Monday, March 28, 2011

The Genmar saga rolls on with equity infusion and restructuring package

In vessel provider business models, there is little any private equity firm can add in efficiencies. Success is largely a matter of the freight market cycle and asset speculation. The only means for high returns is scaling up in huge leveraged block purchase deals, arguing expanded earnings multiples despite marginal (often diminishing) returns on asset. Peter G managed last year to raise capital for Genmar on such expectations without discount. The timing was bad. Now Genmar is in a mess.

Genmar's share price has been in steady decline since the heady days of 2007 when it was trading close to US$ 40. It stabilized after the 2008 meltdown just above US$ 7 and even briefly exceeded the US$ 8 level on the euphoria of the ill-fated Metrostar block deal and capital raise.

The Group is now in a fight for survival with weak cash flows, unfunded capex, mounting debt maturities and a requirement of new equity by year end by its beleaguered senior lenders. The Company has been trying to sell unencumbered vessels to raise cash via leading, which is the first resort when a shipping company faces financial problems. This brings a nice cash infusion that later slowly erodes with the payment of the lease obligations that reduce free cash flow.

The likelihood of a dilutive equity offering increases day by day with the prospects of the entry of a private equity financial investor. Oaktree Capital is a prospect. Other names mentioned include the Blackstone group and Maritime Equity Partners. Oaktree is deeply involved with the Beluga bankruptcy. Another option for Genmar shareholders would be a firm like Advent with its system of operating partners that would bring new blood into Genmar management. As Paul Slater has remarked, it is time that underperforming shipping companies are compelled to fire management in the same way as other listed companies when shareholders lose money and value is impaired. As usual, only the senior leaders have any clout and shareholders are at the mercy of the management and its lenders.

Platou Markets estimate Genmar has no equity value, assuming a 10% decline in asset values in their current supply/demand outlook. Genmar has severe cashflow and liquidity problems. There are two credit facilities: the 2005 credit facility of US$ 745 mio still outstanding (LIBOR + 250 bps, but US$ 580 mio swapped at 4.2%) and a new 2010 credit facility of US$ 372 mio (LIBOR +300 bps) for the acquisition of the 7 Metrostar vessels. It also has US$ 300 mio 12% notes due 2017. Of the 2005 credit facility, US$ 50 mio falls due in 2011 and the remaining US$ 695 mio in 2012. The 2010 credit facility has a repayment schedule starting September 2010 estimated at US$ 33 mio per year. Cash deficits of US$ 67 mio/ US$ 787 mio are projected in 2011/ 2012.

The company needs substantial restructuring and new business plan. A merger with a larger, stronger group with a better commercial base is another option. The quality of the fleet could make this attractive.

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