Wednesday, May 25, 2011

Scorpio successfully pulls off a second public offer for US$ 68,4 mio

Investors snapped up all the 6 million shares of Scorpio common stock on offer at $10,50 each and underwriters grabbed 900,000 over allotments at the same price.  Since the first IPO last year,  Scorpio has been trading in a fairly tight range between US$ 9.80 - 11,90.  It started out at the high level but fell hard to the lower range in later December 2010.   The New York-listed owner is on the brink of booking five medium-range (MR) products tankers in South Korea.

Scorpio has a multi-step plan that includes the above MR new building order with delivery of the five ships in late 2012 with the options to follow a year later if taken, opportunistic second-hand vessel purchases and chartered-in tonnage for its contract book needs.

The company is a pure play product tanker listing. Scorpio is an old company with roots in New York from the Lollighetti family, who moved their operations to Monte Carlo. Scorpio CEO Emanuele Lauro is third generation. During the boom years, he concentrated on building a tanker pool with a strong team of brokerage professionals rather than leveraging up and acquiring tonnage at top of the market prices. He took on ex-OMI management, making Robert Bugbee President of his US operation and bringing to capital markets last year. Bugbee warned investors last year that recovery for the tanker market might come later than expected.

Scorpio lost money in 2010, closing the year with a US$ 2,8 mio loss.   The company reported a loss of US$ 1,4 mio in 1st quarter 2011, reversing a US$ 1,2 mio profit posted a year ago. The result, which amounted to a deficit of $0.06 in basic and diluted earnings per share, was three cents ahead of the consensus forecast. Scorpio said the addition of new ships helped vessel revenue increase by US$ 10,9 mio to US$ 17 mio in the first quarter, but admitted the gain was offset by a decrease in time charter equivalent rates which slipped to US$ 14.997 per day on average from US$ 22.798.  

The product tanker market has been struggling to absorb the large inflow of tonnage seen in 2008 and 2009. This may continue well into 2012. Rates and values remain low as demand fell short of supply in the product tanker fleet. For 2011, distance-adjusted demand is expected to advance 6% and the product tanker fleet is expected to grow by 5%. This might support rates and values, but this all depends whether demand will large enough finally to surpass the growth in fleet capacity, the persistent problem that has been plaguing the product tanker sector for years.

If Scorpio’s newbuilding plan pans out, the company will control a fleet to 22 products tankers in addition to options for the three MRs and a pair of 2008-built panamaxes.

Full speed ahead for Seaspan targeting a US$ 105 mio preferred offering

Seaspan is continuing its aggressive expansion plans and looks to use the new funds from this offering for further vessel acquisitions. It has been mulling an giant order of 20 units of 14.000 teu vessels at South Korea’s STX Offshore & Shipbuilding yard. The offering is priced like a junk bond with accrued dividends of 9.5% per year.

Seaspan last ordered vessels in 2007. Its fleet currently numbers 55 containerships with 12 newbuildings due for delivery by April 2012. Since the 2008 meltdown, Seaspan held on to its orderbook and made strenuous effort to take delivery all tonnage as ordered. They covered these new units with period employment from Chinese Coscon and CSCL, which now comprises 70% of their total revenue.

Two months ago, Seaspan signalled its intention for up to 22 post-panamaxes of 10,000 teu at China’s Yangzijiang Shipbuilding in a deal worth up to US $2.1 bn. But the company will only firm up orders once it has long-term charters in place.

Seaspan's bottom line only recently turned back into the black. The company said it made US$ 50,55 mio to 31 March on a net basis, from a loss of US$ 36,61 mio in the same three months of 2010.

The company future is intimately tied to insatiable Chinese demand with the strategy of its now almost legendary CEO Jerry Wang.

BLT successfully spins off its domestic cabotage/ FPSO business

Berlian Laju's domestic cabotage spinoff Buana was up 11% on debut and over subscribed 16,77 times. This marks the third step in the group restructuring initiative this year. Previously, the company did a massive US$ 685 mio debt restructuring with senior lenders as well as a US$ 90 mio sale and lease back deal for four chemical tankers with Standard Chartered bank. These initiatives buy time for this over financially overstretched group until underlying market conditions improve.

The new credit facility will be used to refinance ten loan facilities of US$ 593 mio and fund capex on 3 of 4 newbuildings for delivery in 2011. The refinancing will reduce total instalments over the next three years with US$ 167 mio in total. BLT will mortgage forty of its existing vessels as well as the 3 new deliveries for security.

We believe that separately listing the Buana entity will enhance the imbedded value of their cabotage business better than currently reflected in the BLT share price. In any case, this much touted Indonesian cabotage business accounts for only a relatively small part of their total turnover.

Buana just recently turned to positive operating profits after making losses the previous year.  It is a relatively small operation with three tankers and one FPSO unit, but BLT wants to scale up the operation.

Meanwhile, BLT has consolidated the commercial management of their fleet in the Chembulk operation that they purchased several years ago from American Marine Managers. Chembulk CEO Jack Noonan has been making an upbeat case about the chemical tanker market, arguing that ‘bleeding has stopped’.

