Tuesday, February 3, 2009

A bailout plan for the shipping industry?

YA Global is effectively bailing out OceanFreight, who has seen its vessel asset prices plummet and sought a waiver with its senior lenders for the default in their asset coverage covenants. This model of recapitalization of the OceanFreight balance sheet could be used as public policy to promote the recapitalization of the US banking industry by private funding.

OceanFreight scaled up their fleet at top of the market asset prices in the dry bulk shipping cycle boom. This was partially financed by senior bank debt. Since the financial crisis last fall, freight rates have plummeted for dry bulk vessels and some routes have been below cost. A growing number of vessels are in semi-laid up status, waiting for orders. Vessel values have fallen by 60% on the average. Older tonnage is close to scrap value. Many companies are forfeiting their deposits and canceling new yard orders.

This in turn has impaired the OceanFreights balance sheet. The market value of the fleet no longer conforms to the limits of their senior debt asset/ loan coverage covenants. They have also faced charterer rate renegotiation demands of period employment contracts down to market levels. YA Global offered OceanFreight an innovative solution where it puts fresh funds in the firm that are used to pay down term debt and recapitalize the balance sheet. In return YA Capital is taking an equity share in the company with an agreed pricing formula.

This type of solution could be adopted by public policy to encourage greater participation of private investment funds to recapitalize the US financial industry. The US government could offer tax concessions to induce investors to place more of their funds in US banks for the needed industry recapitalization.

The advantages would be the conservation of taxpayer money for other pressing needs, less public debt burden and smaller government intervention in the banking industry where there could be serious conflicts of interest on credit extension.

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