Wednesday, January 19, 2011

Genmar muddles through

Genmar recently found reprieve in Northern Shipping funds, selling three product carriers and leasing them back for seven years at US$ 6.500 per day that will rise to US$ 10.000 per day after two years. The group has been fighting a shortfall on the US$ 620 mio Metrostar deal for some time and needed the cash to repay a short-term loan. Northern participation reflects increased interest in this financial sector to book shipping transactions.

Northern - composed of mainly ex-NFC (DvB Bank leasing venture, who lost a lot of people in the 2008 meltdown) executives like Sean Durkin and Nikos Stratis - has been looking for leasing business and Peter G/ Genmar is a too big to fail company and ideal client.

Peter G did the Metrostar deal in the spring of 2010 on the euphoria of tanker market revival, taking advantage of the funding window opened in capital markets. He was constrained to do a large block deal for a follow-on offering with investors. Metrostar got a premium price on their units because of the time needed as well as the uncertainly to complete the deal with share underwriting and bank lending. In the end, the Genmar follow on offering was very successful with only marginal discount and their banks happy granted them a large loan facility to support the acquisition.

Since then the tanker markets have deteriorated and values are under pressure. This year the crude market has started badly with a nasty tonnage overhang and slack cargo demand, mainly driven by the Far East and Western economies much weaker. The products market is faring better with firmer rates, but still historically low levels.

The pricing of this deal with US$ 6.500 leasing rates in the first two years reflects current market conditions, leaving Genmar barely above water with two of their units chartered at US$ 15.000 per day and the third unit at US$ 16.000 per day. This is comparatively better than other leasing deals with hard pressed owners where sometimes there is even a burn rate that has to be funded in such transactions whereas Genmar has a surplus. The lease rate structure, however, is probably insufficient to provide acceptable investor return; thus, the US$ 10.000 rate increase in later years. We do not know, of course, how residual value is shared. NFC was normally quite aggressive on this with owners as it is key factor in lease profitability.

Northern is counting on a revival of the product tanker sector in later years, which is probably a reasonable bet. With Western governments pushing the 'green' energy revolution and adopting policies hostile to offshore drilling and domestic refineries, the main growth in the crude sector is coming from China and the Far East, but the products markets may get a substantial boost from the numerous Middle East refinery projects, where Gulf Oil producers are looking for more valued-added content in their economies.

Producing oil products at source will give them a big competitive advantage. The shift to longer trading routes will hopefully result on more tonnage soaked up to resolve the supply overhang. The product tanker orderbook situation is only slightly more favorable than the crude sector, but there is a lot more growth potential in the product sector.

The product tankers in this package are handy-sized where there has been the most ordering recently, but also more potential for scrapping due the age of the existing fleet (older, smaller units) and the larger cargo lots. Genmar had previously been trying to market a sale-lease back deal with Pareto for several VLCC's, but this did not work out well with the collapse in the spot market for this tonnage class.

Note that Genmar investors have been lately taking it in the chin with a 53% decline in market value in 2010 (not including follow-on offerings during the year) according to a recent Dahlman Rose study. TeeKay was one of the best performers among listed tanker operators with a 44% increase in market value. Teekay's business model incorporates more added value and is less dependent on asset speculation for profits. Genmar has higher financial and operating leverage making them an attractive turn-around investment should there be an unexpected and early revival in the tanker market.

Genmar capitalization, however, is closer to US$ 310 mio rather than the US$ 188 mio figure in Dahlman's study because of their follow on offering. Genmar's shares are presently trading around US$ 3,25 whereas investors purchased at double these levels in the follow-on offering so they have been badly burned in the transaction.

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