Bank of China in Action Again, What’s New

Bank of China has extended a USD 179.55 million buyer’s credit facility to STX Pan Ocean recently in relation to the South Korean shipper’s acquisition of three 17,600 DWT bulkers ordered at Jiangsu New Century Shipyard. Jiangsu New Century Shipyard is one of the largest private shipbuilding groups in China who has built over 100 ships for owners in Denmark, United Kingdom, Germany and Italy. This successful transaction was initiated by Bank of China’s branch in Jiangsu province, upon news of STX Pan Ocean’s difficulty in securing finance for the ships. This year, STX Pan Ocean has earmarked USD 203 million to invest in 6 vessels. Continue Reading

ECA to the Rescue

Undeniably, export credit agencies (“ECAs”) has played an important role in satisfying part of the financing gap needed by the shipping industry. In China, China Exim Bank plays an instrumental role in supporting the maritime industry, having granted shipping/shipbuilding related loans of over RMB 102.5 billion (USD 15 billion) in the domestic currency and USD 7.45 billion in greenback at the end of 2008. In 2009, the policy bank extended a USD 389 million, 12 year secured facility to New York listed Overseas Shipholding Group (“OSG”), in its first ever loan facility to a US company. It would be nearly impossible to secure a 12 year ship finance loan today, let alone this quantum from a single financial institution. Continue Reading

Setting Sights on Overseas

Danish shipowner Torm has signed a ten year USD 167.3 million loan facility with a syndicate of banks led by Bank of China and Societe Generale. The funds will be used to cover 60% of the cost of six 53,000 dwt MR product tankers, each ordered at USD 46.5 million a piece from Guangzhou Shipyard International. Out of the USD 167.3 million facility, USD 83.7 million will be unsecured loans and the other USD 83.7 million in the form of buyer’s credit. This is also the very first time in a foreign syndicated loan that China Export & Credit Insurance Corporation (“Sinosure”) will underwrite the country risk in relation to the buyer’s credit. Torm will have to fork out the remaining 40% equity. Continue Reading

Bigger, Better… Forever

We don’t know how they do it, but this year’s CMA’s shipping and trade conference and exposition, “Shipping 2009”, was not only the biggest ever but showed the resilience of the industry. The ladies of CMA, who run the conference like a well-oiled machine, tell us attendance exceeded 2,200. If sports arenas are named after corporations, it seems only fair that the Hilton be renamed the CMA during this annual event.

The success of this event is attributable to the fact that it reaches out to the whole industry and covers all of the issues it faces. This year the shipping markets and piracy got equal billing. While, naturally, our main focus is on the shipping markets, Professor Christopher Coker’s presentation on piracy highlighted its significance, permanence and far-reaching risks, if it becomes linked with terrorism. For us, the rude awakening was his statement that unlike the 19th century when piracy was eradicated, today the best we can hope for is to “manage risks.” And, if we are unsuccessful even in that, we will have far more serious issues. The speech is a must read for its realistic but unfortunately bleak perspective of our future.

From the extensive three day program our chairman puts together with the assistance of the CMA, we have selected the following as perhaps being of the greatest interest to our readers.

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Third Quarter Earnings Season

The third quarter was of course an entire world ago, pre global economic meltdown, when China was still expected to roar back after its great Olympics before orders were cancelled and charterers began handing back ships and FFA settlement days loomed like an executioner. So it may come as no surprise to our readers that company after company has reported earnings and dividends in line with financial analysts predictions. We tip our hat to the stewards of these companies, especially OSG and Eagle where earnings and then subsequent conference calls accomplished what we had hoped for, clear, confident and distinguishing attributes. Companies like Torm and OSG are on their way to their best years ever and Eagle has earnings visibility stretching way forward while DRYS is selling at a .69 P/E in other words for less than its ‘08 earnings.

Clarification

Last week in our article on D/S Torm we were guilty of a number of errors, which are clarified below:

We misstated the differential in MR earnings between East and West. In fact, on a yearly basis the differential between the two basins is $2.7 million.

We deeply regret our statement that product carriers could not be built in China at this time. What was meant was that the new shipyards coming on stream in China will mainly build dry cargo vessels initially as tankers are too sophisticated to start-up with. There are a number of yards in China building product tankers.

With respect to dry cargo, Torm does intend to grow the model but to change and grow it in the present environment would be suicidal.

