The market is depressed. The people are not.
The debt markets exist. But you are looking at a lot less for a short term costing a lot more. A lot of the banks will be properly back into the game by 2010. It will help to have companies based in ship finance exporting countries.
The capital markets exist. The bond market is open at very reasonable rates. The equity markets are open for existing issuers but valuations are poor.
We may have a rebound this year thanks to stimulus plans and fiscal loosening, but the underlying damage is done. Banks will eventually HAVE to account for their losses. The write-downs have to come from somewhere and government debt is hardly the answer. Unless they wait years with the balance sheets impaired.
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Written by:
nhuvane2 | Categories:
Conferences,
Freshly Minted | June 25th, 2009 |
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In late December of 2007 when the financial debacle had begun to unfold from a housing crisis to a credit crunch, Pacific Basin took the challenge and launched its convertible offering – the largest by an Asian shipping company ever and the second largest convertible offering by a Hong Kong issuer since the beginning of 2006. Raising USD 390 million with the overallotment exercised for 5 years at a fixed 3.3% on an unconditional and unsecured basis was truly remarkable especially in such tough market conditions.
Fast forward to a year later and the deteriorating global market conditions have created opportunities for Pacific Basin to retire the convertible bonds early at a very attractive price. Over a 4 day execution period between 14 October and 17 October 2008, the company was able to buy back convertible bonds worth USD 60 million at face value for USD 39.35 million or an average price of only 65.6%. This off-market buyback exercise immediately created USD 22 million of net present value for the company. At the time of publication, we noticed that Pacific Basin has bought back and cancelled USD 76.05 million convertible bonds, at around 20-35% discount, and we expect the management to continue to do so given its current strong balance sheet. All these transactions will save the company around USD 23.6 million at the time of redemption on the amount repurchased. Continue Reading
Written by:
carisk | Categories:
Asia,
Bonds,
Equity | February 12th, 2009 |
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It is always a pleasure to hear from someone with a fresh and confident outlook, and such was the happy occasion when the Norwegian American Chamber of Commerce presented Rune Bjerke the Group Chief Executive of DnB NOR at an early evening, late summer event in New York. Mr. Bjerke joined the Bank leaving the successful Hafslund ASA where he was CEO. And as he noted the switch to banking left some of his friends perplexed it was the sort of challenge that appealed even though his start date approximately coincided with the start of the Sub Prime crisis.
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Written by:
carisk | Categories:
Freshly Minted,
Market Commentary | August 21st, 2008 |
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In a market in which issuing new equity at or above net asset value is nearly impossible, and at a time when high payout shipping companies are struggling to grow, General Maritime’s all stock acquistion of Arlington Tankers not only makes perfect economic sense – the cashless and symbiotic nature of the deal is probably a blueprint for a few more transactions to come.
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Written by:
carisk | Categories:
Freshly Minted,
The Week in Review | August 7th, 2008 |
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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
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.
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Written by:
carisk | Categories:
Freshly Minted,
The Week in Review | April 17th, 2008 |
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Worldwide Shipping has mandated UBS and Carnegie to manage the planned flotation of 50% of their LNG/LPG assets in a listing on the Oslo Stock Exchange. The company will own 20 LNG vessels and is expected to use the Teekay LNG Partners MLP structure. The new company is to be managed out of Norway by CEO Jan Haakon Pettersen.
Written by:
carisk | Categories:
Equity,
Freshly Minted | June 23rd, 2005 |
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Don’t be misled by the trade press articles and the fact that recent shipping issuers have priced IPOs at the low end of already lowered price ranges; the fact remains that based on our valuations of these companies, issuers are continuing to do U.S. capital markets deals at very attractive valuations. Moreover, we are seeing deals with single hull tankers (Capital), older vessels (TBS) and secondary share sales (Eagle), as well as related party management companies (various). Despite claims to the contrary, the fact remains that the American equity markets are wide open for all kinds of shipping deals. As we see dry cargo rates begin to bounce in recent days, we would not be at all surprised to see this sector regain momentum and enjoy another run.
