FM understands that Genco executives made their presentation to the sales force at Joint Bookrunner Morgan Stanley today in preparation for the start of their roadshow on Monday.

The firm is certainly in the middle of the action these days. Morgan Stanley is also a Joint Bookrunner with Citigroup on the Quintana deal, which is currently on the road, with the New York investor launch and pricing expected next Thursday. However, since Jefferies is the lead manager of the Genco deal, the sales force at Morgan Stanley will not be playing as central a role in that deal as they are in the Quintana deal.

In the light of the fact that at least 3 IPOs (Quintana, Genco and Wexford/Cavan) will be coming to market before the equity community goes on holiday in August, and another 5 have been completed recently, we thought it would be interesting to take a look at the valuations of these deals at the time of issue to see what, if anything, we could conclude about valuation trends and investor preferences.

As you can see from the deals in Figure 1, which are presented in reverse chronological order, it is very difficult to compare shipping deals to each other in a true “apples to apples” way. Some fleets are focused on a certain sector while others are diversified, some are new while others are older, some are exposed to the spot market while others have term time charter coverage, some companies charter-in tonnage while others prefer to own their ships – some pay hefty dividends while others conserve their capital for further growth and fleet replacement.

At the risk of being overly simplistic, if companies want to have any chance of pricing their deal at a high premium to net asset value, then they have to demand that value from investors. What we have seen in recent deals is that investors are now in discount mode and will likely put in limit orders at 10% or more off the bottom end of the price range. Although this led to a disastrous result for Capital Shipping last week, which had set its initial range at a reasonable level, it did not have a major impact on Eagle, which set its initial range very high. And the winner in this category is DryShips. In looking at why this company was able to achieve nearly 2x all-time high net asset values, it is clear that momentum played a role. In the world of IPOs, in which many investors buy deals simply to flip them for a quick profit, buyers do not care if they overpay so long as someone else will over pay more once the deal starts trading. The same was true of Arlington, which priced at 120% of net asset value, but did so with under the market charters, which would have effectively reduced their cash flow generation power.

In looking at this metric, it is clear that two of the highest valuations, Aries and Arlington, went to the companies with the longest term employment of their vessels. Diana, boasting the highest cash flow valuation, also had what would qualify at the time as long-term contract cover, though as the market has come down this approach has come more into vogue. The lowest valuation, on the other hand, went to TBS and DryShips, which do not place any emphasis on long-term contracts. Another factor here is that this latter pair of companies also has the oldest vessels which also trade at the lowest multiples to cash flow because of the diminished productive life of their assets.

And, finally, with respect to dividends, it is unclear whether investors are really paying up for them when those dividends are not backed up by long-term underlying contracts. What is clear, however, is that when it comes to IPOs investors like to buy into markets that have positive momentum and the chance for a quick profit.

Evangelos Marinakis had the world of shipping and capital markets contemplating and strategizing after Capital Maritime’s decision to withdraw its 16.7 million share IPO during pricing on Monday night. Goldman led the deal, while Bear Stearns and Jefferies played supporting roles as co-managers. With deals for Genco, Quintana, Wexford, and others confidentially filed by foreign issuers in the process of coming to market, Capital’s decision to pull has been a reality check for both issuers and underwriters that valuations are coming under increasing pressure with every new deal that comes to market, irrespective of the quality of the fleet and corporate structure.

Ironically, the factors that most influenced the pulling of this deal were determined before the company jumped on the first private jet out of Teterboro: the price range and the corporate structure.  As we understand it, a solid group of blue chip institutional investors liked the Capital deal, especially in light of the fundamentals for the product tankers that Capital has on order. However, they became very focused on the price relative to the range.

Unlike Eagle, which went to market at about 180% of net asset value and therefore had a lot of room to negotiate with investors, Capital was boxed in from the start. Goldman advised the company to put a very reasonable price on the cover of the red herring at $14-$16 (5.3x-5.8x EBITDA), hoping that investors would place enough market orders (which do not specify the price) to push the stock to the high end of the range or above it.