We deeply apologize for our errors.

D/S Torm

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.

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2008 Dahlman Rose Energy Supply Chain Conference

Last week’s conference showcased Dahlman Rose’s prowess in their chosen franchise -the energy supply chain. In a two day New York and Boston road show, they presented 29 companies covering the full range of the supply chain including offshore, exploration and production, drilling, offshore construction and shipping to a myriad group of investors. And as much as we appreciated the formal presentations, we really enjoyed the opportunity to sit and talk with the principals who presented their companies, a rare opportunity for us, in the casual atmosphere of the breakout room. The participants could not have been more generous in sharing their time to teach us about their companies and their industry.

The morning began with a keynote address by Mr. Simon Rose. We strongly suggest you beg, borrow or steal a copy of the presentation that distills the energy crisis in a mere 10 slides. The quick answer is that is all about motorization.

Rather than try to cover the conference, which is impossibility, given the breadth and depth, we have chosen instead to highlight discussions we had with Northern Offshore and Omega Navigation.

“Who Are Those Guys?”
Marion Woolie, the President and CEO, of Northern Offshore Ltd. began his short and picture filled presentation with the above referenced quote from the movie, “Butch Cassidy and the Sundance Kid.” For him, it reflected the company’s lack of recognition, which was one of the key issues that he encountered when he joined the company last year. But even in this short period of time, he has put his stamp on the company and the market now knows who they are.

Throwing off the shackles of the corporate world, Mr. Woolie has found his dream job, building a company from scratch. And although he is having fun doing it, it is quite a challenge. After emerging from a re-structuring with three older rigs, with an average age of 30 years, the company entered into an agreement last June with Maersk to purchase and leaseback three North Sea Jack-ups bringing the fleet to six and the average age down to 28. The company was then listed on the Oslo Bors in September 2007. And by the time the fourth quarter arrived, Mr. Woolie’s greatest challenge was to pull together a management team. He reached out to his network and brought together solid managers with whom he worked with for 15 to 20 years and who together have a combined 200 years of experience. And, they, too, are apparently having fun.

Flipping through rig pictures, Mr. Woolie described the employment picture of the fleet. The Energy Driller, a first generation semi-submersible is on a three-year charter to ONGC at $230,000 and operates in a water depth of 600-1,000 feet. The Energy Searcher, a drill ship, is working short-term in Southeast Asia for Total. The Energy Producer is working in the North Sea earning a tariff rather than a day rate. It is paid according to the volumes produced and the price of oil. These are the cash cows. Then there are the Maersk rigs, which are all operating in international waters. The rigs are earning $170,000 per day with two of them off contract in 2008 and the last in September 2009. The good news is that the Maersk Exerter, coming off the contract in May, has found follow-on work for 6 months at $250,000 per day. Given Northern’s past history, this deal was structured to minimize risk for the charterer by requiring a secured performance bond and a cash collateral account and an accelerated debt repayment schedule for the benefit of the bank. Specifically, the new rig debt has to be paid down to 0 in 2010 requiring principal payments of $100 million per year.

The best illustration of where the company was and how it has been transformed was shown in a calculation of uncontracted rig months, which Mr. Woolie describes as a health gauge. As of the fourth quarter 2007, 62% of the total available months were available. With market focus and execution, the new management team brought that figure down to 12.5% in the first quarter 2008. The total current backlog is $616 million, which compares to a market cap of $600 to $700 million indicating that the stock is cheap in management’s view.

The next task this management team faces is how to grow the company. Mr. Woolie doesn’t pull any punches. Organic growth through the placement of new rig orders is unlikely. Rig prices are too high and deliveries, now scheduled for 2011, are too slow. He is targeting existing rigs whether used or newbuildings under construction. It is the latter group that is of particular interest. He does not expect that all of the 150 rigs on order for delivery in 2008 and 2009 will be delivered on time, on budget and with a term contract and therein lies the opportunity. Finally when asked if he is going into deepwater or the jack-up market, his simple response is that it doesn’t matter as long as it adds value.

With respect to oil prices, his views remain traditional. He joked that oil prices are changing so quickly oil companies cannot keep up. He acknowledges a fundamental change but argues prices will remain cyclical. The trading range is certainly higher with lots of volatility. To Mr. Woolie, it is not the price but the direction. All of which is clouded for the moment by lots of emotion.

