight, blank check company International Shipping Enterprises announced that, “following a competitive bidding process, it executed an agreement providing for an exclusive period to negotiate definitive documentation to acquire all of the shares of Navios.”
For those who don’t know the company, Navios was founded 50 years ago as the shipping subsidiary of United States Steel Corporation, and today the fleet is comprised of 28 panamax and handymax vessels. We don’t have the offering memo on this deal, so we won’t even play around with a valuation because it’s impossible to do with any accuracy. Here’s why: of the company’s 28 vessels, the 6 ultra handymaxes are owned, and of the 22 long-term time chartered vessels, 15 are currently in operation and the remaining seven are scheduled for delivery at various times over the next two years. Moreover, Navios has options to acquire 13 of the time-chartered vessels. Further, we suspect that the owned vessels have a substantial net asset value and historically the vessels controlled under the largely Japanese charters-in have low daily rates and cheap purchase options. If that weren’t enough of a rat’s nest for valuation, Navios generates loads of money trading ships and FFAs and owns and operates a bulk terminal in Uruguay to boot. That’s why we won’t touch it.
We will say, however, that we always find it fascinating when asset-light shipping companies, whether they are traders or non-owning pools, solicit a valuation for their businesses. We say fascinating because historically shipping companies have had a hard time proving worth beyond steel irrespective of the talents of their management or sophistication of their software. That said, there have been some success stories, the best of which is Noble Group, which has a $3 billion market capitalization on the Singapore Stock Exchange. PacBasin also got some credit for its management. Noble, like Navios, owns few ships but instead make their money trading commodities.
Until we have more information, all we will say is this: if any asset-light shipping company could break ground in gaining a high valuation, it is Navios and it is now. The company has an incredibly good reputation and has developed what we understand to be highly efficient freight forecasting models – which begs another question: why are they selling?
Navios Selling, Selling Navios
There’s been a lot of buzz in the ship finance world this week about Lazard’s auction of Connecticut-based Navios Corporation. For those that missed it, Navios major shareholders, which are comprised of the company’s management, the Leventis Group of Greece and Saltchuk of Seattle, together hired investment bank Lazard Freres to sell the asset-light dry bulk owner operator a few months ago, and as bids came in late last week the market was aflutter with speculation and excitement.
Many of the shipping investment banks were representing bidders on the deal, which saw valuations range from $450 million to over $550 million. The deal also piqued the interest of many of the dominant consolidators and traders like OMI, Restis and Fredriksen, along with Goldman Sachs and George Economou‘s recent, oversubscribed and cash-laden DryShips. As we go to press tonight, blank check company International Shipping Enterprises announced that, “following a competitive bidding process, it executed an agreement providing for an exclusive period to negotiate definitive documentation to acquire all of the shares of Navios.”
For those who don’t know the company, Navios was founded 50 years ago as the shipping subsidiary of United States Steel Corporation, and today the fleet is comprised of 28 panamax and handymax vessels. We don’t have the offering memo on this deal, so we won’t even play around with a valuation because it’s impossible to do with any accuracy. Here’s why: of the company’s 28 vessels, the 6 ultra handymaxes are owned, and of the 22 long-term time chartered vessels, 15 are currently in operation and the remaining seven are scheduled for delivery at various times over the next two years. Moreover, Navios has options to acquire 13 of the time-chartered vessels. Further, we suspect that the owned vessels have a substantial net asset value and historically the vessels controlled under the largely Japanese charters-in have low daily rates and cheap purchase options. If that weren’t enough of a rat’s nest for valuation, Navios generates loads of money trading ships and FFAs and owns and operates a bulk terminal in Uruguay to boot. That’s why we won’t touch it.
We will say, however, that we always find it fascinating when asset-light shipping companies, whether they are traders or non-owning pools, solicit a valuation for their businesses. We say fascinating because historically shipping companies have had a hard time proving worth beyond steel irrespective of the talents of their management or sophistication of their software. That said, there have been some success stories, the best of which is Noble Group, which has a $3 billion market capitalization on the Singapore Stock Exchange. PacBasin also got some credit for its management. Noble, like Navios, owns few ships but instead make their money trading commodities.
Until we have more information, all we will say is this: if any asset-light shipping company could break ground in gaining a high valuation, it is Navios and it is now. The company has an incredibly good reputation and has developed what we understand to be highly efficient freight forecasting models – which begs another question: why are they selling?
