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Helping Out the Banks
In his recent sector report, John Parker of Jefferies highlighted a trend that began last year and continues today. Borrowers continue to replace bank debt with a combination of bank debt and high yield bonds. With these transactions, the banks benefit from reduced exposure, higher pricing and fees, while borrowers meet their liquidity needs albeit at a cost. High yield, as we have preached, is now becoming a staple of the balance sheet.
In the latest iteration, Marquette Transportation Company offered $250 million of senior secured notes due in 2017. Rated B3/B-, the notes which bear a coupon of 10.875% are priced at 98.81% to yield 11.125% (equating to a spread of T + 795 bps) slightly under the price talk of 11.25%. The pricing was superior to that offered to American Commercial Lines (B2/B+) in a similar deal done this summer. Those notes were priced to with a YTW of 13.5% (T + 1,013 bps), although they are currently trading at 104% with a YTW of 11.5% (STW 869 bps). The notes will be secured by a 2nd lien on all of the issuers’ and guarantors’ assets that will secure a new credit facility described below. Details of the transaction are provided in the Guts of the Deal.
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Fixing Debt
Also, last week, Commercial Barge Line Company (“CBL”), a direct wholly owned subsidiary of American Commercial Lines Inc. (“ACL”) announced the private placement and pricing of its $200 million 12 1/2% senior secured second lien notes due July 15, 2017. The notes were issued at a price of 95.181% yielding 13.13%. Concurrent with this offering, CBL and ACL will close on a new four-year $350 million senior secured first lien asset-based revolving credit facility.
The proceeds of the notes and the credit facility will be used to repay ACL’s existing credit facility, to pay certain related transaction costs and expenses and for general corporate purposes.
The book-running managers for the notes were Bank of America, UBS, SunTrust and Wachovia.
Rashomon – As We See It
It began with the movie “Rashomon” and evolved into a concept. “The Rashomon effect is the effect of the subjectivity of perception on recollection, by which observers of an event are able to produce substantially different but equally plausible accounts of it.” Or as the movie asks, who is telling the truth and what is the truth?
Our version of the script calls for a look at Seaspan’s first quarter earnings announcement to elicit the main takeaways. We then turned to our favorite shipping analysts, including Natasha Boyden of Cantor Fitzgerald, Gregory Lewis of Credit Suisse, Omar Nokta of Dahlman Rose, Douglas Mavrinac of Jefferies, Urs Dür of Lazard and Justin Yagerman of Wachovia, for their views and calls. This becomes a very interesting exercise because, as the analyts tell us, there is no company that is easier to model given their strategy to lock-in costs and fix revenues for the long-term.
Hard Numbers
Moving from the theoretical to the concrete, the following examples illustrate the real cost of today’s crises:
Genco Bites the Bullet
On Tuesday, Genco Shipping & Trading (“Genco”) made the correct but painful decision to cancel the previously announced acquisition of six dry bulk newbuildings, including three Capesize and three handysize vessels, from Lambert Navigation et.al., at an aggregate purchase price of $530 million. As part of the agreement, the sellers will retain the deposits totaling $53 million. The three Capesize vessels and three Handysize vessels are being constructed in the Daehan and Jinse shipyards in South Korea, with deliveries commencing in the 4th quarter 2008 (two Handysize) through 2009.
New York Conference Outtakes
As a preview for next week, we decided to cover some of the more interesting early highlights of the conference. In his welcome to the conference, Hamish Norton of Jefferies got a laugh when he made the point that Jefferies was now the largest investment bank in the U.S. He also pointed out that Jefferies having avoided the sub prime mess was well capitalized and ready to assist the industry. With respect to the industry, he commented that we were back in the good old times of shipping, however the good news is that there is an investor base which understands shipping and we don’t want to lose them.
I.M. Skaugen & Teekay LNG Partner in $90 million Lease Deal
The market moves, liquidity returns, but things have changed. Forty two percent of bankers who responded to our annual survey last month believe that a reasonable advance rate for a charterfree newbuilding is under 60%. Another 46% believe the rate should be under 70%. This leaves most owners without an attractive and high quality charter left to come up with 30-50% of newbuilding costs in equity. Taking into account how high ship values have gotten, that means even strong owners with significant newbuilding programs need to think creatively about how best to raise the equity they need if they don’t wish to resell their newbuilding contracts.
The Week in Review
The week has been relatively quiet from a transaction standpoint, but sentiment by and large is upbeat. The shipping markets as a whole continue to perform above expectations, and the credit and equity markets functioning smoothly, if not lavishly.
For example, Caterpillar Financial Services this week entered into an agreement to increase Aker Philadelphia Shipyard’s credit line by $150 million. Under the agreement, Caterpillar will fund up to $80 million in construction costs for seven consecutive product tankers, valuing the full agreement at $560 million. Interest payments will be required only during the construction period, and Aker may apply the funding to up to three ships simultaneously. The deal takes care of financing for the remainder of the 12 Jones Act tankers under construction at the yard, which are to be sold to Aker American Shipping for bareboat charter to OSG America. Four these tankers have been delivered, three are currently under construction, and the remainder are to be completed by 2011. Continue Reading
Counterpoint!
At times, it is extremely difficult to portray the various perspectives of a transaction, particularly when it is in a public deal for obvious reasons. In light of our article last week, Seaspan’s management wanted to set the record straight and provide their insights into the process and in particular the timing and the rationale for being the first shipping public offering of the year despite the credit crunch.
Sentiment Turns
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.
Debutante
Last week D/S Norden (“Norden”) held its first Capital Markets Day in New York at the prestigious Four Seasons Hotel. The event was hosted by Mr. Ivar Hansson Myklebust, EVP and CFO, and Mr. Martin Badsted, VP & Head of Corporate Secretariat. As this was the premier event in N.Y., the crowd was relatively small but high powered and included, among others, key New York shipping analysts Natasha Boyden of Cantor, Doug Mavrinac of Jefferies, Glenn Muller from JP Morgan and Michael Webber from Wachovia. Others in the audience included investors as well as Peter Shaerf of AMA.
The company allocated three hours for the presentation and Q&A session and we are struggling how to distill the in-depth presentation and do it justice. Objectivity is also an issue as we are ardent admirers of the company’s rather unique market approach and strategy. With that said, here are our key takeaways and our favorite slides from their presentation.
The Official Guide To Marine Finance Providers
Shipping Index
