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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Marine Money Capital Market League Tables

Deutsche, Morgan Stanley, DnB NOR, JP Morgan, Pareto and Citi Top League tables from Busy start of the year

By almost every measure, the start of 2010 has been a good one for those working in the capital markets for shipping. Over $2 billion has been raised in the US public equities markets, while in excess of $2 billion has been raised in the Western public debt markets.  What is more another $2 billion in shelf registrations have been filed, with many additional projects at various stages of development.

Part of the story for the first part of 2010 has to be shipping’s remarkable ability to have avoided the catastrophic meltdown so many predicted.  But, perhaps, an even more dramatic story has been the sure arrival of the influence of the public shipping company, with its nearly instant access to capital with which to take advantage of opportunity.

Marine Money’s recent survey of the bank and investment banking communities (see the May issue of Marine Money published shortly for more details) showed that by a wide majority public companies currently do and would continue to enjoy greater access to funding, and therefore a competitive advantage.
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Silence Is Golden

It’s Wednesday, as we write this, and for the first time we can remember in months it’s been a quiet week in terms of transactions. We took the opportunity of a free moment to meet with Mark Friedman and Hugh Baker of Evercore Partners. Our agenda was twofold: we wanted to understand how Evercore is positioning itself in the competitive landscape of investment banking and to engage in a post-mortem of the recent shipping equity offerings to better understand why some have succeeded while others struggled.

Evercore is different. It is obvious when you walk into their offices, which are quieter than a library should be. There is no trading floor. This is about advisory work in the old style, built on relationships and trust. Like all bankers, they are client-centric, but with a difference. Lacking distribution, they are less driven by the constant need to feed securities through a distribution network. Instead, they are focused on long-term relationships and providing the highest quality advice with respect to their clients’ strategic needs.
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OSG Goes the High Yield Route

Following its recent equity offering, OSG announced on Monday its plans to issue $300 million of unsecured senior notes due in 2018. Proceeds will be used to pay down the balance on the company’s $1.8 billion senior revolver due in February 2013 that bears interest at LIBOR + 70 bps. As of year-end, the revolver balance was $654 million and under its terms the facility steps down $150 million annually in 2011 and 2012 before the final maturity in 2013.
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Memories and a Miscalculation

The Good News
We wonder whether in preparing his keynote address for our Hamburg conference entitled Memories, a view of what happened to and where the industry is heading, Mr. Arntzen had a memory of his own and thought, “Wasn’t there a time when OSG accessed the capital markets?” Seizing on the thought and the opportunity, Mr. Arntzen jumped on the Lexington Avenue Express and headed down to Wall Street to arrange a follow-on offering of OSG’s shares. Given the high repute and credit standing of his company, Mr. Arntzen knew the investment banks were hungry and would compete heavily for his deal. There was no need for an overnight or marketed transaction so he simply arranged an auction among the banks (more than 5 but less than 10) for 3.5 million of OSG shares.
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Shareholder Activism

Last December, we wrote about MMI Investments L.P.’s investment in DHT Maritime. At that time this activist shareholder had purchased approximately 3.95 million shares, representing approximately 8.1% of the outstanding shares for $15.6 million.  At the conclusion of our article, we presciently suggested that the company should soon expect a call. This week, with its ownership stake increased to 4.325 million shares now representing 8.9%, MMI fired its broadside.

We have always believed that criticism should always welcome as long as it is given constructively and thoughtfully. Second-guessing from the cheap seats in our estimation is at best unproductive and at worst detrimental to the party it is directed at. In this light, we believe in the role played by shareholder activists, but often wish it were directed in a positive constructive manner in the long-term interests of the shareholders as opposed to an attempt to hike the share price for a quick and profitable exit. We cannot paint all activists with the same brush but do distinguish a Calpers from a Carl Icahn. And in the same vain, there is both good and bad management, necessitating a role for these activists. For the moment, we will withhold our judgment of MMI but their first run at DHT leaves us decidedly unimpressed.
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ECA to the Rescue

Undeniably, export credit agencies (“ECAs”) has played an important role in satisfying part of the financing gap needed by the shipping industry. In China, China Exim Bank plays an instrumental role in supporting the maritime industry, having granted shipping/shipbuilding related loans of over RMB 102.5 billion (USD 15 billion) in the domestic currency and USD 7.45 billion in greenback at the end of 2008. In 2009, the policy bank extended a USD 389 million, 12 year secured facility to New York listed Overseas Shipholding Group (“OSG”), in its first ever loan facility to a US company. It would be nearly impossible to secure a 12 year ship finance loan today, let alone this quantum from a single financial institution. Continue Reading

Oppenheimer’s 4th

We had the pleasure of attending Oppenheimer’s 4th Annual Industrials Conference this week. Reflecting difficult and uncertain markets, the tone was muted and at least at the open presentations interest has seemingly flagged. Like the owners waiting for the perfect distressed deal, investors, too, seem to be circling and asking the difficult questions. Can you maintain your dividend? How low will asset values fall and so on? We wouldn’t call it bearish but it was certainly circumspect. Here are some of our takeaways. As always we leave the analysts to do the heavy lifting on the numbers.

The early morning slot went to Capital Product Partners LP with Iannis Lazaridis presenting the company. Despite the continued deterioration in the product markets, CPLP’s strategy of long-term employment continues to pay-off with 3rd quarter results in line with expectations. Distributable income was down due to lower revenues from a lack of profit sharing and higher interest costs attributable to the increased margin agreed in the recent loan amendment.

However, the company now has to face the difficult market with eight vessels coming off hire in 2010. MR spot market rates are at the lowest level in 20 years and consequently period activity is reduced.

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Back in the Saddle

After what we perceived to be a long absence, we were pleased to see the return of Justin Yagerman at his new desk in Deutsche Bank. Mr. Yagerman leads the transportation and shipping team that includes Robert Salmon and Michael Webber. Coverage includes trucking, airfreight, logistics, railroads and, of course shipping.

On Wednesday, Mr. Yagerman initiated coverage of the sector. His main takeaway on shipping was: “near-term fundamentals challenging across the board, but high quality names should continue to outperform.”

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The China Story

The hammering and digging begin at sunrise and last well beyond sunset. Beneath the dust and dirt, Shanghai is making ready for its quest to become an international financial centre and shipping hub by 2020. Gazing at the iconic view of the Bund and the Pudong skyline across the Huangpu River, it is not hard to understand why Shanghai is a natural choice as a maritime hub. Ideally located on China’s east coast and the major East West trade routes, Shanghai serves as a major transportation hub for the Yangtze River Delta and is China’s most important gateway for foreign trade. Marine Money trotted to this magnificent city last week to understand the current challenges faced by the Chinese shipping community.

Much has been written in the press on the central government’s aggressive support for the shipyards, highlighting concerns that the excessive state financial intervention could endanger the commercial viability of many ocean shipping companies going forward. The government is well aware of the problem of overcapacity in the shipping sector, but at the same time, it simply cannot allow her core shipyards to fail. The economic and social costs will be too overwhelming to manage. But if we take a closer look, many measures introduced by the central government in reality are largely tailored for the more established shipyards and very few financial incentives have been rolled out for either the small and medium local shipowners or the smaller shipyards. Continue Reading