Written by: carisk | Categories: Freshly Minted, Mergers & Acquisitions | February 10th, 2005 | Add a Comment
Morgan Stanley Upgrades Tanker Sector
Morgan Stanley Upgrades Tanker Sector
Just four days after upgrading General Maritime Corporation to Overweight-V on the announcement of its new dividend policy, Morgan Stanley analysts Mark MacLean and Ole Slorer issued a report revamping their formerly bearish view on the tanker market and raising their industry view to Attractive. This, of course, is good news for tanker companies and their shareholders, but we thought we would take a closer look at what is behind their change of heart.
OPEC Passes on Production Cut, Demand
Forecasts Improve
We looked back just as far as Mr. MacLean’s much more cautious forecast for the tanker market in 2005 published in the January issue of Marine Money, and we were reminded yet again of just how volatile the tanker industry really is. In both the earlier report and the more recent one, near-term fundamentals were classified as strong and concerns about OPEC production cuts were iterated. Since December, a 1.0 mbpd OPEC production cut effective as of January 1, 2005 did not have any particularly deleterious effects, while an OPEC meeting held on January 30 confirmed that OPEC did not feel it was necessary to cut production again at this time. Both these factors improved the outlook for the demand side of the equation.
Also in Mr. MacLean’s earlier forecast, an expansion of supply in the realm of 2.0 mdwt was predicted, to be met by an expansion of demand of 1.5 mbpd. In their more recent report, however, the two Morgan Stanley analysts raised their demand forecast to 1.7 mbpd after this week’s OPEC meeting, noting that at 2.0 mbpd the markets would be balanced and an increase to 2.6 mbpd, as seen last year, would see the market “positively booming.” These numbers do leave room for some notable upside potential in freight rates, which helps explain the 15-20% composite upside potential in the General Maritime, OMI, OSG, and Teekay stocks the analysts cover.
Beyond Supply & Demand: Stronger Asset Values,
Hopes for More Dividends
However, it does not appear to be just the numbers that underlie the analysts’ new bullish view. Whereas the earlier analysis focused primarily on the supply-demand balance, the newer one is broader in focus, considering fundamental changes in the tanker companies covered and in the tanker industry. While this sort of qualitative analysis is, to a certain extent, less scientific, it has the advantage that it is less affected by relatively minor differences (i.e. scrapping estimates, oil demand estimates) and so has the potential to be somewhat more consistent in the face of changing forecasts for supply and demand.
In their most recent report, Mr. Slorer and Mr. MacLean note the increased support for net asset values lent by increases in both newbuilding and secondhand prices and by strong balance sheets that are only being further strengthened by record 4Q04 earnings. As cash becomes slightly less dear to companies, they are willing to spend more on investments for the future, pushing up asset prices and even the monetary value of their own companies.
Perhaps more interesting is the temporary positive externality General Maritime seems to have created with the announcement of its new dividend policy. Far from boosting its own stock price at the expense of the other tanker companies, it has actually moved the Morgan Stanley analysts to become more bullish on General Maritime’s competitors, because they expect the change in policy will put pressure on the other U.S.-listed tanker companies to follow suit as the “valuation bifurcation of high yielding stocks” is brought into relief.
Just four days after upgrading General Maritime Corporation to Overweight-V on the announcement of its new dividend policy, Morgan Stanley analysts Mark MacLean and Ole Slorer issued a report revamping their formerly bearish view on the tanker market and raising their industry view to Attractive. This, of course, is good news for tanker companies and their shareholders, but we thought we would take a closer look at what is behind their change of heart.
OPEC Passes on Production Cut, Demand Forecasts Improve
We looked back just as far as Mr. MacLean’s much more cautious forecast for the tanker market in 2005 published in the January issue of Marine Money, and we were reminded yet again of just how volatile the tanker industry really is. In both the earlier report and the more recent one, near-term fundamentals were classified as strong and concerns about OPEC production cuts were iterated. Since December, a 1.0 mbpd OPEC production cut effective as of January 1, 2005 did not have any particularly deleterious effects, while an OPEC meeting held on January 30 confirmed that OPEC did not feel it was necessary to cut production again at this time. Both these factors improved the outlook for the demand side of the equation.
Also in Mr. MacLean’s earlier forecast, an expansion of supply in the realm of 2.0 mdwt was predicted, to be met by an expansion of demand of 1.5 mbpd. In their more recent report, however, the two Morgan Stanley analysts raised their demand forecast to 1.7 mbpd after this week’s OPEC meeting, noting that at 2.0 mbpd the markets would be balanced and an increase to 2.6 mbpd, as seen last year, would see the market “positively booming.” These numbers do leave room for some notable upside potential in freight rates, which helps explain the 15-20% composite upside potential in the General Maritime, OMI, OSG, and Teekay stocks the analysts cover.
