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Scorpio on a Roll – Enters into a New Credit Facility, Files Shelf, Orders Ships and Executes Follow-on
Earlier this month, we reported on Scorpio Tankers Inc.’s new $150 million credit facility and filing of a shelf registration to issue up to $500 million of securities. Last week, they put these to good use. With sole bookrunner Morgan Stanley and co-managers, Dahlman Rose, Evercore and Fearnley Fonds, the company sold 6 million shares in a successful follow-on offering, which was upsized from the originally intended 5.5 million shares due to strong demand. The shares were priced at $10.50, a discount of 6.67% from the closing price prior to the announcement. The shares closed the next day at $10.75 with 1.065 million shares traded versus average volume of 88.8 thousand shares. Subsequently, the underwriters exercised their over-allotment option to purchase an additional 900 thousand shares, bringing total net proceeds to approximately $68.4 million. Details of the offering are shown below in the Guts of the Deal.
Pacific Drilling’s $500 Million Private Placement
Pacific Drilling S.A. announced last week its intention to offer 50,000,000 common shares in a private placement to qualified investors. The share price is expected to range between $9.20 and $10.50, raising proceeds of approximately $500 million. The proceeds of the offering will be used to finance the Pacific Khamsin and Pacific Sharav, two new advanced capability, ultra-deepwater drillships which were contracted this month at Samsung Heavy Industries (“SHI”) for delivery in the 2nd and 3rd quarter of 2013 respectively. Similar to the four drillships previously ordered at the yard, the latest new orders are capable of drilling in water depths of 12,000 feet to a depth of 40,000 feet. The aggregate contract price for the two rigs is $1 billion, with the total cost of each vessel, including commissioning and testing and other costs, to be approximately $600 million, excluding capitalized interest.
Aker Drilling’s Makeover in Three Steps
Parent company, Aker ASA, intends to recapitalize and reintroduce its subsidiary, Aker Drilling ASA, after a 3 year hiatus, to the Oslo Stock Exchange after carrying the company through the start-up phase and establishing a solid base for its future growth. In 2009, the company took delivery of two new 6th generation harsh environment UDW H6e semi-submersible drilling rigs, the Aker Spitsbergen and the Aker Barents, both of which are on long-term contracts. The Aker Spitsbergen is on contract with Statoil through July 2013, with the operator having 5×2 year options. The contract has a remaining value of $480 million over the remaining fixed term. Fixed by Det norske Oljeselskap (“DNO”), the Aker Barents is on contract through July 2014 with DNO having 1×2 year option. The remaining firm value of that contract is $730 million. With both rigs in operation, revenue of $1 million per day is generated with daily EBITDA of $600 thousand.
Name Change Needed – DRYS Goes Wet
It should come as no surprise that George Economou’s DryShips was in the news. First, there was the announcement that the private placement of shares in Ocean Rig UDW was successfully closed with total gross proceeds of $500 million raised. Not only was it a success from the perspective of the capital raise, the company achieved a superior market valuation, both in terms of the rigs themselves as well as in relation to its peers, according to Scott Burk of Oppenheimer. But perhaps more importantly, the company now has a balance sheet which is self-sustaining.
This news was immediately followed by the company’s announcement that the Board of Directors had approved a share purchase program for up to $25 million of common stock of Ocean Rig for the first quarter of 2011. The maximum share purchase price is capped at $17.50, the offering price of the shares.
But why stop there? In furtherance of its diversification strategy, the company announced that it had entered into agreements with Samsung to purchase twelve high specification newbuilding tankers at a cost of $770 million. The order consists of six Aframax tankers, of which four will deliver in 2011 and two in 2012, and six Suezmax tankers, of which one will deliver in 2011, two in 2012 and three in 2013. Given the delivery dates involved, the majority of these were clearly re-sales, which is further affirmed by the favorable payment terms of approximately 70% of the contract price per vessel due at delivery. On the other hand, as Erik Nikolai Stavseth of Arctic Securities points out Samsung is involved in the construction of its drillships and the tanker order must be viewed in the context of the total relationship with the shipyard. The company has paid in $120 million from its cash as the down payment on the tankers and intends to finance the balance from cash on hand and bank debt. Ultimately, the intention is to position the company for a spin-off or IPO.
The deal has engendered much discussion among the analysts, particularly with respect to the price paid and the original contracting party. DryShips tried to head off discussion of the former by describing the vessels as having high specification and over $3 million in extras per vessel. Nevertheless, Pareto, Oppenheimer and Morgan Stanley suggest that the company paid a premium of $11 million, $38 million and $50 million respectively for the entire package based upon their analyses. The bigger question arose when the observant analysts noted that Mr. Economou’s private company, Cardiff Marine, had a similar order in place, raising the question as to whether the vessels were in fact purchased from Cardiff or were purchased directly from Samsung. Management made it clear that the transaction was done directly with the shipyard.
