“Solid Financial Condition”? – Time Will Tell

Yesterday, TBS International announced that they had reached agreement with its lenders to forego making its principal payments due in the 4^th quarter. The lenders have agreed to forebear from exercising their rights and remedies with respect to the defaults, both payment and covenant, under the loan agreements. During this period, the parties hope to restructure the existing facilities and cure the defaults. Interest will continue to be paid currently with default interest accrued and added to the balance due.

The Other Side of the Capital Markets

Last week we discussed how Paragon and Hellenic Carriers were fine-tuning their respective strategies, the former through diversification while the latter through fleet renewal. This week’s transactions, a merger, a divestiture and a joint venture, evidence shipping’s evolution from simple asset trader to corporate strategist.

Fulfilling the theory that two is bigger and better than one, Eidsiva Rederi ASA and Dyvi Shipping AS agreed last month to enter into a business combination in which Eidsiva would acquire Dyvi to form Norwegian Car Carriers ASA (“NCC”).

The combined company will be the 4th largest car carrier tonnage provider with a total of 16 ships (13 car carriers and 3 Ro-Ro vessels) and the world’s only listed pure-play car carrier tonnage provider. The car carrier market is currently dominated by a few large operators, including NYK, Wilh. Wilhelmsen, Eukor, MOL, K-Line Hoegh and Grimaldi. These companies provide complete logistics services incorporating terminals, inland transport and IT services to meet their customers needs.   These operators control 80-90% of the deep-sea fleet in capacity terms and depend on the tonnage providers for capacity. Intending to gradually exit all of its pure Ro-Ro investments, the new company will focus on the most standardized and liquid PCTCs, the mid-size 4,000-5,500 CEU and the large size 6,000 to 7,000 CEU vessels, which are the backbone of the fleets of all the major operators.
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At Last!

We were wrong and for that we blame Joe Royce and his management team, who over an extensive period successfully re-negotiated new covenants in their loan agreements without having to issue a high yield bond to reduce the bank exposure as we surmised. But then again, as an industry insider suggested, given their credit and the uncertainty surrounding the negotiations, it may not have been possible or the price was too high.

TBS International successfully concluded the negotiations this week and amended its credit facilities with the three syndicates led by Bank of America (“BofA”), The Royal Bank of Scotland and DVB Group Merchant Bank as well as its loan agreements with AIG Commercial Equipment, Commerzbank, Berenberg Bank and Credit Suisse. Objective success will be determined on whether TBS remains in compliance with the new covenants going forward. Currently, the company expects to be in conformance with the financial covenants through maturity of the facilities. The important outcome of the agreements is that long-term debt, which had been previously classified as short-term, as the debt was considered callable due to the borrower’s inability to cure the breaches within a twelve month period, is again being classified as long-term debt.
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“Curioser and Curioser!”

Last week, we observed that TBS International had filed Form 4s (insider trading) with the SEC that related to the disposal and acquisition of shares, in late March, by beneficial trusts controlled by Mr. Joseph Royce, the President, and his wife. In this instance, Mr. Royce and Mrs. Royce chose to convert 1.25 million and 1.1 million Class A shares for the like amount of Class B shares. There is absolutely nothing untoward in the transaction but as the title suggests we were intrigued.
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Pricing May No Longer Be an Issue

Yesterday, TBS International announced that it had secured a waiver of certain covenants from its lenders for an additional 30-day period so that negotiations of new or amended credit facilities could continue. The lenders consist of syndicates led by Bank of America, The Royal Bank of Scotland and DVB Group. There are also loan agreements with AIG Commercial Equipment, Commerzbank, Berenberg Bank and Credit Suisse.
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Being Conservative, TBS Reclassifies

Following the accounting rules, TBS International reclassified its long-term debt as current. According to GAAP, long-term loans must “be classified as a current liability when either a covenant violation that gives the lender the right to call the debt has occurred at the balance sheet date, or such a covenant violation would have occurred absent a waiver of those covenants, and in either case it is probable that the covenant violation will not be cured within the next 12 months.”