Beyond Supply & Demand: Stronger Asset Values, Hopes for More Dividends
However, it does not appear to be just the numbers that underlie the analysts’ new bullish view. Whereas the earlier analysis focused primarily on the supply-demand balance, the newer one is broader in focus, considering fundamental changes in the tanker companies covered and in the tanker industry. While this sort of qualitative analysis is, to a certain extent, less scientific, it has the advantage that it is less affected by relatively minor differences (i.e. scrapping estimates, oil demand estimates) and so has the potential to be somewhat more consistent in the face of changing forecasts for supply and demand.
In their most recent report, Mr. Slorer and Mr. MacLean note the increased support for net asset values lent by increases in both newbuilding and secondhand prices and by strong balance sheets that are only being further strengthened by record 4Q04 earnings. As cash becomes slightly less dear to companies, they are willing to spend more on investments for the future, pushing up asset prices and even the monetary value of their own companies.
Perhaps more interesting is the temporary positive externality General Maritime seems to have created with the announcement of its new dividend policy. Far from boosting its own stock price at the expense of the other tanker companies, it has actually moved the Morgan Stanley analysts to become more bullish on General Maritime’s competitors, because they expect the change in policy will put pressure on the other U.S.-listed tanker companies to follow suit as the “valuation bifurcation of high yielding stocks” is brought into relief.
Merrill Hires Friedman, Breaks into Shipping
Merrill Hires Friedman, Breaks into Shipping
In yet another sign of how hot shipping is in the capital markets, Freshly Minted understands that Mark Friedman has left Goldman Sachs to start a global shipping practice at Merrill Lynch. While at Goldman, Mark called on North American clients like OMI, OSG and General Maritime, though we understand Merrill’s efforts will be global. Adding Merrill to the mix gives shipping companies more access to the retail investor market through their enormous network of retail stockbrokers, something we really haven’t seen fully developed in the past. Unlike many investment banks, Merrill is also a lender when need be. We wish Mark the best of luck in building the practice on what is without a doubt a mighty platform.
In yet another sign of how hot shipping is in the capital markets, Freshly Minted understands that Mark Friedman has left Goldman Sachs to start a global shipping practice at Merrill Lynch. While at Goldman, Mark called on North American clients like OMI, OSG and General Maritime, though we understand Merrill’s efforts will be global. Adding Merrill to the mix gives shipping companies more access to the retail investor market through their enormous network of retail stockbrokers, something we really haven’t seen fully developed in the past. Unlike many investment banks, Merrill is also a lender when need be. We wish Mark the best of luck in building the practice on what is without a doubt a mighty platform.
Written by: carisk | Categories: Freshly Minted, People & Places | January 27th, 2005 | Add a Comment
Is the Sky Falling in on Tanker Equities?
Is the Sky Falling in on Tanker Equities?
Is the sky falling in on the tanker market? That seems to be the question of the day. There are certainly those who would assert that it is, or is about to, as rapidly falling tanker stock prices and even more rapidly falling charter rates remind many of the barren shipping landscape of the 80s and parts of the 90s. Then there are those who would disagree and have drawn a very different conclusion based on their view of tanker market fundamentals. We thought it might be useful to take a look at these views and the opinions behind them as investors and operators recover from an ungraceful destruction of the tanker equities.
The Beginning of the End…?
Citigroup Smith Barney analyst John Kartsonas reports that dayrates for all classes of vessels have fallen by an average of more than 60% while Jefferies analyst Ray Wu reports that VLCC spot rates have fallen around 80% over the past eight weeks. JP Morgan analysts note that tanker stocks themselves have correspondingly fallen by 20-35%. An extrapolation of current trends would of course predict future devastation of the tanker industry, but fortunately these trends appear to be more of a temporary correction than an indicator of future rate and stock price falls.
Momentum vs. Value
In the first place, importantly, this sort of gargantuan drop was almost universally anticipated. No one thought the unprecedented rates and stock prices seen in November were sustainable. The question, rather, was when, how far, and how hard they would fall. OSG CEO Morten Arntzen exhibited this philosophy in his explanation to Bloomberg: “I never told anyone that the rates would stand at $200,000 a day. But I enjoyed it.” Savvy investors must have been able to identify with this sentiment in late autumn. JP Morgan analysts Jon Chappell, Gregory Burns and Hassan Malik noted that their 2005 projections, pre-the recent fall, had “already factored in seasonal declines, the impact of an OPEC production cut, and the belief that the November rate levels were not at all sustainable.” The difference between them and the more bearish Citigroup Smith Barney reports appears to have been more along the lines of how to prepare for and del with the dropping tanker market situation than over whether it would occur. So who were the investors that have moved suddenly and in droves to substantially more cautious tanker market positions?
