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Survival – It’s All about Liquidity and Gearing
Continuing our recent trend of playing with numbers, we have decided this week to focus on survivability, which, for our purposes, we measure in terms of liquidity and leverage. For a selected group of companies which have reported 1st half results, we have calculated the debt to equity and net debt to equity ratios. We also show the cash position of these companies, which compared to just a couple of years ago is substantially lower, a reflection of this difficult market. While we show both the debt to equity and net debt to equity ratios, the latter in deference to the analysts, we prefer the former as we believe the cash will be long gone before it can be applied to the debt.
Written by: marinemoney | Categories: Freshly Minted, The Week in Review | August 18th, 2011 | Add a Comment
Managing Expectations
Over the weekend, TBS announced it had secured waivers of certain covenants with respect to its outstanding credit facilities with its syndicate of lenders led by Bank of America, its syndicate of lenders led by The Royal Bank of Scotland and its syndicate of lenders led by DVB Group Merchant Bank, as well as its loan agreements with AIG Commercial Equipment, Commerzbank AG, Berenberg Bank and Credit Suisse (the ” Financing Facilities “).
The company initiated discussions with its lenders to obtain waivers as a result of the current market conditions with a specific focus on the market value of vessels. The Financing Facilities were modified to provide a waiver through December 31, 2009 of loan-to-value and other financial covenants, provided that the company satisfies new covenants, including minimum end of month cash balances of not less than $40.0 million and a minimum ratio of EBITDA to interest expense. In addition, TBS prepaid all the principal installments that would have been due under the term loan facility this year. This reduced the total non-construction related debt to $$247.5 million.
The company is now in position to report its earnings with a clean opinion from its auditors.
Written by: carisk | Categories: Freshly Minted, The Week in Review | April 2nd, 2009 | Add a Comment
That Was The Week That Was
Marine Money’s flagship conference came to New York this week and if you were a kid you might refer to it as a three- ring circus. With the conference as the centerpiece, the week has become filled not only with the usual owner/banker meetings but formal presentations and the usual bevy of social events. The numbers are astounding with over 1,000 delegates registered this year, exceeding by far all previous years. In fact, as quickly as we printed a copy of the delegate list, we found it to be obsolete.
The Week in Review
Doubts about the global economy and gravity-defying oil prices were sidelined this week by extraordinarily robust shipping – and hence ship finance – markets. Polys and Nicolaos Hajionnaou’s Safe Bulkers came out with the first US IPO filing we have seen in some time while TBS and Genco both went to market with follow-on offerings. SPAC Seanergy announced a deal with Restis and 70% of Navibulgar at long last looks set to go to German-Indian consortium KG Maritime. In the private equity markets, Tufton Oceanic Middle East announced a new investment $50 million joint venture investment company with Kuwait Finance House. Reportedly the largest ever ship finance loan to a Turkish shipping company was closed for Kiran Holdings, and Ship Finance found $700 million in debt finance for the $850 million sale leaseback
Written by: carisk | Categories: Freshly Minted, The Week in Review | May 22nd, 2008 | Add a Comment
Examining the Valuations of Current and Upcoming IPOs
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.
Net Asset Value – Selling the Momentum
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.
Price/EBITDA
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.
Why Capital Maritime Pulled its IPO – What it Means
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.
Dissecting the Deal – Lessons Learned
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.
Set the Range High and Negotiate Down
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.
Don’t Offer Newbuildings If You Won’t Get Valuation Credit
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.
Keep It Simple
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.
Why Capital Maritime Pulled its IPO – What it Means
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.
Dissecting the Deal – Lessons Learned
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.
Set the Range High and Negotiate Down
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.
Don’t Offer Newbuildings If You Won’t Get Valuation Credit
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.
Keep It Simple
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.
IPO Market Remains Robust For Shipping Issuers
Don’t be misled by the trade press articles and the fact that recent shipping issuers have priced IPOs at the low end of already lowered price ranges; the fact remains that based on our valuations of these companies, issuers are continuing to do U.S. capital markets deals at very attractive valuations. Moreover, we are seeing deals with single hull tankers (Capital), older vessels (TBS) and secondary share sales (Eagle), as well as related party management companies (various). Despite claims to the contrary, the fact remains that the American equity markets are wide open for all kinds of shipping deals. As we see dry cargo rates begin to bounce in recent days, we would not be at all surprised to see this sector regain momentum and enjoy another run.
As one of the 150 investors at Marine Money Week said over coffee, “just because we aren’t paying the retail price that investment banks put on the prospectus doesn’t mean that sellers aren’t getting a premium.” We would concur with that. The message being telegraphed back to the industry from Wall Street and Main Street investors is that the market is open for shipping IPOs even though the heady days of 2x net asset value are gone – at least until rates begin to gather momentum in the coming months.
