Saturday, December 11, 2010

Genmar's scaling up proves poor timing decision

Peter G was the star of Posidonia earlier this year with his US$ 620 mio block tanker deal for the Metrostar fleet (five VLCCs and two suezmax newbuildings). He succeeded to raise US$ 195.6 mio in net proceeds from the sale of 30.6 million new shares plus allotments with a minimal 4.75% discount in a highly touted deal. One cynical hedge fund manager said at the time that the deal was a means to raise equity with minimal dilution for an already belabored operation suffering from high leverage.

The leverage reduction was only 5% with a drop from 75% to 70% by this equity raise on hyped expectations of a tanker market recovery. A number of major brokerage firms were bullish on tankers at the time. Several analysts upgraded Genmar, which facilitated the issue.

These shares represented 50% of the companies market valuation. There was both market and dilution risk in this operation, yet well-regarded analysts like Cantor's Natasha Boyden ignored the risks arguing that the acquition was accreditive and encouraged investors to buy. Unfortunately, the tanker market disappointed and Genmar's share price has been heading southwards since. Investors got badly burned.

In the fall, Genmar announced a US$ 165 mio sale and leaseback deal with Pareto for two VLCC's (Genmar Victory and Vision Dwt 312,000 both built 2001). This transaction looked like signs of financial trouble with leverage and liquidity. Genmar was facing a 15 December deadline to carry out asset sales. Pareto struggled to rally investors to put in US$ 43 to US$ 63 mio equity to close the deal.

Generally sale and lease back deals raise cash at the expense of future cashflow. In the case of poor markets, this can create further problems. On the other hand, they enhance operational leverage should there be an upturn.

Under these circumstances, it is not surprising that Standard and Poor's (S&P) has just slashed General Maritime Corp’s (Genmar’s) long-term corporate credit rating from B to CCC+. S&P cited lack of current borrowing ability, low levels of cash and significant intermediate-term debt obligations as the rationale.

Wells Fargo Securities analyst Michael Webber said: "given that Genmar's best options to avoid a covenant breach include: additional waivers, which would indicate continued dependency on its lenders and a potentially higher interest burden; asset sales, which could imply material [net asset value] NAV downside if forced on to the market; and an equity raise (which would be significantly dilutive); we believe shares could continue to face downward pressure over the near-to-intermediate term.”

Many feel that tanker markets will improve in 2011. The question is the degree of recovery since the fall in rates has been substantial and the winter season so far has had lackluster results.

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