Although the Company was in compliance with all modified additional covenants and the debt is not currently callable, the Company would have been in violation of the previously effective minimum consolidated fixed charge coverage ratio and the maximum consolidated leverage ratio. Moreover, based upon current internal projections, management anticipates that it is likely that the original covenant requirements will not be met during the next twelve months. Accordingly, long-term loans are classified as a current liability in the September 30th balance sheet.

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Earnings Season Continues

We continue to admire our analyst friends, who four times a year have to pore through the company financial reports, analyze them and update their models to fine tune their calls. With the greater disclosure there is much work to be done during these periods and we are happy to leave it to them. We, on the other hand, prefer to give the earnings releases a quick review in search of items of interest to us, which we think provide broader general insights both to the companies themselves as well as the industry. What follows is a selection of these items.

Eagle Amends
Within its 2nd quarter earnings release, Eagle Bulk Shipping (“Eagle”) disclosed that it had amended its revolving credit facility and entered into a management agreement with its former main shareholder.

In its third Amendatory Agreement to its credit facility, Eagle and Royal Bank of Scotland (“RBS”) have agreed to reduce for the second time the amount of availability under the facility. Originally the facility was for $1.6 billion which amount was reduced in December 2008 to $1.35 billion. With the current amendment, it has been further reduced to $1.2 billion. The facility, which matures in July 2014 continues to be interest only until July 2012, when availability begins to decline with the commencement of four semi-annual reductions of $56.25 million with the balance due at maturity. The facility currently accrues interest at LIBOR + 2.50%, with undrawn portions bearing a commitment fee of 0.7%. The cost of interest has become expensive, having nearly doubled from prior periods. It now represents ~22% of EBITDA up from 13%.

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Delay Or Not to Delay

This week Excel Maritime joined TBS International in choosing to delay its earnings release and conference call for the 4th quarter and year-end 2008 results pending receipt of the necessary waivers. Although it raises some uncertainty, particularly with respect to the status of negotiations, shareholders should take comfort that this conservative approach is appropriate as it avoids the formality of the bank debt being treated as current, resulting in the borrower being unable to meet its obligations and, ultimately, the auditors giving a “going concern” opinion. This domino effect gives the banks a great deal of leverage.

According to a report by Omar Nokta of Dahlman Rose the situation is at best difficult. “Excel’s $1.4 billion credit facility, led by Nordea, has several financial covenants that are either in violation or could be in violation in the coming months. These covenants include fair market value-to-loan, interest coverage, net debt-to-EBITDA and minimum net worth, among others.” The breach of the balance sheet covenants is no surprise given today’s valuations although Mr. Nokta foresees a substantial breech of the net worth covenant as Excel marks to market the Quintana fleet it acquired last year. It does not seem so long ago that the fleet’s value was depressed as a consequence of its below market charters and hence very few showed interest in acquiring the company.

Perhaps of greater concern are the possible breaches of its cash flow covenants. Mr. Nokta suggests that the couunterparty defaults have led breaches of its interest coverage and net debt to EBITDA covenants. Cash balances as of the 3Q 2008 were $225 million and if that level of cash remains the company will have some breathing room although the banks’ assistance, in terms of restructuring the debt, will be required.

Unwitting Leverage

Lying under the accountant’s Damocles sword, TBS International announced yesterday that it was delaying its earnings release for the fourth quarter and year-end 2008 as it sought to complete negotiations of waivers of certain financial covenants with respect to its credit facilities. Without the waivers, the debt, under accounting rules, is no longer a long-term liability and instead becomes a current liability due and payable within the year. No one has an interest in that happening. But the fact that negotiations have been cut so close to the announcement suggests they haven’t been easy.

Genco, TBS Tap the Equity Markets

TBS International successfully priced 3,400,000 common shares at $51 this week to raise $173.4 million in an offering led byJefferies and Banc of America as join book-running managers and Dahlman Rose as joint lead manager. Of these shares 2,000,000 (worth approximately $102 million) were sold by the company while the remaining 1,400,000 were sold by selling shareholders in what is understood to be their first sell-out since the company went public in 2005. The trajectory ofTBS’ share price over the past three months, as shown in the Follow-ons & Share Prices graph, leaves little reason to wonder why the selling shareholders might consider this an appropriate time to divest some of their holdings. The move wasn’t too painful for shareholders, either, representing a file-to-offer discount of a relatively modest 3%, with the shares having since rebounded.