Sunday, September 27, 2009

Odfjell is well positioned in the current shipping crisis

Odfjell is one of the big four traditional parcel chemical tanker operators together with Stolt Nielsen, JO Tankers and Tokyo Marine. Odfjell controls 17.8% of the global core chemical market. They have an integrated logistical system with tank storage, large chemical tanker fleet and sizeable contract book with end users. They are expanding their tank storage business to complement their ME partnership with NCC for Middle East refinery exports to the Far East.

Odfjell is a mature chemical parcel operator with the largest share of the world market of any peer operator. They are well positioned to weather the financial meltdown and current shipping market slowdown. In recent boom years, they expanded moderately their fleet without taking on excessive leverage.  They relied on time-chartered tonnage to fill excess demand. Their large contract book protects them on the downside.

The drop in cargo volume and nominations has caused bottom line damage. EBITDA first half 2009 for their parcel chemical tankers was US$ 49 million, compared to US$ 101 million in the same period 2008. Operating result (EBIT) was a loss of US$ 9 million first half 2009, compared to a gain of US$ 47 million in 2008. Compared to their peers in dry cargo, tankers and container; they are sharing the pain of the downturn, but their situation is comparatively more manageable.

Odfjell is focussing on building up their partnership with their Saudi-Arabian partner National Chemical Carriers (NCC) in the Middle East. In the first quarter the entered into an agreement with NCC to bare-boat charter three 37 000 stainless steel parcel tankers for ten years with purchase options. The three ships are NCC Jubail (1996), NCC Mekka (1995) and NCC Riyad (1995). Furthermore, Odfjell entered into three to six year time charters for three ships that earlier were owned by NCC. These ships are Bow Baha (24 728 dwt/1988), Bow Asir (23 001 dwt/1982) and Bow Arar (23 002 dwt/1982).

In June 2009 Odfjell SE signed a new 50/50 joint venture agreement with NCC to establish a company in Dubai, to be named NCC-Odfjell, to commercially operate our respective fleets of coated (IMO 2/3) chemical tankers of 40 000 dwt and above, in a joint pool for trading in the chemicals, vegetable oils and clean petroleum products markets on a world-wide basis, with emphasis on the growing production and export of the Middle East region. The new company will start operations early next year with 15 vessels and a total dwt capacity of nearly 660.000 tons, which is planned to grow to 31 vessels and total dwt of nearly 1.4 millions tons over the next three years.

Stolt is competing with Odfjell in their partnership with Gulf Navigation where they have ordered a series of Dwt 44.000 coated chemical tankers from Korea, but Gulf is a much weaker partner in providing local commercial business than NCC.  Stolt has recently refused to take delivery of one of these units due late performance.

The Odfjell expansion in its Singapore tank terminals is to facilitate the Far East export business that they expect to develop from the Middle East refinery projects coming on on line. In this context, it is not surprising that senior debt financing for the tank terminal project was easily forthcoming.

Wednesday, September 23, 2009

Things seem to be looking up for Navios Maritime Partners

The New York-listed company (NMM) announced recently that it would sell 2.8m units to help fund its fleet expansion. The sale of 2.8m units would bring in $34.18m at the offer price. The company has attracted a lot of attention for its opportunistic Capesize purchases of four units in June and two additional units with long term charters in August. Whilst the parent Navios Maritime Holdings reported recently a 56% decline in earnings, Navios Maritime Partners had a 34% increase in revenues.

Navios Maritime Partners (NMM) is a spin-off from Navios Maritime Holdings (NM) after it was acquired by a SPAC set up by Angeliki Frangou and sponsored by Sunrise Securities. It is part of a complicated corporate structure where a general partner company Navios GP L.L.C. owned 100% by Navios Maritime Holdings (NM) has holds a 2% interest in Navios Maritime Partners (NMM). Navios Maritime Holdings (NM) has a 44,7% limited partnership stake in the spinoff company, Navios Maritime Partners (NMM). The remaining share 53,3% limited partnership interest in this spin off company is held by 'common Unitholders', which are publicly traded common units of which 2% is held in a company controlled by Angeliki Frangou. Judging the participation of John Stratakis in the BoD, perhaps Poles, Tublin advised on this structure and played a role in the rationale.

There have recently been some intercompany transactions for vessels, where the spin off company struck a deal to escape a Capesize purchase from parent Navios Maritime Holdings and bought "all rights" to a Panamax with share exchanges. The new Capesize deals with reduced asset value have been channeled to the spin-off company. Already the parent balance sheet lacks transparency and the relations with this new spin-off company further complicate matters. Yet for the time-being in share performance, Angeliki Frangou seems to be managing better than most of her Greek peers in the dry cargo sector.

Whilst Navios Maritime Holding (NM) has made a good recovery from March lows and is outperforming most peer companies, Navios Maritime Partners (NMM) has been out performing its parent company. The parent company is an old established firm with a solid contract customer base providing far more intrinsic value than most publicly traded, Greek controlled dry cargo companies, which are nearly all vessel provider business models dependent on third-party charterers for vessel employment. Further Navios is a mature company, whereas its Greek peers are recent startups, which expanded their fleets rapidly in the boom years with large block acquisitions.