So, if anyone comes up to you and asks you “who are those guys,” the correct response is Northern Offshore’s posse. Watch your back!

Deferred Equity and Other Interesting Insights
We were also intrigued by a number of points in Omega Navigation Enterprises, Inc.’s (“Omega”) presentation including, in particular, the structuring of its yard financing.

Timing and creativity are crucial aspects of financing in general and we found both of these evident in Omega’s newbuilding financing. Omega had signed shipbuilding contracts, in 2007 with Hyundai Mipo, to construct five 37,000 DWT product/chemical IMO II/III tankers for $44.2 million each for a total cost of $221 million. The vessels are scheduled for delivery between March 2010 and February 2011.

Currently the shipyard is quoting the identical vessel for $47.5 million with delivery in 2011. However, market sources indicate the current value of the vessels is closer to $50 million particularly the earlier deliveries.

Financing for both the progress payments and post delivery is in place.  Our focus, however, is on the former, which minimizes the use of Omega’s cash flow while allowing the payment of dividends. To accomplish this, the progress payments are highly levered in the beginning with increasing amounts of equity required, as subsequent installments are due as follows:

The benefits of this structure are best illustrated in the chart that shows the sources of the progress payments through 2009.

Ultimately, as the process is reversed and more equity is injected and the capitalized interest is paid, the overall financing at delivery is 75%. The post-delivery financing benefited from being negotiated just before the credit crisis and is extremely competitive at a rumored LIBOR + 80 bps. All of this was made possible by the timely placement of the orders as well as the quality of the vessels and the shipyard and the company’s employment strategy.

Among other interesting insights provided at the presentation was Omega’s employment strategy. When it comes to time charters, they believe that 3 years is ideal as anything beyond that is steeply discounted. When feasible, upside protection is obtained through profit sharing agreements. Currently, 6 of their 8 vessels have such arrangements. Their fleet is currently time chartered to Norden, Torm and with Glencore. In the case of Norden and Torm, the vessels are operated in pools. Although all three are first-class, they find that Glencore is more creative and flexible as a consequence of their trading mentality.

On the other hand, Omega faces challenges. The company is frustrated by the fact that asset values and charter rates are disjointed making it difficult to do an accretive acquisition. And investors are concerned about the lack of liquidity of the company’s shares. Float is small with only 12 million shares trading making it difficult for an investor to take a position.

And, finally, financing of growth may be somewhat more difficult as it is already moderately leveraged with a net debt to capital of 63% and its shares carry a low valuation. Some relief will come from its re-structured debt facility, which is expected to close in Q1 2008. Both junior and senior facilities will be non-amortizing until the final repayment date in April 2011.

Despite these issues, the company is extremely well positioned to take advantage of evolving worldwide trading patterns resulting from roughly 5 million barrels per day of new refining capacity in the Middle East and India starting up by the end of the decade. These trades will involve longer hauls and therefore increased demand. To service this trade, Omega will have one of the youngest fleets with an average age of less than 2 years, which will be almost equally divided between the MR and LR1 sizes upon delivery of the newbuildings.

This pure play product company may just have gotten it right. With an established market position, fixed employment and carefully structured debt, the company’s dividend is protected in the interim while waiting for the market to catch-up.

In the interest of full disclosure and perhaps as an indication of the quality of the conference, we must confess that we were sufficiently intrigued by a number of presentations to buy shares in two companies, but not in the shipping sector, of course. We are certain that our investment was not quite what Mr. Rose hoped for but we expect that others, with more meaningful dollars to deploy, either took new positions or increased their holdings.

TORM Takes Half of FR8

Some people are better than others at sharing, and TORM seems to be right at the top of the list. After purchasing OMI jointly with Teekay this past spring and splitting the assets, TORM announced this week that it had acquired a 50% equity stake in FR8 from Projector for $125 million. The FR8 Group controls 25 vessels including three LR2 newbuildings for delivery in 2008. It owns six modern product tankers, comprising four MR and two LR1 vessels and has long-term charters on three LR2, four LR1 and 11 MR product tankers, with purchase options on three of these vessels. The group also commercially manages one LR2 vessel and has about 30 staff worldwide in Singapore, London and Veracruz. The full fleet list is shown on the next page.

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