By Ethan Ram, DVB Capital Markets LLC
In light of the recent offerings by Hornbeck and Seacor, Ethan Ram’s latest capital markets offering could not be more timely, as the industry searches for alternatives to bank debt.
The tight supply of ship mortgage debt has highlighted the shipping industry’s need for alternative sources of capital, and the role the capital markets can play in ship finance. In recent months, many shipping companies, public and private, have resorted to raising equity to fund themselves, in some cases diluting shareholders in order to bring themselves into compliance with their bank facilities. For those companies that are eligible, however, an alternative to issuing dilutive equity is to tap the high yield bond market, where recent developments have made conditions highly favorable for issuers.
The high yield market got off to slow start in 2009 in a continuation of the preceding four quarters of 2008 which saw the volume of new issuance shrink to the lowest level in nearly ten years and yields for the average high yield bond expand to over 20%. In April, however, there was a surge of new issuance and since then the high yield market has not looked back. Driven by a sustained period of net capital flows into bond funds totaling $15.9 billion (31 of the past 36 weeks have registered net inflows), positive market sentiment on the back of rising equity markets (the DOW and the S&P 500 have risen 48% and 56%, respectively, since their March lows), the past five months have seen a renewed investor appetite for high yield bonds. Today yields have compressed to below 9% for the average high yield bond and, despite the slow start, 2009 is on track to be a solid year in terms of amount raised and number of transactions.
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Written by:
carisk | Categories:
Freshly Minted,
The Week in Review | September 24th, 2009 |
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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 |
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Tropical JP Morgan High Yield Conference Attracts Snowbirds
JP Morgan hosted a phenomenally well-attended high yield conference at the Lowe’s Hotel on sultry South Beach in Miami Florida last week. Among the 300 hundred companies that presented at the enormous event were faithful JP Morgan shipping clients NCL, Stena and General Maritime – the former two of which issued bonds in 2004. Although most shipowners have been selling equity due to where we are in the cycle, the high yield market remains incredibly receptive to new issuers and should not be overlooked.
JP Morgan hosted a phenomenally well-attended high yield conference at the Lowe’s Hotel on sultry South Beach in Miami Florida last week. Among the 300 hundred companies that presented at the enormous event were faithful JP Morgan shipping clients NCL, Stena and General Maritime – the former two of which issued bonds in 2004. Although most shipowners have been selling equity due to where we are in the cycle, the high yield market remains incredibly receptive to new issuers and should not be overlooked.
Written by:
carisk | Categories:
Bonds,
Freshly Minted | February 10th, 2005 |
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