While speculation on such a move initially centered on containers, DryShips’ need to resolve Ocean Rig’s financing and the speedy recovery in the container space foreclosed that opportunity. While near-term prospects for tankers do not look bright, most analysts believe, as does Mr. Economou, in an improving medium and long-term outlook. In the interim, DryShips is a diversified holding company with interests in dry bulk, crude oil tankers and offshore drilling.
Why We Like Norwegian Bonds
We are outspoken in our belief in the importance of the Norwegian bond market, which has become a major alternative funding source, filling in the gaps left by the impact of the financial crisis on the banks and traditional lenders. But who better to tell the story then the Norwegians themselves, as they did at our recent New York conference.
Pareto’s Niels Lyng-Olsen provided a broad overview of the market in his excellent presentation. Looking at the broad market, Mr. Lyng-Olsen noted that the high yield markets, in general, are active with record issuance volumes and decreasing yields. In our world, the traditional banks continue to be constrained, with respect to new lending, making the bond market an important and attractive alternative source of refinancing and capex funding for the shipping and offshore sectors. The dichotomy between the two markets is clearly evident in the following two slides (from Pareto’s presentation) which illustrate the return of bond yields to pre-financial crisis levels, while the cost of bank funding remains high.
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At Long Last, the Spin-off (Partial and Private) of Ocean Rig
After announcing the successful completion of its $350 million ATM offering on Friday, DryShips announced that its wholly owned subsidiary, Ocean Rig UDW, intends to offer through a private placement approximately $500 million worth of Ocean Rig’s common shares in exchange for a 20% to 22% stake. The transaction has an extremely short time-line with the deal expected to close this month. The offering will be made to Norwegian private investors, and other qualified investors outside of the U.S. In addition there will be a concurrent private placement in the U.S. under 144A to qualified institutional buyers. Nevertheless, based upon the choice of managers, DnB NOR, Fearnley Fonds and Pareto, and the tight time frame, we expect the focus to largely be in Norway, where the “offshore” is part of investors’ DNA. The net proceeds of the offering are expected to be used to finance the construction costs of the four drillships under construction in Samsung, to exercise the recently announced options to construct a further four UDW drillships, and general corporate purposes.
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It’s Cold Outside, But the Money Is Hot – A Walk Around Another Financial Center
It is a very short walk between Aker Brygge, Haakon VII’s Gate and Dronning Mauds Gate. Yet the compactness of the area should not dissuade you of the importance of this area. With one noticeable exception, Nordea Bank, it is the center of ship finance in Norway and Nordea has solved the problem of being an outsider by establishing unofficial satellite offices in the Theatercafeen and Dagligstuen depending on the time of day. By definition, Oslo is the center of the Norwegian bond market which lately seems to be single handedly financing the offshore business, but just as importantly it is home to two major Western shipping banks, the previously mentioned Nordea Bank and DnB NOR who more often than not lead the syndicated loan league tables, in addition to having leading capital market roles.
“The Market Is Hot” – The Theme of Yield Continues
While the action in bonds this week continued in Norway, New York joined the fray with Ship Finance’s latest offering. The beauty of Norway’s market is its speed and simplicity but Wall Street is the place for longer tenor dollar denominated deals such as Ship Finance’s ten year senior unsecured offering.
DOF Subsea Finalizes
Earlier this month, DOF Subsea tested investor appetite by circulating a preliminary term sheet for a senior unsecured open bond issue, which we covered in detail in our October 7th issue. The company was looking to raise a minimum of NOK 650 million and closed the books when offers of NOK 750 million were received.
Testing the Waters – Preliminary Marketing of DOF Subsea Bond Issue
With joint managers, Arctic Securities, First Securities, Nordea and Pareto leading the process, DOF Subsea, which is indirectly owned by DOF ASA (51%) and energy focused private equity firm, First Reserve (49%), began marketing a senior unsecured bond issue consisting of floating and fixed rate tranches. Indicative terms for the offering assume a maximum amount of NOK 1,000 million with a minimum of NOK 650 million with a tenor of 3.5 years. Pricing on the FRN is proposed at 3-month NIBOR + 650 to 700 bps with the coupon on the fixed rate at 9.80% to 10.30%. Proceeds will be used to refinance the NOK 500 million outstanding under DOFSUB01 due March 2011 with the excess for general corporate purposes. The Guts of the Deal for this transaction also contained herein provides a closer look at the terms.
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