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Top Ships and DVB Bank Agree
A preliminary agreement was reached last week between Top Ships and DVB Bank pursuant to which Top Ships will receive waivers for covenant breaches through the end of 2010 and the loan related to the acquisition of the M/T Ionian Wave and M/T Hongbo, due July 30, 2010, will be restructured.
In return for a partial payment of $7.7 million, of which $3.7 million was from cash on hand and the balance from two bridge loans from unrelated third parties, DVB agreed to the repayment of the loan in quarterly installments through June 2015 and the termination of the stock pledge of approximately 12.5 million shares.
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TOPS Problems Continue
In its 3rd quarter earnings release, Top Ships reported that it was in breach of its loan covenants and is in discussions with all of its banks to receive waivers for these breaches as well as to extend existing waivers that were scheduled to expire in 2010 and 2011.
Previously, the company had received waivers and amended the loan agreements with its five leading banks with respect to covenant breaches dating back to December 31, 2008. However, the company is now in breach of additional covenants relating to EBITDA, minimum liquidity, adjusted net worth and LTV as it relates to the product tankers.
“PFIC” – Call Your Accountant Immediately!
For an investor, this is an acronym you don’t want to hear. Unfortunately, Top Ships (TOPS”) announced this week that it expects to be treated as a passive foreign investment company (“PFIC”) for U.S. tax purposes in 2009. This is generally the case if either (1) at least 75% of its gross income for the year consists of certain types of “passive income” or (2) at least 50% of the average value of the corporation’s assets produce or are held for the production of those types of “passive income.” In this instance, TOPS ran afoul of the rules and will be treated as a PFIC, which may have adverse tax consequences for U.S. shareholders.
It fell into this trap as a consequence of the deployment of its fleet. Of the total fleet of 13 vessels, seven, including the six newbuilding vessels delivered in 2009, are employed on bareboat charters. Under the PFIC rules, vessels employed on bareboat charters are considered to earn passive income. Consequently, the youngest vessels, which have the highest asset values, contribute heavily to the total assets employed in the production of passive income. Although management intends to take the necessary steps in order to avoid PFIC status for 2010 and future taxable years, which would likely involve expanding the fleet through the purchase of non-passive income producing assets, there can be no assurance that such remedial measures will be effective.
TOPS Goes Active
On Friday, Top Ships filed the prospectus supplement with respect to its Standby Equity Distribution Agreement with YA Global Master SPV making the deal effective. The offering has been downsized by approximately 17.8% to 57.9 million shares from the original registration statement that had incorporated 70.5 million shares.
Assuming the full issuance of 57.9 million shares are sold at a price equal to 97.25% of the stated price of $1.82, net proceeds to the company would approximate $102.4 million. On a pro forma basis this would reduce the ratio of debt to total capitalization from 60.1% to 52.4%.
Let the sales begin.
TOPS Turvy
In its 4th quarter and year-end report, Top Ships (“Top”) disclosed the uncertain state of its debt obligations due to a breach of certain loan covenants. It is currently in discussions with all its lenders to obtain waivers extending to March 2010. Without waivers, the company must classify its debt as short-term, since it is due and payable within the year. As a consequence of cross-default provisions, it requires agreement from all of its banks, a tough position to bargain oneself out of as the last holdout effectively cuts the deal. The company’s lenders include: RBS, HSH Nordbank, DVB, Alpha Bank, and Emporiki Bank.
“Is It Safe?”
This oft spoken query by Sir Lawrence Olivier in the film Marathon Man is the question of the moment when it comes to vessel chartering. Having settled with Bocimar, Fortesscue updated the market with respect to the eight remaining long term COA and consecutive voyage contracts under dispute. According to the company, the remaining eight contracts were for original terms ranging from three to six years with an average duration of five years. Currently, the total amount of these arbitration claims for the suspended contracts is approximately $30 million, which is expected to increase until the suspension is lifted or a resolution is achieved legally or commercially.
“Notwithstanding the inherent uncertainty in quantifying potential exposure relating to the out of the money shipping contracts, Fortescue has calculated a potential damages estimate to the company of $171 million. This covers all of the unresolved suspended and terminated contracts and a number of existing time charter agreements that remain active. While this is management’s best assessment based on currently available information, the company has used the now settled Bocimar negotiation as a benchmark together with consideration of the current spot rate of around US$10.50/tn relative to the average contracted rate of $15.78/tn.”
On a less conflicted basis, Top Ships agreed with Armada Singapore, time charterers of the M/V Astrale, to reduce the time charter rate from $72,000 to $40,000 for the three remaining hire payments until the scheduled termination of the charter and redelivery. Total cost from loss of hire is approximately $1.5 million. There is no mention of any concession received.
We don’t know the answer to the question posed in our title but assume a willingness to openly come to the table to negotiate will manage the risk, which unfortunately increases daily as the market stays weak and liquidity dries up.
Economou Out
Top Ships today announced the expiration of the exclusivity agreement between the company and an affiliate of George Economou. Mr. Economou’s affiliated entity had reduced its offer to acquire the outstanding shares of the company to $3 per share in cash, down from the original $6. After consideration of numerous factors, including the recent volatility in global markets and decline in the company’s share price, the company’s board has determined that this offer is not in the best interest of shareholders.
Mr. Economou Continues Discussions with a Cautionary Note
As discussions continue with an affiliate of Mr. Economou, Top Ships announced last week that it had extended its exclusivity agreement for two weeks through October 22. However, the earlier price indication of $6 has gone by the wayside. The potential acquirer has informed the company that the purchase price will be subject to further negotiations and will reflect prevailing market conditions. At today’s levels, we expect shareholders and management may be less inclined to move forward.
TMI?
What a week for investors! Starting with CMA’s annual event, continuing with JPMorgan’s Conference and concluding with the Capital Link Forum, it is conceivable that even the most interested observer of the industry may have suffered from information overload. Thankfully, with Good Friday, many of us had the opportunity to recover with a long-weekend.
Despite the early start, the Capital Link Forum played to a full house. There were company presentations galore interspersed with lively and informative panel discussions. With far too much information to distill, here is a highly selected compendium of our outtakes.
The Official Guide To Marine Finance Providers
Shipping Index