The Chappell-Burns-Malik report argues that the recent massive drop in the tanker stocks represents “the exodus of a vast number of momentum investors,” to which the analysts attribute the tanker stocks’ “meteoric” rise and subsequent fall. Now that the stocks have come back down to earth, the JP Morgan analysts expect a return of the value investors. Indeed, Hibernia, who downgraded Top Tankers to a HOLD just as the stock tumble began in early December, has just upgraded the company back to a BUY, indicating they expected something of the recent fall and seem comfortable that the worst is over.
Citigroup and JP Morgan on Supply & Demand
The supply demand balance, is, naturally, also extremely important in determining the prospects for the tanker market’s health in 2005. The JP Morgan report looks for fleet expansion of 19.2 mdwt, or 5.9% capacity growth, in the coming year while Citigroup reports demonstrate comfort with a slightly higher growth number of around 21.5 mdwt, a growth rate of close to 7%. As the orderbook is a known number, discrepancies revolve more around scrapping expectations, largely involving how tanker companies will deal with the new IMO regulations set to come into effect in April of this year. In the demand arena, Citigroup’s Kartsonas expects growth of around 2% as compared to 7% this past year, with OPEC’s one mbpd production cut to reduce tanker demand by as much as 7-8 mdwt with a shift to less long-haul and more short-haul tonnage. OMI’s Robert Bugbee told Tradewinds that he expects demand to be stronger than this, pointing out factors such as China’s intent to build a strategic petroleum reserve that could easily raise demand by one mbpd. Also on the upside, the JP Morgan analysts used IEA forecasts to estimate tanker demand growth of 13.5 mdwt. This discrepancy seems to be largely geographic with respect to oil supply.
Material Gains
Yet another dispute revolves around whether shipping stocks are cheaply or expensively priced. Kartsonas notes their expense relative to historical levels while the JPM analysts note their cheapness relative to many other industries. You can look for yourself at their P/NAV ratings in the “Fair Value” table. As usual, the truth probably lies somewhere in the middle. While the extraordinary spot rates witnessed in the past few months may have dissipated, current rates are still comfortably above breakeven levels, which are estimated in the low $30Ks for a typical being above mid-cycle and even comparable to annual highs in more typical years as shown in “Rate Comparison” chart. Not only that, but this past boom has seen shipping companies increase transparency, modernize their accounting practices and begin to access whole new pools of capital, all of which contribute to lowering their cost of capital and increasing the opportunities for financing available to owners and operators.
The tanker companies are now seeing that not all their new supporters will stick around when the fad passes, but they have undoubtedly succeeded in raising their profile and increasing the breadth of their long-term support base. Just as importantly, the companies are continuing to demonstrate strong performance, in a far more sustainable fashion than before, and, as the JP Morgan trio pointed out, they offer the potential for share buybacks, dividend increases and consolidation.
Is the sky falling in on the tanker market? That seems to be the question of the day. There are certainly those who would assert that it is, or is about to, as rapidly falling tanker stock prices and even more rapidly falling charter rates remind many of the barren shipping landscape of the 80s and parts of the 90s. Then there are those who would disagree and have drawn a very different conclusion based on their view of tanker market fundamentals. We thought it might be useful to take a look at these views and the opinions behind them as investors and operators recover from an ungraceful destruction of the tanker equities.
The Beginning of the End…?
Citigroup Smith Barney analyst John Kartsonas reports that dayrates for all classes of vessels have fallen by an average of more than 60% while Jefferies analyst Ray Wu reports that VLCC spot rates have fallen around 80% over the past eight weeks. JP Morgan analysts note that tanker stocks themselves have correspondingly fallen by 20-35%. An extrapolation of current trends would of course predict future devastation of the tanker industry, but fortunately these trends appear to be more of a temporary correction than an indicator of future rate and stock price falls.