Unfortunately, since investors recently had their way with Aries, TBS and Eagle, they put in limit orders (which state a firm price) at $13 – or $2 below the range. The problem was that with a net asset value of about $15/share, Capital had little room to be negotiated down. This inflexibility was compounded by the fact that Evangelos Marinakis put his entire family fleet and management company into the public vehicle, making the impact of a dilutive deal even greater.

Yield deals like Diana, Aries and Eagle were able to tap an investor community that focuses on valuations such as Price/EBITDA and dividend yield. However, Capital had much of its net worth in newbuilding contracts (which produce negative cash flow until the ships deliver) and therefore put the company squarely into the world of value – net asset value in this case – which allowed investors to feel they possessed the upper hand. This is not a new phenomenon; TEN has also struggled to have its fantastic newbuilding program assigned a fair value.

As superficial and shallow as it sounds, valuing the Capital fleet may have been more time consuming for investors than expected. As of June 3, 2005, the company’s existing fleet was comprised of 39 vessels of which twenty-six are product tankers, four are OBOs and nine are bulk carriers. In addition, Capital currently has 16 Ice Class 1A MR product tanker newbuildings on firm order, which are scheduled for delivery in January 2006 through November 2007. These tanker newbuildings have an aggregate carrying capacity of 665,500 deadweight tons and currently comprise the largest fleet of this type and size on order in the world. As sad as it sounds, valuing Capital’s fleet, which has a wide range of ages and types, may have required more of a commitment than the average value investor wanted to make.

Like many good deals, the sellers didn’t need the money, and indeed may have been disgusted by the way future partners valued the company after the efforts made to construct a first class investment opportunity. All in all, this was a good deal and it is a disappointment that it didn’t get completed. In the end, we think it is the investors who have lost out here. Although every deal seems to influence the next one, we do not think the pulling of this deal will have a major impact on future shipping IPOs – so long as issuers go into the market with reasonable expectations. The fact remains that at today’s high net asset values, issuing a minority interest in equity at even a slight premium is a very attractive proposition.

Evangelos Marinakis had the world of shipping and capital markets contemplating and strategizing after Capital Maritime’s decision to withdraw its 16.7 million share IPO during pricing on Monday night. Goldman led the deal while Bear Stearns and Jefferies played supporting roles as co-managers. With deals for Genco, Quintana, Wexford, and others confidentially filed by foreign issuers in the process of coming to market, Capital’s decision to pull has been a reality check for both issuers and underwriters that valuations are coming under increasing pressure with every new deal that comes to market, irrespective of the quality of the fleet and corporate structure.

Ironically, the factors that most influenced the pulling of this deal were determined before the company jumped on the first private jet out of Teterboro: the price range and the corporate structure.  As we understand it, a solid group of blue chip institutional investors liked the Capital deal, especially in light of the fundamentals for the product tankers that Capital has on order. However, they became very focused on the price relative to the range.

Unlike Eagle, which went to market at about 180% of net asset value and therefore had a lot of room to negotiate with investors, Capital was boxed in from the start. Goldman advised the company to put a very reasonable price on the cover of the red herring at $14-$16 (5.3x-5.8x EBITDA), hoping that investors would place enough market orders (which do not specify the price) to push the stock to the high end of the range or above it.

Unfortunately, since investors recently had their way with Aries, TBS and Eagle, they put in limit orders (which state a firm price) at $13 – or $2 below the range. The problem was that with a net asset value of about $15/share, Capital had little room to be negotiated down. This inflexibility was compounded by the fact that Evangelos Marinakis put his entire family fleet and management company into the public vehicle, making the impact of a dilutive deal even greater.

Yield deals like Diana, Aries and Eagle were able to tap an investor community that focuses on valuations such as Price/EBITDA and dividend yield. However, Capital had much of its net worth in newbuilding contracts (which produce negative cash flow until the ships deliver) and therefore put the company squarely into the world of value – net asset value in this case – which allowed investors to feel they possessed the upper hand. This is not a new phenomenon; TEN has also struggled to have its fantastic newbuilding program assigned a fair value.

