Eagle Bulk Shipping – All About the Arbitrage

It’s all about the arbitrage these days.

What we mean by this, of course, is the fact that ships have a higher value on Wall Street than they do in the shipping markets – and not surprisingly there is a steady stream of people looking to capture the difference.

For proof of this, one need only to look at our Cash Flow Multiples by Vessel Type valuation table and compare it to the “Fair Value” table showing the valuation of shipping companies that trade on the stock exchange. It depends on the age of the vessels, of course, but on average a shipowner can buy a middle-aged vessel at about 4x cash flow and sell it to Wall Street investors at about 6x cash flow – much more if the company is valued based on its dividend yield.

Here’s where the rubber meets the road: by valuing shipping companies using a multiple of their cash flow generation, issuers of equity can effectively sell their vessels for 1.5-2.0x their value in the sale and purchase market. It is a truly remarkable moment in the evolution of shipping and the capital markets – and not surprisingly the Delta flight between Athens and New York is once again being seen as a direct journey to wealth and early retirement for shipping dealmakers.

A Growing Party – Private Equity Funds Enter

In the early stages of this “multiple expansion” (or “bubble” for cynics) process on Wall Street, issuers of equity were largely financially savvy shipping companies that realized that by selling ships, and leasing them back as Stena did with Arlington Tankers, they could extract the premium value of their ships while at the same time maintain commercial control and chartering “upside.”

However, as we move into year three of the shipping bull market, we are beginning to see private equity funds hire some shipping professionals and form new companies for the purpose of buying ships at 4x cash flow and selling them to Wall Street for 6x cash flow – capturing the arbitrage along the way.

Not surprisingly, most of these private equity investors are focusing on the dry bulk sector where the fundamentals are rosy, and more importantly, the valuations are higher, even in situations with external management companies with older vessels.

There are several deals presently preparing or considering coming to market in which the issuer is a private equity fund, or “sponsor” as they are called, looking to capture the value arbitrage, but the first has finally reached the starting line – a newly-formed entity called Eagle Bulk Shipping owned by a private equity fund in New York called Kelso and comprised of former Credit Suisse investment bankers.

We’d like to take a moment to discuss why this deal has filed. For those readers less familiar with the S.E.C, there are two kinds of registration forms used for equity – the F-1 and the S-1 – the former of which is used by foreign-based filers and the latter by U.S.-based filers. The documents are virtually the same except for one critical difference: foreign filers using form F-1 are permitted to submit their initial prospectus filing confidentially while U.S. filers are not. That is why companies such as TBS Shipping, Horizon Lines and now Eagle Bulk Shipping have documents accessible to the public while foreign filers such as DryShips and Diana do not have their registration statements made public until they have finished with the SEC comment period and are ready to print red herrings and go out on the road. But we digress…

The first financial sponsor deal, Eagle Bulk, is hoping to raise up to $250 million through a listing on the Nasdaq under the ticker symbol EGLE. Start-up companies use the NASDAQ because it does not have the same requirements for previous years of existence and profitability that the NYSE imposes. Joint bookrunners on the deal are UBS Investment Bank and Bear, Stearns & Co. – a pair of that seems to have either officially or unofficially teamed up to underwrite shipping deals. Legal advice is being provided by Simpson, Thacher & Bartlett for the underwriter and Seward & Kissel for the issuer.

What is unique about this IPO is that the company did not actually own any vessels at the time it filed its S-1 with the SEC. A quick look at the balance sheet shows that virtually all of the company’s net worth is associated with the deposits paid to secure vessels delivering in April to June 2005. We’re sure that some of the vessels have been delivered by now and there is nothing inherently wrong with this, but it is clear that the issuer has been formed for the express purpose of the IPO.

Although we will refrain from getting into valuation issues, Eagle’s fleet will consist of 11 modern handymax dry bulk vessels, nine of which have been acquired and two of which are to be delivered in June 2005, as shown in the accompanying chart. The vessels range in size from 40,000 to 60,000 dwt and have an average age of six years, as compared to the global handymax fleet average age of 15 years. In a small industry where nothing is secret, management did a good job hiding their purchases from the market and industry publications such as Tradewinds. It is still true that if the sellers know you have plans or money, the price goes up.

Management

The management team is lead by 39-year old Sophocles Zoullas, and Alan Ginsberg, a former editor of Marine Money, will serve as CFO. The rest of the directors are drawn from private equity fund Kelso, which is sponsoring the deal, and Norlands Shipping. This team will focus on strategic and commercial management, while technical management will be done by V. Ships.

The company’s pitch is that by focusing on handymax dry bulk vessels, they will have advantages that include reduced volatility in charter rates, a smaller newbuilding orderbook, increased operating flexibility, the ability to access more ports, the ability to carry a more diverse range of cargoes, and a broader customer base.