Momentum vs. Value
In the first place, importantly, this sort of gargantuan drop was almost universally anticipated. No one thought the unprecedented rates and stock prices seen in November were sustainable. The question, rather, was when, how far, and how hard they would fall. OSG CEO Morten Arntzen exhibited this philosophy in his explanation to Bloomberg: “I never told anyone that the rates would stand at $200,000 a day. But I enjoyed it.” Savvy investors must have been able to identify with this sentiment in late autumn. JP Morgan analysts Jon Chappell, Gregory Burns and Hassan Malik noted that their 2005 projections, pre-the recent fall, had “already factored in seasonal declines, the impact of an OPEC production cut, and the belief that the November rate levels were not at all sustainable.” The difference between them and the more bearish Citigroup Smith Barney reports appears to have been more along the lines of how to prepare for and del with the dropping tanker market situation than over whether it would occur. So who were the investors that have moved suddenly and in droves to substantially more cautious tanker market positions?
The Chappell-Burns-Malik report argues that the recent massive drop in the tanker stocks represents “the exodus of a vast number of momentum investors,” to which the analysts attribute the tanker stocks’ “meteoric” rise and subsequent fall. Now that the stocks have come back down to earth, the JP Morgan analysts expect a return of the value investors. Indeed, Hibernia, who downgraded Top Tankers to a HOLD just as the stock tumble began in early December, has just upgraded the company back to a BUY, indicating they expected something of the recent fall and seem comfortable that the worst is over.
Citigroup and JP Morgan on Supply & Demand
The supply demand balance, is, naturally, also extremely important in determining the prospects for the tanker market’s health in 2005. The JP Morgan report looks for fleet expansion of 19.2 mdwt, or 5.9% capacity growth, in the coming year while Citigroup reports demonstrate comfort with a slightly higher growth number of around 21.5 mdwt, a growth rate of close to 7%. As the orderbook is a known number, discrepancies revolve more around scrapping expectations, largely involving how tanker companies will deal with the new IMO regulations set to come into effect in April of this year. In the demand arena, Citigroup’s Kartsonas expects growth of around 2% as compared to 7% this past year, with OPEC’s one mbpd production cut to reduce tanker demand by as much as 7-8 mdwt with a shift to less long-haul and more short-haul tonnage. OMI’s Robert Bugbee told Tradewinds that he expects demand to be stronger than this, pointing out factors such as China’s intent to build a strategic petroleum reserve that could easily raise demand by one mbpd. Also on the upside, the JP Morgan analysts used IEA forecasts to estimate tanker demand growth of 13.5 mdwt. This discrepancy seems to be largely geographic with respect to oil supply.
Material Gains
Yet another dispute revolves around whether shipping stocks are cheaply or expensively priced. Kartsonas notes their expense relative to historical levels while the JPM analysts note their cheapness relative to many other industries. You can look for yourself at their P/NAV ratings in the “Fair Value” table. As usual, the truth probably lies somewhere in the middle. While the extraordinary spot rates witnessed in the past few months may have dissipated, current rates are still comfortably above breakeven levels, which are estimated in the low $30Ks for a typical being above mid-cycle and even comparable to annual highs in more typical years as shown in “Rate Comparison” chart. Not only that, but this past boom has seen shipping companies increase transparency, modernize their accounting practices and begin to access whole new pools of capital, all of which contribute to lowering their cost of capital and increasing the opportunities for financing available to owners and operators.
The tanker companies are now seeing that not all their new supporters will stick around when the fad passes, but they have undoubtedly succeeded in raising their profile and increasing the breadth of their long-term support base. Just as importantly, the companies are continuing to demonstrate strong performance, in a far more sustainable fashion than before, and, as the JP Morgan trio pointed out, they offer the potential for share buybacks, dividend increases and consolidation.
Trust Us: The NYSE and Shipping Boards of Directors
By Matt McCleery with Nora Huvane, Marine Money Research
“‘Business Ethics’ does not have to be an oxymoron.”
Gretchen Morgenson, The New York Times
The bad news is that a crisis of confidence in Wall Street threatens the health of the global capital markets for years to come. Investors have lost faith in everything from analyst recommendations to audited financial statements to the credibility of company officers and directors. The damage could be huge. As we go to press, economic indicators tell us the United States economy is in a strong recovery but the stock market indices are steadily sinking to levels not seen in months. Poor valuations have halted capital formation, which has halted revenue growth and earnings. But the good news, at least for Marine Money readers, is that ship finance may benefit from it.
From opaque and off balance sheet energy trading at Enron to immature Internet technology, most of the flame-outs that have brought about the current market malaise have resulted from investors being unable to adequately understand the businesses they financed. Corporate deception was often enabled by investor inability to identify it.
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