Navios Maritime Partners is more along the lines of its Greek peers. It is a new start up operation, but unlike its peers it is now expanding its fleet in present market conditions with marked down asset prices. It is concentrating on Capesize vessels, which have had the biggest revival this year in the dry bulk sector. The vessels have been conservatively chartered on long term contracts with profit sharing. The company holds options for further vessel acquisitions in 2010, 2012 and 2013 and additional growth through Navios Holding-controlled vessels.

Lately the Capesize market has been waning to lower levels. The tonnage supply on order in this category is substantial but the real question is the sustainability of the Chinese demand for iron ore and coal and the inventory restocking. The domestic stimulus plans have been centered on the construction industry and thus steel intensive, but China has a substantial overcapacity problem in both construction and industry. Export demand continues to be weak.

It is a reasonable play that Navios Maritime Partners (NMM) benefits from lower asset prices with the marked-down Capesize vessel acquisition transactions and better break even levels than most peer companies. The ultimate success of the venture depends on the fate of the dry bulk sector in the coming years and the major driver is Chinese supply chain needs for steel and iron ore.

Thursday, September 17, 2009

Grand Union-Aries merger: where is the value?

This reverse merger is one of the strangest shipping deals ever done. Aries (RAMS) is an ailing NASDAQ-listed company with nine product tankers, two container ships and big financial problems. The original IPO had a rough start with a lot of question marks and thereafter there were operating setbacks. Things improved somewhat when Jeff Parry, formerly of Poten, took the helm at CEO. The deal is a barter where Aries (RAMS) acquires three middle-age Capesize bulk carriers in return for a complicated share exchange agreement as well as management and debt restructuring. Whilst the deal may be attractive to major shareholders, it not so clear whether investors are getting much of deal.

Grand Union is Greek shipowning venture launched by Newfront Shipping boss Nick Fistes and Stamford Navigation’s Michael Zolotas. It also by coincidence the name of a well-known US supermarket chain. This is a privately owned, family-controlled shipping company with a fleet of 46 bulkers, tankers and newbuildings. The companies have been around for a number of years, but this is a fairly new venture that has had a very aggressive expansion plan. As a private firm, it difficult to assess its financial condition and how it has been impacted by the financial crisis and bear shipping market environment. Aries (RAMS) is a penny stock and it has had a balance sheet qualification about its future as a going concern.

The vessels that Aries is acquiring are the 135,364-dwt Yiosonas (built 1992), the 151,738-dwt Grand Nike (built 1995) and the 172,972-dwt Grand Mirsinidi (built 1993) in return for transfer a complicated share exchange and debt restructuring. 2,67 million Aries shares are being transferred to Rocket Marine (controlled by Mons Bolin and Gabriel Petrides), giving Rocket 36.8% of the total shares and Grand Union (controlled by Michael Zolotas and Nick Fistes) control of 34.2%. But the voting agreement gives Grand Union control of 71% of Aries. As part of the overall transaction, Investment Bank of Greece is buying $145m in 7% senior unsecured convertible notes, due in 2014, which Aries plans to use for vessel acquisitions and paying down debt, among other potential uses.

The Securities Purchase Agreement is subject to a number of conditions, including but not limited to (1) the entry into definitive agreements for the issuance of the Convertible Notes and the closing of that transaction; (2) the entry into definitive agreements with the Company's existing syndicate of lenders for the refinancing of the Company's existing credit facility; and (3) the absence of any event reasonably likely to have a material adverse effect on the Company or the three Capesize drybulk carriers.

The deal will see Fistes become chairman of Aries, while Zolotas will become executive director and president, as the board swells to seven members. It is difficult to evaluate the financial impact of this complex transaction on Aries. The management and BoD changes are significant.

Financially no party appears to be putting cash in the deal. The 'equity' appears to be in the vessel transfer. Further there appears to be some additional debt and refinancing from a bond issue with the Investment Bank of Greece, not a run of the mill shipping finance entity. It is not clear whether this increases Aries leverage. Some cash in the deal would have provided more transparency and plain vanilla comfort for investors.

The weakest point is the lack of commercial synergy. The biggest value in Aries is its nine product carriers (their container business is a dead letter, but the product sector is also in deep recession), but Grand Union brings no expertise or contract base to service these units. A merger with a group like Scorpio (of Monte Carlo) would have offered a better synergy, adding more value here. Aries (RAMS) is clearly betting all their strained resources on the Capesize unit additions in the dry bulk sector. This follows the Top Ships example of opportunistic fleet diversification to get out of their hole at the time, but at much lower asset price entry levels and ready financial structuring that purports to improve the balance sheet.

It would be helpful if Aries (RAMS) prepared an investor presentation to make sense of this complicated transaction. Perhaps something will be soon available so we can make further comments.