As superficial and shallow as it sounds, valuing the Capital fleet may have been more time consuming for investors than expected. As of June 3, 2005, the company’s existing fleet was comprised of 39 vessels of which twenty-six are product tankers, four are OBOs and nine are bulk carriers. In addition, Capital currently has 16 Ice Class 1A MR product tanker newbuildings on firm order, which are scheduled for delivery in January 2006 through November 2007. These tanker newbuildings have an aggregate carrying capacity of 665,500 deadweight tons and currently comprise the largest fleet of this type and size on order in the world. As sad as it sounds, valuing Capital’s fleet, which has a wide range of ages and types, may have required more of a commitment than the average value investor wanted to make.

Like many good deals, the sellers didn’t need the money, and indeed may have been disgusted by the way future partners valued the company after the efforts made to construct a first class investment opportunity. All in all, this was a good deal and it is a disappointment that it didn’t get completed. In the end, we think it is the investors who have lost out here. Although every deal seems to influence the next one, we do not think the pulling of this deal will have a major impact on future shipping IPOs – so long as issuers go into the market with reasonable expectations. The fact remains that at today’s high net asset values, issuing a minority interest in equity at even a slight premium is a very attractive proposition.

There is loads of chatter in the market these days about the fact that sharp declines we have seen in the BIFFEX are a pure repeat of what we’ve seen in previous years. The subject is particularly relevant for the many dry cargo companies, such as Wexford, Genco Shipping, Quintana, TBS and Eagle, that are planning to do IPOs in the coming months and would benefit from the dry markets regaining lost momentum.

As you can see from the accompanying graph, the decline in the Baltic Freight Index has been a seasonable phenomenon for the last couple of years. The question is when the market will come back. If this year is like 2003, the market will not come up until September, but if this year is like 2004, the market should start to turn back up in mid June.

Such bullish sentiment has been echoed through the market in recent weeks. At the Macquarie Metals & Mining conference in Beijing, the “overwhelming message from all the speakers so far is that underlying growth is still firm and there is minimal risk that government initiatives will lead to an imminent slow down.” Macquarie’s equities research also noted that “The current soft patch is simple inventory adjustment that may take a few months and impact some spot prices, but the overall dynamics of shortages remains unchanged.”

Of course, not everyone shares this view, which is what makes the market a market. Philippe van den Abeele, managing director Clarkson Securities, told the Bimco meeting in Copenhagen today, “If panamaxes go below $20,000 per day in the next two to three weeks, then I fear we can kiss the bull market goodbye.”

Analysts at Morgan Stanley, which also is serving as joint bookrunning manager on the Quintana deal, Mark MacLean, Ole Slorer and Akshay Soni issued what is probably this week’s most comprehensive outlook on world shipping with their commodity shipping industry report. In this report, the analysts addressed with healthy confidence concerns that have been piqued this week about both the tanker and the dry bulk sectors. Even while recently the dry bulk market has taken a turn for the worse and such experts as John Kartsonas of Citigroup Smith Barney have advised against investing in tanker stocks, the Morgan Stanley reports explains smoothly that the “world has been gripped in a mild China panic over recent weeks.” It goes on to say that, “the dry bulk market is pointing to some minor weakness, albeit from very high levels, and appears to reflect a degree of seasonality.”

While they note that the “global economy appears fragile” and that capesize dry bulk rates in particular are showing notable weakness, they attribute the rate change more to seasonal factors and note that chartering rates and chemical shipping rates “have remained surprisingly firm.” The analysts expect that the global economy and the closely linked global shipping industry may be slowing down, but show no signs of collapse. While rating the entire shipping sector as “In Line” with other sectors, MacLean, Slorer and Soni do view the sector as “modestly undervalued, with near term fundamentals pointing to a classic seasonal upturn.” They believe that “strong global incremental oil demand of 4 mbpd over the next two years coupled with a tight refinery market supporting continued increases in cross trade should ensure a continued tight and volatile tanker market while the combination of port congestion and a continued strong Chinese economy should support the dry bulk market.”