Strategy: Buy With Debt, Backfill with Equity

There’s a whiff of Diana Shipping and Nordic American to the Eagle deal, thanks to the fact that Bear Stearns is involved in all three. The company is planning to use the proceeds of the IPO to paying off existing debt and will enter into a new 10-year $330 million credit facility to refinance other existing debt, acquire additional vessels and fund general corporate purposes. Eagle plans to keep lower than industry average levels of debt. The company has not committed to a specific dividend and will leave the decision to the discretion of the company’s board of directors.

Written by: carisk | Categories: Equity, Freshly Minted | April 7th, 2005 | Add a Comment

Healy & Baillie Makes Key Hire to Expand Capital Markets Practice

Healy & Baillie Makes Key Hire to Expand Capital

Markets Practice

George Economou isn’t the only Greek that came to the U.S. capital markets this week. Leading New York maritime law firm Healy & Baillie announced on Monday that the firm has added public securities law to its practice areas with the arrival of Antonios (Tony) C. Backos as partner. Formerly with the London and New York offices of Weil, Gotshal & Manges, LLP, Mr. Backos “brings to the firm a wealth of experience in public securities law, mergers & acquisitions, private equity, and general corporate work,” stated John Kimball, Chairman of Healy & Baillie.

In our view, the timing could not be better for Healy, and this was a very intelligent move. With more than a dozen shipping deals en route to the capital markets, the law firm will now be able to leverage its existing client relationships by serving as issuer’s counsel on public and private debt and equity deals. The move is an important addition to the work in the market that Seward & Kissel has been doing for many years by giving issuers an option as well as a place to turn when conflicts arise based on previous or current relationships. The fact that Tony is fluent in Greek (and will likely be able to find his way around the Posidonia parties) will also be a great asset to Greek clients interested in exploring or executing a capital markets transaction.

George Economou isn’t the only Greek that came to the U.S. capital markets this week. Leading New York maritime law firm Healy & Baillie announced on Monday that the firm has added public securities law to its practice areas with the arrival of Antonios (Tony) C. Backos as partner. Formerly with the London and New York offices of Weil, Gotshal & Manges, LLP, Mr. Backos “brings to the firm a wealth of experience in public securities law, mergers & acquisitions, private equity, and general corporate work,” stated John Kimball, Chairman of Healy & Baillie.

In our view, the timing could not be better for Healy, and this was a very intelligent move. With more than a dozen shipping deals en route to the capital markets, the law firm will now be able to leverage its existing client relationships by serving as issuer’s counsel on public and private debt and equity deals. The move is an important addition to the work in the market that Seward & Kissel has been doing for many years by giving issuers an option as well as a place to turn when conflicts arise based on previous or current relationships. The fact that Tony is fluent in Greek (and will likely be able to find his way around the Posidonia parties) will also be a great asset to Greek clients interested in exploring or executing a capital markets transaction.

Although Tony has not previously been active in the bulk shipping market, while at Weil Gotshal he was involved with the acquisition by Chiles Offshore Inc. (formerly listed on AMEX) of an oil drilling rig, the merger of GIA2, Inc. with and into Chiles Offshore in 2001, and the Chiles Offshore IPO on the Amex in 2000. He also advised on SEC filings for SEACOR Smit Inc.

Written by: carisk | Categories: Freshly Minted, People & Places | February 3rd, 2005 | Add a Comment

When Listing Companies Have Accidents

It has been an unusually active month for incidents involving vessels owned by shipping companies that are public, related to public companies and planning to go public.

First came the Athos I, a panamax tanker that on November 26th, the Friday after Thanksgiving, struck a submerged object punching two holes in the cargo and ballast tank ultimately releasing a still unknown quantity of crude oil as it was being maneuvered to a dock at the Citgo terminal on the Delaware River in Philadelphia. The incident has already exceeded the $45 million of $1200 per grt liability limit under OPA and many claims have not yet been filed. The ship’s manager was Tsakos Shipping and Trading, a private company controlled by the Tsakos family but completely separate from NYSE-listed TEN.

Next, on December 2nd, a 1998-built panamax bulker named Selendang Ayu lost power while in transit from Tacoma to China with a cargo of soybeans and ended up breaking up on the rocks on the west coast of Unalaska Island. The Coast Guard rescue effort resulted in the loss of six seafarers’ lives. The bow has now sunk while the stern remains aground and salvors are still working to remove diesel and bunkers from the stern. There are confirmed reports that about 40,000 gallons of oil have been lost, though the vessel had about 424,000 gallons on board.

The Selendang Ayu is part of the 14-vessel bulker fleet owned by Global Maritime Ventures (GMV), a joint venture between the Malaysian Government and the Tsao family’s IMC, which has a minority interest and serves as the vessel’s commercial manager. GMV, like Malaysian Bulk Carriers, is a joint venture created through Malaysian Development Bank, Bank Industri & Teknologi Malaysia, and the private sector in an effort to boost the country’s international maritime industry. MBC, which was a joint venture between the Kuok family and the Malaysian Government, went public in 2004.