As one of the 150 investors at Marine Money Week said over coffee, “just because we aren’t paying the retail price that investment banks put on the prospectus doesn’t mean that sellers aren’t getting a premium.” We would concur with that. The message being telegraphed back to the industry from Wall Street and Main Street investors is that the market is open for shipping IPOs even though the heady days of 2x net asset value are gone – at least until rates begin to gather momentum in the coming months.
That said, we should acknowledge the two companies currently engaged in roadshows in the U.S. Capital Maritime & Trading Corp filed an F-1 today for the issuance of 16.67 million shares at $14-$16 per share on the NYSE. We will discuss this deal further next week, when it is expected to price. Cosco has also traveled a long way to bring its roadshow to New York this week.
Eagle Bulk – Don’t Believe What You See
But deals still in the market do little to demonstrate investor appetite. Let’s take Eagle Bulk as our first in-depth example of why the U.S. equity markets are still open, and yes even attractive, to shipowners. The U.S.-based handymax owner Eagle cut the estimated price of its initial public offering to $14-$15 a share from the planned $16-$18 a share, but the company increased the size of the IPO to 14.4 million shares from 13.25 million to make up for the shortfall. The deal priced at $14 per share, which we estimate to be around 1.6x a net asset value that is already high, especially in light of declining charter rates. This is a phenomenal execution that gives start-up Eagle a better valuation than Teekay or OSG. As mentioned above, despite the fact that investors have supposedly rejected issuer’s attempts to sell secondary shares, private equity fund Kelso, which is the financial sponsor behind the Eagle deal, was able to extract about $70 million through fees and debt repayment, which represents almost the fund’s entire investment in Eagle, even while it still retained about half of the equity.
Soft Aftermarket Trading for Eagle
As we saw with Diana Shipping, Eagle has sagged in early aftermarket trading as the stock immediately sank to $13.50. As we understand it, Citigroup’s Smith Barney and UBS’s Paine Webber sold about 65% of the deal to retail investors while the joint bookrunners, which include the names above plus Bear Stearns, sold the balance of the deal to institutional investors. Although this type of sales technique resulted in solid pricing, as it did in the Diana deal, the aftermarket performance prevents “flippers” from immediately selling their stock for a gain. We do not know whether the underwriters exercised the green shoe or are willing to offer support by buying stock to stabilize the pricing. If they have already used their dry power to support the stock, however, we would not be surprised to see continued soft price performance, at least until we run into some sort of market upturn.
Are Dividends Losing Effectiveness?
One question we’ve been asked lately relates to yields. Specifically, how are investors looking at them? The answer, in our view anyway, is that yield can be used to increase valuation among certain fringe buyers of these stocks such as retail, but most experienced institutional investors clearly are looking at net asset value because issuers like Eagle do not have the long-term contracted cash flows required to meet the dividend in question over a sustained period.
In fact, investors that we spoke with at Marine Money Week seem to like growth stories and are discounting the real value of the dividend over the long-term. They are, however, looking at dividends as a way for them to lower their cost basis by receiving their deprecation and earnings in cash. As one Eagle investor said, “Do I think the 16% dividend is a guaranteed? No. But based on the company’s charters, I know I can get more than 30% of my money back over the first two years, meaning that I am really buying this company at closer to net asset value. That is the trade.”
This logic, although tempting, neglects to embrace the potential loss of principal that would result if rates and values return to historically normal levels. In our view, companies that seek to pay dividends and do not have long-term employment to back them up should just be careful to set them at realistic levels that do not stress the company’s liquidity and leave enough cash to take advantage of growth opportunities. It follows from this that Eagle priced at a quite respectable valuation, indicative more that investors have sobered a bit since January than that they have lost interest in dry cargo equity.
Written by:
carisk | Categories:
Equity,
Freshly Minted | June 23rd, 2005 |
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In what we think is a truly defining moment in history of shipping and the capital markets, Eagle Bulk Shipping began its roadshow this week to raise approximately $255 million of equity against a fleet of 11 handymax bulk carriers. We don’t mean to be histrionic here, but we think the valuation of Eagle will strongly influence the dozen other dry bulk deals queued up to come to market.
What we find fascinating about the deal is that Eagle Bulk is using its circa 14% dividend to come to market at approximately 2x net asset value at a time when the comparables are trading closer to 1x net asset value.