BLT has high financial and operating level that makes it a speculative play should the chemical markets turn up. The order book overhang for chemical tankers is presently the smallest in the tanker sector, albeit Stolt Tankers - a market leader and outperformer in the sector - has been taking a cautious view, not expecting any major relief on rates until the second semester 2012.

Monday, May 23, 2011

Greece and Eurozone: between a rock and a hard place!

Black Friday 20th April saw another Fitch downgrade to B+/ negative outlook, the ECB vehemently rejecting any debt restructuring and Norway suspending a Euro 42 mio grant to Greece. Spreads soared to 1.340 basis points equivalent to 17% market-level interest rates.  Total disaster for beleaguered and inadequate Greek Finance minister George Papaconstantinou, a man well over his head.  Will Greece avoid default and survive in the Eurozone?

Last year at the annual Minsky Conference at the Levy Economics Institute, Rob Parenteau demonstrated in his presentation why fiscal austerity will fail in Greece and lead to a Fisher debt deflation vortex. The prerequisite for the EU/ IMF program to work is a surge in exports that counter balances the demand compression from austerity to achieve high private net savings. Otherwise reducing the fiscal deficit will irreparably erode the domestic private sector and the tax base will implode. 

In fact this seems to be happening as there is a massive drop in revenues 1st quarter this year from the recession. Now Mr. Papaconstantinou in "Hail Mary" desperation wants to raise taxes in part to make up for the shortfall.  So far his record in containing public expenses has been dismal despite all the noise.  Clearly he never had the opportunity to read the work of Arthur Laffer in his studies at LSE and fails to comprehend that raising tax rates does not bring a linear increase in revenue, but rather the curve is parabolic and at a certain point revenues start to fall. 

Normally trade deficits are corrected by external currency devaluation, but Greece suffers from the problem of the Impossible Trinity.  It is locked into a Eurozone straight jacket that leaves minimal room for a current account surplus .  ECB monetary policy is not accommodative to this effort.  In fact, it is counterproductive with its hawkish stance recently raising interest rates. 

Already Greek public debt is at unmanageable levels.  Yet the ECB is maintaining a Taliban stand on any debt restructuring, with Jean-Claude Trichet, ECB president, rudely storming out of a finance ministers meeting and threatening to deny Greek banks access to the ECB’s refinance operations after any restructuring.  The threat would force Greece out of the eurozone within days, creating mayhem.

Herein lies the conundrum: Greek public debt is constantly expanding and the Greek GDP is rapidly contracting. Mathematically, the fiscal deficits will never close and create surpluses in time to contain the debt explosion. Greek debt needs restructuring because it it is at unsustainable levels and cannot be paid down.

Greek banks survive by short-term funding from the ECB/Eurosystem, using mainly Greek sovereign debt as collateral. When the value of the Greek sovereign debt declines in the secondary market, the mark to-market value of the collateral offered by the Greek banks to the ECB/Eurosystem declines and triggers margin calls (demands for additional collateral to make up for the reduced value of the existing collateral). European banks, especially Eurozone banks, are seriously exposed to Greek risk. This has terrified the ECB and has led Mr. Trichet to take such emotional positions on Greek debt restructuring.

Of course, Greece in a new national currency free from the shackles of counterproductive ECB monetary policy could make an immediate sharp nominal and real currency depreciation with gain in competitiveness, which would be most welcome and would take years by internal devaluation with risks of insurmountable social revolt.

The spoiler here is that unless the balance of economic and political power in Greece is changed fundamentally, a depreciation of the nominal exchange rate would soon lead to adjustments of domestic costs and prices that would restore the old uncompetitive real equilibrium. The key rigidities in small open economies like Greece are real rigidities, not persistent Keynesian nominal rigidities, which are necessary for a depreciation or devaluation of the nominal exchange rate to have a material and durable impact on real competitiveness.

The existing political system is based on state-sponsored capitalism,  a rampant spoils system and  a parasitic, rent-seeking cronyism with the private sector.  The status-quo interests are wed to these rigidities and see leaving the Eurozone as a means of maintaining their privileges.  Whether or not Greece leaves the Eurozone, it still has enormous fiscal problems that cannot be cured without substantial institutional changes and a new political culture.

On the other hand, for Greece to live and survive within the Eurozone would require the ECB to accept Greek debt restructuring along the lines of Brady Bonds and more accommodative monetary policies as well as Euro depreciation to facilitate the fiscal restructuring efforts by  the periphery countries to restore competitiveness. Ironically a managed Greek default and debt restructuring with the ECB continuing to finance Greek banks with 'C' ratings might well achieve this depreciation.  No one could possibly accuse the ECB here of any manipulation!

The ECB rules and the reigning mentality of its current members precludes this. The EU elite is badly divided on these issues.  Major EU core members fear rating downgrades and paying higher interest rates on their debt. Many are dead set against this even if it means sending the Eurozone periphery countries to disaster. The Eurozone would have to reach an common denominator for the periphery countries that they are so far not prepared to do. 

The failure of the current Greek government to inspire any confidence and their deteriorating credibility with the IMF/ EU do not help to make these decisions any easier.  Why should EU core members throw more of their taxpayer money and sacrifice their credit rating for what seems a bottomless hole in Greece?

So it is presently a Mexican stand off: Greece is between a rock and a hard place on the edge of disaster.