A Sizeable Deal and the Power of the Press – Euronav Facility

It should come as no surprise that while the banks continue to be active, there still remains uncertainty. The banks seem to have capacity but the shipping markets are not cooperating and continued deterioration will continue to make things difficult.  We were reminded of DnB Nor’s Harald Serck-Hansens’s comments at his bank’s conference earlier this year where he highlighted this possibility and encouraged owners to tap the market while they can.

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Leveling the Playing Field

In the world of shipping, the Jones Act, like Rodney Dangerfield, gets no respect. It is only of interest to the parties involved, not many, and like most protected trades it is at best a political minefield. In political speak, participants in the trade are compensated for the higher costs of construction and labor in the U.S. in order to maintain a fleet of merchant vessels for our defense. The political reality however is that it is in fact a jobs program. And there is nothing wrong with that, except for the burden the inefficiencies put on the taxpayer. As a self-contained system it works. But what of the player, who operates both in the Jones Act and internationally.

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The “Company Men”

By Robert Kunkel

Though many of us have experienced final scrap voyages to Alang as a result of age, overcapacity or falling freight markets, few have witnessed an actual newbuilding auctioned before the hull ever had a chance to taste saltwater.  We had that opportunity last week in New Orleans and Alabama as the machinery, steel, partially completed modules and equipment for hulls 104 and 105 of the bankrupt American Heavy Lift virtual shipbuilding project were put on the blocks by liquidators Hilco Industrial and Myron Bowling Auctioneers.

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Pareto and Odin Products Confab

Last week, Pareto Securities and Odin Group hosted a seminar on the product market and the news was generally good. In the introductory presentation on the market, Pareto’s Martin Korsvold, highlighted the “Positive Delta”, the fact that rates are at an historic low levels and upside is likely as market balance recovers. This outlook is supported by:
•    A manageable orderbook compared to other shipping sectors
•    Demand to outstrip supply going forward
•    The larger trend of more oil being refined closer to production areas
•    Limited investor knowledge of products compared to crude shipping, thereby creating opportunities
•    Oil demand trend gives a bullish backdrop as the oil market has tightened significantly in 2010 driven by strong demand growth, as evidenced by declining inventories.
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A Look at the Numbers – “You got to know when to hold ‘em, know when to fold ‘em”

By George Weltman

One does not often hear public companies these days speaking about going private. And why should they? In today’s world of limited bank lending, access to capital is paramount, with liquidity a close second. The world has changed immeasurably from the past when public shipping companies worried about the lack of recognition or respect that their shares received, what perhaps could be called the Rodney Dangerfield syndrome.

Years ago, shipping shares were on no one’s radar and China had yet been admitted to the WTO. Other than OSG, TK and NATS among others in the U.S., shipping shares were mainly traded on international exchanges, where shipping held some importance.
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Leveling the Playing Field

In the world of shipping, the Jones Act, like Rodney Dangerfield, gets no respect. It is only of interest to the parties involved, not many, and like most protected trades it is at best a political minefield. In political speak, participants in the trade are compensated for the higher costs of construction and labor in the U.S. in order to maintain a fleet of merchant vessels for our defense. The political reality however is that it is in fact a jobs program. And there is nothing wrong with that, except for the burden the inefficiencies put on the taxpayer. As a self-contained system it works. But what of the player, who operates both in the Jones Act and internationally.

Unlike the rest of the international shipping community, OSG pays taxes. It is the price it pays for being a U.S citizen, a requirement to participate in the Jones Act. This makes the company less competitive and therefore focused on managing this cost. On the domestic side, they have minimized taxes by electing to be taxed under the new tonnage tax rather than the corporate income tax regime. More challenging is foreign source income, which is a regular target of the revenuers. Historically, so long as the earnings from shipping operations of the company’s foreign subsidiaries are invested abroad and not repatriated they are not subject to tax. Today, all foreign earnings of U.S. corporations are a high profile target of the current administration. However, unlike other industry segments, the maritime unions have supported deferral of the foreign source earnings of US shipping companies because they recognize that this would better enable US companies, such as OSG, to invest in the US business while maintaining the international competitiveness of their foreign flag business. So when OSG asked for support for deferral from the main maritime unions, it was not surprising that they agreed to do so, after all OSG is the sector leader and one of two who have actually contracted and built new vessels in major fleet renewal programs ensuring shipyard and sea jobs. With the assimilation of OSG America back into OSG, Mr. Arntzen is a committed man and we have no doubt he will succeed in his efforts to position his Jones Act and international fleets competitively.

