Old Ways Work Best

In what could be a milestone event, Star Bulk last week became the first shipping company to declare a dividend after having suspended it. The company has agreed to pay $0.05 per share, or approximately $2.5 million to its shareholders after receiving lender approval. In giving their consent, the banks took into account the company’s liquidity position, high contract coverage (100% for 2009 and 85% for 2010), low gearing (~44% of equity) and lack of exposure to newbuildings. The current cash position of $70 million covers the remainder of this year’s principal repayments, $23 million, as well as a substantial portion of next year’s ($60 million) with the shortfall being paid out of contracted cash revenues (~$350 million).

While the company took a step beyond traditional Greek ownership by going public, it remained traditional in the sense of avoiding newbuildings and running a middle age fleet. It’s hard to beat old formulas.

Gleanings from Capital Link

Following the CMA, Capital Link held its 3rd Annual Invest in International Shipping Forum at the Metropolitan Club, which was overflowing for much of the day. There were general presentations, panels as well as company presentations. The following were our main takeaways from this forum.

The container sector has been the hardest hit and so we listened with great interest to that panel led by Ken Hoexter of Banc of America Securities-Merrill Lynch. The panelists included Gerry Wang of Seaspan, Aristides Pittas of Euroseas and Dimitiri Andritsoyiannis of Danaos. The collapse of the market is attributable to simple supply and demand. Overbuilding joined with reduced demand resulting from a slowdown in consumer buying. Mr. Wang believes this is a 12 to 18 month problem with 2012 to 2014 being good years. The lines will survive as they exercise self-help by utilizing alliances, like the airlines. Slot sharing is not as effective as filling a single ship instead of having two partially filled. Mr. Andritsoyiannis espoused the certainty that globalization will continue and that the containership is the only way to efficiently move finished goods. Mr. Pittas reminded everyone that it is a cyclical business and the good market will return. He plays the market more than his fellow panelists. He operates his smaller ships on shorter-term charters taking advantage of good markets and laying up vessels when the market is bad. He currently has three ships in lay-up and is relying on his solid balance sheet to get his company through the downturn.

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Opportunity to Bolster the Balance Sheet While Providing an Exit

While simultaneously working with its bankers, Star Bulk was also preparing a shelf registration to issue $250 million in securities, which may include: common shares, preferred shares, debt securities, warrants, purchase contracts and units. In addition, the prospectus provides for a secondary offering by existing shareholders to sell up to 14.3 million shares and 1.1 million warrants that were previously acquired in private transactions. Unless specified otherwise in a prospectus supplement, the net proceeds from the sale of securities will be used for capital expenditures, repayment of debt, working capital, vessel acquisitions or general corporate purposes. The prospectus went effective on Tuesday.

Hard Numbers

Moving from the theoretical to the concrete, the following examples illustrate the real cost of today’s crises:

Genco Bites the Bullet
On Tuesday, Genco Shipping & Trading (“Genco”) made the correct but painful decision to cancel the previously announced acquisition of six dry bulk newbuildings, including three Capesize and three handysize vessels, from Lambert Navigation et.al., at an aggregate purchase price of $530 million. As part of the agreement, the sellers will retain the deposits totaling $53 million. The three Capesize vessels and three Handysize vessels are being constructed in the Daehan and Jinse shipyards in South Korea, with deliveries commencing in the 4th quarter 2008 (two Handysize) through 2009.

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Don’t Throw the Baby Out with the Bath Water or How I Learned to Stop Worrying and Love the Fundamentals (with thanks to Stanley Kubrick)

With a full house, Simon Rose began Dahlman Rose’s 1st Annual Global Transportation Conference confessing that despite Wall Street’s having spent years educating investors as to the difference between period and spot business they have largely been ineffective. We disagree with this assessment believing the current market reflects a herd instinct and an avoidance of betting against the tape. The companies presenting at the conference are all clearly differentiated from spot players, with visibility of earnings and cash flows yet their shares have also been pummeled as the BDI continues its decline. Mr. Rose exhorted the crowd to take advantage of this anomaly, take a reality check and not to trade on fear.
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Oceanaut Takes Out Its Checkbook

With little time and no specificity in its investment guidelines, other than it be in shipping, Oceanaut Inc., Excel Maritime’s sponsored SPAC, announced, on Monday, that it had found its deal and will follow the footsteps of its sponsor and invest in drybulk but with a difference. It is the intention of the parties that Oceanaut will serve as Excel’s exclusive long-term charter dry bulk vehicle focusing on charters of 4 to 10 years.

The company has entered into definitive agreements to purchase four drybulk vessels from Irika Shipping S.A. for a total consideration of $352 million.  The acquired vessels, which aggregate approximately 279,000 DWT, include three Panamax vessels and one Supramax vessel, which are described above together with their prospective employment.

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