Wednesday, February 18, 2009

More charter party defaults at Excel (EXM)

Excel Maritime (EXM) is under further pressure from counter party risk problems. Its remedies are limited. It is likely to have to live with the problem until market conditions improve.

EXM argued strongly to its investors that one of the strong points of the Quintana (QMAR) merger was the heavily contracted employment profile. QMAR scaled up in 2006 with a massive vessel purchase deal from Metrostar that was backed with Bunge employment. The market in 2007 outperformed all expectations and QMAR's stock rose but the company free cash flow benefited only very mildly because of the conservative employment profile. This led QMAR shareholders to market the company for sale.

EXM paid a substantial price but they reasoned that QMAR's charter contracts would improve their secured coverage of their existing employment profile.

Presently EXM is understandably very vexed about accepting charter renegotiations. I have always argued that in bad markets, legal remedies are only a partial fall back. It all depends on the charterers capacity to pay and other employment opportunities available (which diminish as market conditions get worse). If the charterer is not solvent and risks bankruptcy, there is really no legal remedy. Owners often have a vested interest to assist their charterers in these situations. Each charterer relationship has to be viewed on its merits.

The most important thing in a bad market is to keep the vessels moving. Often voyage charters are safer from a credit risk standpoint, but this requires strong chartering and operational skills as well as a sufficient fleet size.

Bottom line: EXM probably did not sufficiently price the risk factor in the M&A deal. At the time, vessel pricing was virtually free of risk discount. The break even levels were far in excess of the industry median, which is a natural fall back level in this highly cyclical business. The secured employment was only a partial hedge with counter party risk.

This acquisition was heavily financed by senior debt so any shortfall in free cash flow from charter party renegotiations could potentially raise problems in servicing debt.

QMAR was wise to sell out and partially cash in their profits at the time.

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