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Capital Products Partners Feels Some Pain
The recent decision by OSG to buy back the remaining shares of its MLP spin-off, OSG America, highlighted the weak domestic tanker market as well the inability of the partnership to pay the distributions going forward as a result. U.S. Shipping L.P. was also unable to survive the current market as its vessels came off charter and it leveraged itself to meet its fleet replacement needs. And without an interested party, it filed for bankruptcy. These problems raised the question in our mind as to whether the MLP structure is best applied to shipping. Of course, there is no easy answer as the range of MLPs is across the board. What is certain however is that Teekay LNG, with its 25 year contracts most closely resembles the typical MLP, a gas pipeline. The majority of the others are based upon medium term contracts that have rollover risk.
While Capital Product Partners is operating in a poor tanker market, its fleet is fully contracted and it reported good but slightly lower earnings for the quarter as a consequence of a lack of profit sharing revenues and increased interest expense. It’s key measure Operating Surplus, which is net income adjusted for non-cash items less replacement capex, was also down.
Life in the Equity Markets!
Knowing full well that when you need money you can’t get it, DHT Maritime, following quickly on the heels of Teekay LNG’s share offering earlier in the week, announced a secondary offering of it’s own on Thursday. Originally targeting the retail market, the offering was initially set at 6 million shares, but was priced to attract institutions resulting in the offer being upsized to 9 million shares as institutions joined in. The offering price was $4.35, a discount of approximately 8.8% from Thursday’s closing price. Net proceeds were approximately $37 million. After the offering, the stock traded down 4.6% on Friday closing at $4.15.
Concerned about the future of the tanker market, and in particular asset values, the company, in offering these shares, was exercising caution. The offering bolsters its balance sheet and provides a cushion at a time when tanker valuations may weaken as rates decline. This concern is compounded by the fact that valuations are difficult as few sales are occurring and a wide gap exists between bid and ask prices. Through the offering, the company has pre-empted the possible breach of the bank’s LTV covenant as well as a restriction on dividends also based upon that measure. Despite these concerns, DHT remains liquid with strong cash flow from a creditworthy counterparty.
WKSI No More
Perhaps one of the least painful but aggravating aspects of the share price collapse of the shipping stocks is the loss of one’s “well-known seasoned issuer” or WKSI qualification. When the company’s market cap falls below $700 million, the company no longer is a universal filer but must register as you go. For perspective, as of Tuesday, only Teekay, Teekay LNG, Nordic American Tankers, Diana Shipping and Alexander & Baldwin were qualified. OSG just missed at $641 million.
Safe Haven No More
For weeks, we have been puzzling over the markets’ indiscriminate punishment of all the shipping shares. Surely, one cannot separate this sector from the rest of the market so for that reason they cannot be exempt from the broad downturn. However, viewed as a proxy for the commodity markets, this sector, in particular, has largely been pummeled by the slowdown in China with a resulting decline in demand and prices for commodities. This has translated into falling charter rates and a not so severe decline in asset values as of the moment.
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NATS Completes Follow-on, TBSI Goes into the Market
Following successful follow-on offerings by Seaspan, Teekay LNG, and Double Hull Tankers and a placement by Pacific Basin, Nordic American Tankers has seen it fit to raise equity to repay borrowings in the immediate future and for expansion in the longer- term, per its business model. NAT has sold 4,000,000 common shares in the offering and underwriters’ have exercised their option for a 310,000 share over-allotment, raising $173 million in gross proceeds. Morgan Stanley led the offering while Dahlman Rose acted as co-manager.
I.M. Skaugen & Teekay LNG Partner in $90 million Lease Deal
The market moves, liquidity returns, but things have changed. Forty two percent of bankers who responded to our annual survey last month believe that a reasonable advance rate for a charterfree newbuilding is under 60%. Another 46% believe the rate should be under 70%. This leaves most owners without an attractive and high quality charter left to come up with 30-50% of newbuilding costs in equity. Taking into account how high ship values have gotten, that means even strong owners with significant newbuilding programs need to think creatively about how best to raise the equity they need if they don’t wish to resell their newbuilding contracts.
Double Hull Tankers Follows On
April was certainly the month the shipping equity markets sprang back to life – at least for follow-on offerings. Seaspan (SSW) was out first on April 10 with an offering that raised nearly $240 million, followed by Teekay LNG (TGP) on April 17 with a $165 million offering. Then this week Double Hull Tankers (DHT) saw the positive trend and took the opportunity to position themselves for future acquisitions by raising $84 million with the offering of 8,000,000 shares at $10.50 per share in a deal led by Merrill Lynch and UBS with Dahlman Rose also acting as an underwriter. The offering was upsized by 1,000,000 shares on the back of strong institutional demand, though it priced at a relatively steep discount of 12% to where the shares were trading when the transaction was announced just one day before. The accompanying graph shows how the price performance of SSW, TGP and DHT post offering announcement compare. Continue Reading
Sentiment Turns
In a welcome turn of events, the market was resoundingly upbeat this week. The pace of transactions picked up notably across sectors, and we can’t help but view this as a positive sign for the financing market going forward.
On the M&A front Excel and Quintana successfully closed their merger. Each issued and outstanding share of Quintana common stock was converted into the right to receive $13.00 in cash and 0.3979 Excel Class A common shares. The merger creates a combined company that operates a fleet of 47 vessels with a total carrying capacity of approximately 3.7 million DWT and an average age of approximately eight years. Stamatis Molaris stepped into the role of CEO of the combined company, while Hans Mende, Corbin Robertson III and Paul Cornell joined its board of directors. We were happy to hear that the deal was executed smoothly. Moreover, Nordea and the underwriting team were successful in syndicating the debt levels required to make the deal possible – without needing to bring market flex provisions into play.
Aries & TBS Moving Closer to Equity Offerings
The Official Guide To Marine Finance Providers
Shipping Index