IMC is planning a massive $400 million equity offering on the Singapore Stock Exchange during the first half of 2005 through lead underwriter Goldman Sachs and BNP Paribas. IMC was previously listed in Hong Kong (primary) and Singapore (secondary) but took the company private in 2002 when investor interest in bulk shipping companies was anemic.

Finally, this week, the 1992 built, 96,000dwt doubled hulled aframax Tsunami, owned by George Economou, collided with a terminal pier on the Mississippi River. The incident has resulted in the spillage of a minor amount of caustic soda but fortunately the three-foot puncture in the vessel did not pierce the inner hull containing the nearly 90,000 tons of cargo and bunkers on board. The Tsunami is not part of the fleet of ships that is being offered to the public beginning next week in an IPO lead underwritten by investment bank Cantor Fitzgerald, but Economou’s connection to the ship is well known.

It has been an unusually active month for incidents involving vessels owned by shipping companies that are public, related to public companies and planning to go public.

First came the Athos I, a panamax tanker that on November 26th, the Friday after Thanksgiving, struck a submerged object punching two holes in the cargo and ballast tank ultimately releasing a still unknown quantity of crude oil as it was being maneuvered to a dock at the Citgo terminal on the Delaware River in Philadelphia. The incident has already exceeded the $45 million of $1200 per grt liability limit under OPA and many claims have not yet been filed. The ship’s manager was Tsakos Shipping and Trading, a private company controlled by the Tsakos family but completely separate from NYSE-listed TEN.

The Selendang Ayu is part of the 14-vessel bulker fleet owned by Global Maritime Ventures (GMV), a joint venture between the Malaysian Government and the Tsao family’s IMC, which has a minority interest and serves as the vessel’s commercial manager. GMV, like Malaysian Bulk Carriers, is a joint venture created through Malaysian Development Bank, Bank Industri & Teknologi Malaysia, and the private sector in an effort to boost the country’s international maritime industry. MBC, which was a joint venture between the Kuok family and the Malaysian Government, went public in 2004.

IMC is planning a massive $400 million equity offering on the Singapore Stock Exchange during the first half of 2005 through lead underwriter Goldman Sachs and BNP Paribas. IMC was previously listed in Hong Kong (primary) and Singapore (secondary) but took the company private in 2002 when investor interest in bulk shipping companies was anemic.

Finally, this week, the 1992 built, 96,000dwt doubled hulled aframax Tsunami, owned by George Economou, collided with a terminal pier on the Mississippi River. The incident has resulted in the spillage of a minor amount of caustic soda but fortunately the three-foot puncture in the vessel did not pierce the inner hull containing the nearly 90,000 tons of cargo and bunkers on board. The Tsunami is not part of the fleet of ships that is being offered to the public beginning next week in an IPO lead underwritten by investment bank Cantor Fitzgerald, but Economou’s connection to the ship is well known.

What Ship Accidents Mean to Shipping Investors

What do these kinds of incidents mean to investors in the public or soon to be public companies that own the vessels? The answer from capital markets professionals in New York is clear – very little. To shed light on the potential implications of taking a company public that has the contingent liability of an environmental incident not yet quantified, we asked Glen Oxton, a partner at premier New York maritime law firm Healy and Baillie, John Sinders, Managing Director of leading maritime investment bank Jefferies, and Gary Wolfe, partner at Seward & Kissel, the most active law firm doing securities work on behalf of shipowners, for their views on the subject.

Oxton, Wolfe and Sinders Share Their Views

“For all practical purposes, there really is no issue here,” Oxton said. “Standard P&I coverage for non-tank vessels is $1 billion, and unless the incident has been catastrophic, the settlements and judgments should not reach into the equity value of the listing company,” he added. “Although investors shouldn’t worry that the company will soon be driven into bankruptcy by claims, the one real potential economic repercussion is that the company’s insurance rates will rise because of the loss, but that is likely to be it.”

Gary Wolfe echoed the sentiment; “with the exception of the Exxon Valdez, there has never been an environmental incident resulting from a vessel that has exceeded the then available P&I coverage – not Sea Empress, not Amoco Cadiz, none of them. Besides which, if the company is structured properly, the liability should be contained at the subsidiary vessel owning level. That means that you might lose the vessel, but not the whole fleet in case of an oil spill catastrophe,” Wolfe said.

John Sinders agreed. “It’s really just a marketing issue. Unless an incident brings to light the advanced age of the vessel or fleet or a pattern of poor quality commercial management, it’s really not very meaningful.” When asked how he would handle an accident like the Selendang Ayu, which at worst is only 1/10th of the size of Valdez and may be much less, Sinders said he would pause, but only briefly. “I would encourage a company that plans a listing to wait to go to market until the response community has a feel for the scope of the damage. After that, the company will be judged on the manner in which it responds and this will be clear from their actions. The reality is that although it happens very rarely, ships, like airplanes, sometimes have accidents; it’s how infrequently they occur and how you deal with them that defines a company.”

Written by: carisk | Categories: Freshly Minted, Markets | January 6th, 2005 | Add a Comment