Monday, April 4, 2011

Genmar restructuring and its costs

Genmar is one of those companies too big to fail because of borrower leverage from the high quantum of loss in case of default. Also as a publicly listed company, it has the option of raising equity to cover its senior lenders as a sort of private bailout facility. In this case, Genmar (NYSE: GMR) seems to be pursuing both avenues with a Oaktree Capital taking a pricey US$ 200 mio secured position with priority and warrants plus a US$ 53 mio follow-on offer. Peter G's aura seems still there.

The Oaktree deal appears to be dependent on Genmar refinancing existing senior bank debt. Ostensibly, Oaktree wants to see the payments pushed out and no risk of covenant violations in the near future since it looks unlikely that the company will be able to make an cash payments over the next two years and the principal amount will rise with the accumulated compound interest. Oaktree also holds warrants to purchase up to 19.9% of common stock. Perhaps this is a measure to get control of the company should market conditions worsen, but also to reap profits should the shares ultimately rise in value if the company survives in its present form.

I would expect the existing senior creditors to play along with these moves for increased liquidity, even the new priority position of Oaktree over existing bondholders. The troubling thing is that debt and leverage will continue to rise and debt service costs will go up. A more classical approach would have been debt for  equity swaps or more asset sales to get the leverage down, but today debt is king and debt pyramiding is the fashion.

The proposed follow-on equity offering is priced US$ 2 (at par) with the proceeds to pay a portion of the remaining purchase price for a Suezmax tanker that was booked at a high price by last year's levels, which would be very likely less today. Personally I cannot understand why investors would accept to buy in at par for a deal like this. Adding to the risk, there is dilution from the Oaktree warrants, the high debt servicing costs and the restriction on dividend payout. Would not they want a steep discount for their money?  The alternative of reselling the unit would probably mean Genmar taking balance sheet losses on the transaction.

None of these announcements has resulted in share price improvement, but there is stabilization at the US$ 2 level for the time being.

No comments:

Post a Comment