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OSG Goes the High Yield Route
Following its recent equity offering, OSG announced on Monday its plans to issue $300 million of unsecured senior notes due in 2018. Proceeds will be used to pay down the balance on the company’s $1.8 billion senior revolver due in February 2013 that bears interest at LIBOR + 70 bps. As of year-end, the revolver balance was $654 million and under its terms the facility steps down $150 million annually in 2011 and 2012 before the final maturity in 2013.
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Shareholder Activism
Last December, we wrote about MMI Investments L.P.’s investment in DHT Maritime. At that time this activist shareholder had purchased approximately 3.95 million shares, representing approximately 8.1% of the outstanding shares for $15.6 million. At the conclusion of our article, we presciently suggested that the company should soon expect a call. This week, with its ownership stake increased to 4.325 million shares now representing 8.9%, MMI fired its broadside.
We have always believed that criticism should always welcome as long as it is given constructively and thoughtfully. Second-guessing from the cheap seats in our estimation is at best unproductive and at worst detrimental to the party it is directed at. In this light, we believe in the role played by shareholder activists, but often wish it were directed in a positive constructive manner in the long-term interests of the shareholders as opposed to an attempt to hike the share price for a quick and profitable exit. We cannot paint all activists with the same brush but do distinguish a Calpers from a Carl Icahn. And in the same vain, there is both good and bad management, necessitating a role for these activists. For the moment, we will withhold our judgment of MMI but their first run at DHT leaves us decidedly unimpressed.
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The Consolidator Strikes Again
Growth is at the core of every corporate strategy and essentially, companies have the options to grow by either through organic expansion and ramping up their own business activities or collaborating with other industry players. PT Berlian Laju Tanker (“BLT”) is a firm believer of the latter. This week, in another landmark acquisition to expand its footprint in all regions worldwide, BLT announced its plans to launch a voluntary all-share offer for Camillo Eitzen & Co ASA (“CECO”).
BLT is certainly no stranger to consolidation. During the Asian Financial Crisis in 1998, BLT acquired Asean Maritime Corporation which indirectly owned 7 chemical tankers ranging from 3,200 to 7,500 DWT. At that time, the rationale for the acquisition was to accelerate its growth in North Asia. Fast forward nine years later to December 2007, Asean Maritime, which is now BLT’s wholly owned subsidiary, acquired the entire issued share capital of Chembulk Tankers (“Chembulk”) including its 11 chemical tankers ranging from 16,400 to 33,000 DWT. With the acquisition of the world’s 7th largest chemical tanker fleet, BLT had not only strengthened its position as the top intra-Asia chemical tanker operator but also fast-tracked its growth internationally particularly in the western markets where it had a limited presence.
Shipping High Yield – It’s Back and Just in Time
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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Is Two Is Better Than One?
In an effort to unlock value, the management of Golar LNG Ltd (“Golar”) has decided to split the company into two, following the precedent set by Teekay. The namesake will remain a traditional long-term, low risk, high yield LNG shipping charter company. It will retain 2 LNG carriers and 3 FSRU units on long-term charters to solid counterparties. With forward revenues of $1.9 billion, long-term financing in place and limited capex, the company has high dividend capacity. In addition the company will own a controlling stake in the new entity, Golar LNG Energy (“Energy”), which diversifies itself away from pure LNG shipping exposure by taking a larger part in the value chain, by providing innovative and flexible solutions in the LNG upstream and midstream segments.
This company will incorporate project development activities together with the operation of vessels directly exposed to the spot/short-term market. Specifically, the company will focus on regasification projects, liquefaction and the transport and trading of LNG. The transportation business will operate four owned 2003-2008 built vessels of which three are on spot related contracts to Shell. With these vessels, the company has secured capacity for its own FSRU and liquefaction projects. The company also acquires four 1970s built vessels, which will continue to operate in the spot and medium term time charter market as LNG carriers but are being held for FSRU conversions. By controlling these older vessels, the company is well positioned to bid competitively with a short lead-time.
Invest For the Short-term?
We begin this article with the caveat that we have no intention of stepping into the shoes of the investment bankers and analysts who better understand these issues and can likely explain them better than we can. Nevertheless, we were intrigued by a number of disparate things we read this weekend and how they might all relate. Here we ponder such apparent non sequiturs as management’s obligations to shareholders as well as the possibility of recovery of what we lost in the market.
We start with the big picture. In an article entitled, What Now?1 Jeffrey Goldberg, representing everyman, sought advice from the “masters of Wall Street” on how to overcome his financial paralysis and what to do now. The answers were bleak. Not only are the markets stacked against the individual investor but also more importantly not many of us are suited to be investors, whether because of the size of our portfolios or our nature. The thesis is best articulated by the following quotes:
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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Teekay – Mad Momentum
As Thursday August 7 played out Teekay announced they would restate earnings for the years 2003 to 2Q08. The company plans to restate “Financial Statements for Accounting Under SFAS 133″. Just their luck they also missed First Call consensus earnings estimates for the second quarter by $0.15 and saw their stock whacked, down almost 14% at the time of writing.
The Week in Review
While there are rumors of a number of IPOs in the works, volatility and uncertainty has all but brought the US equity markets to a stop, and we don’t expect to see much more done over the summer. Bank debt has not proved as much of a problem for shipping. Most recently this week Deutsche Bank and HSH Nordbank acted as MLAs on a $753.1 million loan for E. R. Schiffhart GmbH & Cie KG to finance ten capesize bulkers currently under construction in Korea by the Hyundai Group with delivery expected throughout 2010. BNP Paribas, Commerzbank and Dresdner Kleinwort joined DB and HSH as arrangers while Deutsche Schiffsbank came in as a co-arranger for the deal, which finances 71% of the $1,056 million project cost and covers both pre and post-delivery financing. Notably Ralph Bedranowsky of Deutsche Bank and Harald Kuznik of HSH both hailed the deal as an example of “the global shipping market…returning to reasonable, market-consistent valuations…”
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The Official Guide To Marine Finance Providers
Shipping Index