According to our calculations, the net asset value of the fleet is about $221 million. We arrive at this figure using our fleet value of $339 million (which includes 3 vessel to be acquired) against liabilities of about $130 million (which includes $97 million on those 3 new vessels and $30 million drawn from the company’s credit facility) and cash of $12 million. Based on the 26 million fully diluted shares (by which we mean the 13.25 million sold to the public and the balance allocated for the green shoe and retained by the sponsor) Eagle Bulk has a net asset value of $221 million, or $8.50/share versus an offering price of $16-$18 per share.
With the serious institutional shipping buyers very savvy in their ability to value shipping companies these days, we can only assume this deal will be sold into the retail market where buyers will be attracted to the yield. Another possibility is that the underwriters have put a very high number of the cover of the prospectus knowing that it will be negotiated down by the investors in today’s choppy IPO market. Eagle Bulk could effectively price its offering more than 50% below the mid price of the range and still capture a premium.
The Opportunity
Aside from the high valuation, small enterprise value and lack of vessel diversification, we think the Eagle Bulk deal provides a well-structured opportunity for investors to participate in the handymax dry cargo market. We say it’s well structured because commercial management is inside and technical management is in the hands of third party V Ships. Moreover, the charters are good, the ships are modern, the company has a large credit facility and the vessels operate in the handymax sector – which enjoys the best supply/demand fundamentals of all the dry cargo markets.
If this deal is successful, the real credit goes to whoever at Eagle (or, perhaps, credit facility provider Royal Bank of Scotland!) decided to put medium term charters on the ships while the market was still strong. Although charter default risk exists in a weakening market, as you can see from our calculations the cash flows generated by these vessels for the next 18 months are presently higher than what could be achieved in the market today and will improve the EBITDA and net asset valuation of the company.
The Challenges – Overcoming Diana
The successful execution of the Eagle Shipping IPO will not be without some challenges, at least if it is sold to institutions. For one thing, the deal is being brought to market by the same pair of bookrunners that brought out the similarly structured Diana Shipping – UBS and Bear Stearns. Citigroup was also added on the cover recently (they did not appear on the original S-1 filing), perhaps to broaden the distribution, and CSFB is the sole co-manager.
Although the high dividend yield structure has created extraordinary premium valuations for tankers companies such as Nordic American Tankers, Knightsbridge Tankers and Arlington Tankers and has clearly inspired replicas in other sectors, the model has not yet successfully translated into dry cargo. Take for example, Diana Shipping, a first rate, high quality company that was the first deal of this sort in the dry bulk space, which has suffered mightily since it began trading in March. It trades at a premium of about 1.3x net asset value and was priced at about 1.4x net asset value before falling in the aftermarket.
Market sources indicate that there were some mistakes made with the execution of Diana, such as who it was sold to, high pricing and a premature exercise of the green shoe, but to be fair to everyone involved the fact that the dry cargo market began falling immediately after the offering was probably the underlying culprit. That said, the unpleasant fact remains that buyers of the Diana IPO have suffered losses – which is why we assume from the high pricing on this deal that it will sold into a new market that puts a greater emphasis on yield than underlying value – retail. Although many within the shipping industry have been astounded by the valuation of companies like Nordic American Tankers, the fact remains that they have delivered very good returns to investors who bought them and held the, over the years.
The Valuation
As is our editorial policy, we will not tell you what we think Eagle Bulk is worth. We will, however, attempt to help you make sense of the information that is presented in the prospectus. As mentioned earlier and outlined in the accompanying figures, the Price/Net Asset Value appears to be high relative to comparables. The key to achieving this high valuation will derive from the healthy dividend that the company is able to pay from free cash flow. As you can see from our calculations, Eagle will generate close to $80 million of EBITDA per year of which about $60 million will be returned to shareholders through a dividend, which will equate to 13.5% yield.
Written by:
carisk | Categories:
Equity,
Freshly Minted | June 9th, 2005 |
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It seems the time has passed for the shipping industry to wave farewell to veteran analyst David Lepper. Mr. Lepper has maintained a post at UBS, but has moved on from the shipping markets into small cap.