That said, we should acknowledge the two companies currently engaged in roadshows in the U.S. Capital Maritime & Trading Corp filed an F-1 today for the issuance of 16.67 million shares at $14-$16 per share on the NYSE. We will discuss this deal further next week, when it is expected to price. Cosco has also traveled a long way to bring its roadshow to New York this week.
Eagle Bulk – Don’t Believe What You See
But deals still in the market do little to demonstrate investor appetite. Let’s take Eagle Bulk as our first in-depth example of why the U.S. equity markets are still open, and yes even attractive, to shipowners. The U.S.-based handymax owner Eagle cut the estimated price of its initial public offering to $14-$15 a share from the planned $16-$18 a share, but the company increased the size of the IPO to 14.4 million shares from 13.25 million to make up for the shortfall. The deal priced at $14 per share, which we estimate to be around 1.6x a net asset value that is already high, especially in light of declining charter rates. This is a phenomenal execution that gives start-up Eagle a better valuation than Teekay or OSG. As mentioned above, despite the fact that investors have supposedly rejected issuer’s attempts to sell secondary shares, private equity fund Kelso, which is the financial sponsor behind the Eagle deal, was able to extract about $70 million through fees and debt repayment, which represents almost the fund’s entire investment in Eagle, even while it still retained about half of the equity.
Soft Aftermarket Trading for Eagle
As we saw with Diana Shipping, Eagle has sagged in early aftermarket trading as the stock immediately sank to $13.50. As we understand it, Citigroup’s Smith Barney and UBS’s Paine Webber sold about 65% of the deal to retail investors while the joint bookrunners, which include the names above plus Bear Stearns, sold the balance of the deal to institutional investors. Although this type of sales technique resulted in solid pricing, as it did in the Diana deal, the aftermarket performance prevents “flippers” from immediately selling their stock for a gain. We do not know whether the underwriters exercised the green shoe or are willing to offer support by buying stock to stabilize the pricing. If they have already used their dry power to support the stock, however, we would not be surprised to see continued soft price performance, at least until we run into some sort of market upturn.
Are Dividends Losing Effectiveness?
One question we’ve been asked lately relates to yields. Specifically, how are investors looking at them? The answer, in our view anyway, is that yield can be used to increase valuation among certain fringe buyers of these stocks such as retail, but most experienced institutional investors clearly are looking at net asset value because issuers like Eagle do not have the long-term contracted cash flows required to meet the dividend in question over a sustained period.
In fact, investors that we spoke with at Marine Money Week seem to like growth stories and are discounting the real value of the dividend over the long-term. They are, however, looking at dividends as a way for them to lower their cost basis by receiving their deprecation and earnings in cash. As one Eagle investor said, “Do I think the 16% dividend is a guaranteed? No. But based on the company’s charters, I know I can get more than 30% of my money back over the first two years, meaning that I am really buying this company at closer to net asset value. That is the trade.”
This logic, although tempting, neglects to embrace the potential loss of principal that would result if rates and values return to historically normal levels. In our view, companies that seek to pay dividends and do not have long-term employment to back them up should just be careful to set them at realistic levels that do not stress the company’s liquidity and leave enough cash to take advantage of growth opportunities. It follows from this that Eagle priced at a quite respectable valuation, indicative more that investors have sobered a bit since January than that they have lost interest in dry cargo equity.
When Will the BIFFEX Turn?
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.”
Aries & TBS Moving Closer to Equity Offerings
Aries Maritime Transport and TBS have emerged this week as the next shipping companies likely to head off on IPO roadshows to raise fresh capital. These two deals follow on the heels of the wildly successful IPO of Teekay LNG, and before that Diana’s less-than-spectacular post-offering performance.
We have been watching TBS since it made its initial S-1 filing with the SEC in March, but noticed that the company filed a revised document with the SEC this week that includes much more detailed figures, as highlighted in the Forthcoming IPOs table. Although public transactions are not generally deemed “effective” until shortly before pricing time, we imagine TBS is getting very close to launching. As for Aries, the deal was initially filed using the confidential Form F-1 and was therefore previously unknown to the marketplace.
This is a very good combination of deals to launch so close together in that they are very different and will likely appeal to different categories of investors. As you can see from the accompanying fleet list, Aries’ fleet is comprised of product tankers and container ships, 100% of which are on term charters. In contrast, TBS operates a long-established liner service using a fleet of owned and chartered-in bulk carriers to serve its industrial customers. There are plenty of other differences as well. For example, Aries plans to pay a substantial dividend that appears similar to Arlington Tankers in concept while TBS does not anticipate paying a dividend. As always, we will refrain from engaging in a valuation analysis until the deals conclude, but below are some facts and figures that appear in the public document.
The Official Guide To Marine Finance Providers
Shipping Index
