Wednesday, July 7, 2010

Peter G's big gamble

Peter Georgiopoulos has been aggressively scaling up his 3 publicly listed companies: Baltic (BALT), Genmar (GMR) and Genco (GNK) with massive block vessel acquisition deals. Whilst asset prices are down from boom year levels, bulk carrier prices have risen considerably off the meltdown lows. Bulk carrier freight rates have fallen sharply. Economists like Nouriel Roubini predict a weaker 2H 2010 and a sluggish recovery ahead, with potential public debt defaults ahead. Does Peter G's timing make sense?

Baltic was conceived in late 2009 as a pure dry cargo play based on opportunistic vessel purchases, spot employment and low leverage with a high dividend payout. Baltic's IPO was successful, but at a larger discount than anticipated. It was priced between US$ 13-14 but it is currently trading at US$ 9-10. It is a captive company of Genco (GNK) who manages the vessels and earns commissions on its fixtures and S+P transactions.

Genco (GNK) crashed in 2008 to US$ 6,50-7, but then made a modest recovery in 2009. Lately it has been under pressure, trading around US$ 14-15.

Genmar (GMR), the oldest Georgiopoulos company concentrating on tankers, is trading around US$ 5,40, which represent new lows for the year. In 2009, it underwent debt restructuring with its senior lenders, which it partially refinanced by a bond issue that cost more than originally anticipated. The successful US$ 200 mio equity raise for the Metrostar 7-vessel block deal was priced at US$ 6,75, only a modest discount. Investors are presently under water, but the increased equity strengthened the company balance sheet by lowering the leverage to 70% down from 75%.

The latest Platou market reports makes subdued projections for the drybulk sector that would indicate that Peter G's timing may not prove to be the best in making his bulker acquisitions. The tanker market is looking better, but Genmar remains with fairly high bank leverage. This would generate exceptional returns if the tanker markets continues to improve, but it also means further covenant violations with senior lenders in a poor market.

The investment thesis depends on China and emerging market growth. China slowdown in construction has sent dry bulk rates southwards lately. Supply-demand conditions and cyclicals are more favorable for the tanker sector but projected demand growth in crude oil transport is low in coming years.

Time will tell whether Peter G's was overly aggressive in his massive block deals of 2010. I think that analysts may have been overly optimistic on the timing. At least, the market has been pricing the shares differently from the analysts.  The next test will be the forthcoming equity raise for Genco to support the 16-vessel Bourbon block dry bulk acquisition deal.

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