Less Buzz, but…………More Business

On the outside, this year’s Jefferies Conference was subdued with less buzz than previously. However, it was a marked improvement to last year’s event, which coincided with the collapse of Lehman Brothers. Then the shipping markets were still good but all eyes were focused on the Bloomberg screens awaiting developments, while discussions revolved around whether or not to buy gold. Today was different. The economy seems to be improving while the shipping markets struggle. Shipping’s main source of capital, bank debt, is rationed while the equity markets are offering hope. Today was the day for public shipping companies to plead their case to investors. It was all about business.

We know that the presentations are the interlude and that the real action takes place behind the scenes during the one on one meetings as investors and companies engage in speed dating. Yet even in the public venue, we saw a clear dichotomy between the haves and have not’s. The rooms were packed for those companies with large market caps, liquidity and share volatility. For investors these days, slow and steady does not win the race. Nevertheless, the good news was that all the companies had meetings, although some had more than others. But all agreed the meetings were of high quality and now included a new class of investor – the opportunity fund.

As usual, our coverage will focus on points of interest to us. But as it was impossible to cover three tracks, our emphasis, for the most part, was on those unappreciated companies where interest may have waned, whether for lack of coverage or as a consequence of the market sector in which they participate.

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When the Cure Is Worse than the Disease

As part of its Chapter XI filing, U.S. Shipping Partners (“USSLP”) filed on April 29th a Plan Support Agreement, which as its name suggests outlines the terms under which the partnership agrees to use its commercially reasonable efforts to obtain Bankruptcy court approval of the pre-arranged Chapter 11 plan of reorganization and the secured lenders agree to cooperate in that regard.

Under the terms of this agreement, all existing partnership and other equity interests are cancelled and extinguished. The partnership will be reorganized as a Delaware corporation and new common stock and warrants to purchase new common stock shall be issued to the senior secured lenders and the holders of the second lien notes.

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Strained Bedfellows

If things were not bad enough, U.S. Shipping Partners’ joint venture with Blackstone to build five U.S. flag product carriers is in the process of unraveling as the latter tries to protect its investment. Under the various operative documents, Blackstone has declared a Board Reduction Event and a Manager Termination Event, the effect of which would be to remove USSLP’s subsidiaries as the managing member of the joint venture and the manager of the vessels under construction. Adding to the woes, the lenders to the joint venture gave notice of default under the credit facility and their intention to foreclose on the M/T Golden State, the first vessel delivered to the joint venture by NASSCO.

USSLP is contesting these claims through a lawsuit and in the interim has filed a motion for a preliminary injunction enjoining Blackstone and the banks from taking these steps. The hearing is set for April 30th, the same day as the latest extension of the forbearance agreement expires. In the interim, the court has issued a temporary restraining order precluding the parties from foreclosing upon the vessel and replacing USSLP as manager.

Secondary Opportunity

The German Ship Finance Forum followed last years’ pattern of commencing with a half-day seminar. This year’s topic was focused on opportunities in secondary markets. Chairman Michel Bourgery of DVB started things off with a brief overview of the markets. Based upon his successful prognostications in the past, we listened carefully as he suggested that listed companies would be taken private. He bases this upon the fact that there is no re-cycling of equity and they are locked-in loss making position. Moreover, limited visibility and overall pessimism are also factors. For those who have no fear, he suggested taking a position in the tanker market was too early as the one-year t/c rate is greater than the three year. For bulkers, the time to go shopping will be this summer.

Dr. Albrecht Gundermann of Salomon Invest took the audience through the secondary market in KG funds, which is relatively new. Historically, once you joined the party you could not leave it. Trading remains limited but there is a real market with real prices. Right now it is a buyers’ market. With a total market of EUR 30 billion, only 4% has been traded.

Pareto’s Peter Wallace next gave his insights into the IS/SPC (formerly the K/S) market. The size of the market is approximately $15 billion and is split evenly between shipping and offshore. The basic structure is a limited partnership which has both paid-in and uncalled capital. No longer tax-driven, this product is extremely flexible and can be designed in any form that makes economic sense to the participants. It is an ideal alternative when public equity is difficult or expensive or when the asset is trading below NAV. Investors like it because:
•    There is no management risk
•    You can pick the asset you want
•    The structure is transparent
•    A trigger clause allows the holders of 15-25% to cause a sale
•    There is a liquid secondary market
•    The price to put the project in the market is relatively cheap at 3-4% of the cost of capital
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Postponing the Inevitable

Or so it appears to us in the case of U.S. Shipping Partners. We reported back in December, that the company and its bankers entered into a waiver and forbearance agreement based upon its failure to pay the December installment of principal and interest due under its senior credit facility. Provided there was no other default, the forbearance agreement and waivers were scheduled to terminate on February 10th. Last week, the company announced that the lenders had agreed to extend the waivers and the forbearance agreement through February 20th. At this juncture, the sale outcome seems less likely but one can hope.

Default I

On the last day of the year, U.S. Shipping Partners filed an 8-K with the SEC announcing that it had failed to pay the interest and principal due under its senior credit facility ($332.6 million), which triggered an event of default. As a result of such failure, the lenders (CIBC, Lehman and Keybank) holding a majority-in-interest of the outstanding loans may declare all outstanding amounts immediately due and payable and to pursue their rights and remedies under the agreement. However in this instance the holders of a majority-in-interest had entered into a forbearance agreement the day before with the partnership pursuant to which they have agreed to forbear from taking any action or exercising any remedy permitted under the senior credit agreement as a result of the partnership’s failure to make the December 31st payment. The forbearance agreement terminates on the earliest to occur of: (i) February 10, 2009, (ii) the occurrence of any event of default other than the failure to make the December 31st payment and (iii) the failure to comply with the terms of the forbearance agreement. During this 40-day period, the parties agree to engage in good faith negotiations regarding restructuring and strategic alternatives, which shall include the possible sale of the partnership.  It should however be noted that the lender’s prior waivers relating to covenant defaults for the third and fourth quarters expire on January 31st. Unless waived or amended, the partnership will be in default under the terms of the forbearance agreement as of that date.
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Waiver And Fourth Amendment to Third Amended and Restated Credit Agreement Otherwise Known as the End of the Line

Reading the press release from U.S. Shipping Partners (“USS”) announcing an amendment to the credit agreement, we came away with the impression of a simple waiver and amendment to get the company through the next year, although it does contain a caveat that the summary “does not purport to be complete and is subject to and qualified in its entirety by reference to the waiver and fourth amendment filed herewith,” which you are urged to read in its entirety. We did and were surprised.
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