No Hype. We Delivered!

Our Chairman’s promotions are sheer artistry and we constantly marvel at these masterful gems. Of course, there are issues with punctuation but why let that get in the way of a great pitch. The amazing thing is that despite his protests otherwise, he really does get it. Our problem is that he is rubbing off on us and we are moving from analytical and objective to the dark side where it’s all about the love as both Matt and he are fond of saying. In the case of this year’s Marine Money week, there is no doubt we got it right. The numbers speak for themselves. This year we went out on a limb denoting the theme as the Comeback or Confidence Returns to Ship Finance. Whether or not that was the case and we believe it is, 1,078 registered guest wanted to hear the answer. This was a new record surpassing 2008’s 1042 guests. Uncertainty + optimism trump a boom.

We relish the awards afternoon. We devote a great deal of energy, although far less than the dealmakers themselves, in choosing the transactions from the many submissions we receive and it is a pleasure to see the winners bask in the recognition they rightfully deserve. It is also educational as the latest structures and ideas are on display for all to see and take advantage of as appropriate. Nigel Thomas and Dan Rodgers of Watson, Farlay & Williams did a masterful job moderating the session which included presentations by Sheldon Goldman, Efthymios Bouloutas of Marfin, Ronny Bjornadal of Nordea, Sean Durkin of NSF, Gerrit Parker of Citi and Craig Fuehrer of Deutsche Bank.
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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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No Pressure Just a Must Deal

General Maritime pulled out all the stops retaining a litany of Wall Street’s bankers to assist in the sale of its common stock needed to complete the financing of five VLCCS and two newbuilding Suezmax tankers from Metrostar. Debt financing is in the process of being arranged, with Nordea and DnB NOR, in the amount of $372 million, representing 60% of the purchase price. The facility is conditioned upon a successful equity offering to make up the remaining balance of $248 million plus any working capital needed. In this period of volatility in the markets, this is no simple deal. Adding further complications was S&P’s recent downgrade of the company’s debt to a B rating. This rating however needs to be put in the context of S&P’s overall view of shipping, which considers Teekay and OSG as BB and BB- rated respectively a few notches above Genmar’s.
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Discretion Is the Better Part of Valor

When it comes to dealing with shareholder activism, management has to quantify the costs as well as the time and energy consumed in its response. In all these respects, it is unlikely that management can win. It is spending money on lawyers and advisors and remains distracted from the day-to-day running of the company. And so at the end of the day, it generally succumbs to the minority shareholder’s gentle coercion, in polite terms, but what is, in essence, blackmail, in order to do what is best for the company or at least move on. A small company, in particular is doomed to this fate.

This is the position DHT Maritime found itself back in March, when MMI, owners of 9.7% of DHT’s outstanding shares, let its feelings about the quality of management and its decisions be known. All would be well, in their mind, if their expert, Bob Cowen, with his 25 years of maritime experience, were to be added to the board and thus a proxy contest ensued. The issue was resolved this week with DHT relenting by agreeing to expand the board from four to five directors and appointing Mr. Cowen to that new seat, which term expires in 2011. In addition, MMI has the right to nominate an additional director at DHT’s 2011 annual meeting for a term expiring in 2014 and DHT has agreed to support that nomination. In exchange, MMI has agreed to a standstill and will not solicit proxies for or participate in a contested election relating to DHT directors or submit any proposals at shareholder meetings through the completion of the 2011 annual meeting. Importantly, should MMI’s shareholding fall under 5% of the issued and outstanding shares as of the date of the agreement, the board seat will be terminated. And finally coming under the guise of adding insult to injury, DHT has indemnified MMI for its fees and expenses incurred with respect to the proxy contest up to $150,000.
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