Tuesday, July 26, 2011

Omega in bankruptcy: Test case for other weak listed shipping companies

Omega Navigation (NASDAQ: ONAV) is a product tanker play with fleet of 12 vessels plus a joint venture with Glencore (LSE: GLEN) .  Most of its fleet on time charter to Glencore.  The fleet is divided between MR and LR 1 units all built in Korea.  The company only had really one good year in 2007.  It was hard hit by the 2008 meltdown.  It had been filing for delays in publishing accounts, but known to be in protracted debt restructuring and suffering from high leverage.

Since this was a vessel provider business model with a relatively small fleet, it was dependent mainly on fleet growth and favorable market conditions to generate profit and value for shareholders. It has one very large customer, Glencore. It remains to be seen what will happen to the Glencore joint venture companies, which have not been included in the Chapter 11 reorganization filings.

Omega entered the product tanker market in boom market conditions, acquiring assets at high prices with leverage. Its CEO Kassiotis had been  commercial director of Target Marine S.A.  He tried to lock in some benefits of the firm charter rates, but its 2009 accounts show a significant drop in time charter equivalent earnings. Further its capital gearing on book value was already over 70%.

Omega's main senior lender in 2008 was HSH Nord-bank of Germany. Apparently HSH Nord-bank intervened early in the game when cashflow problems first emerged. Omega under pressure reworked its credit facility and prepaid principal owed under the main facility with a second-lien infusion of US$ 42.5 mio from new lenders NIBC Bank of Holland and Japan’s Bank of Tokyo-Mitsubishi NFT. Perhaps they were enticed by the fact that this was a public company, the asset quality and the charters; but second lien lending is a highly risky business. Also, this undoubtedly led to a significant increase in financial expense for the service.

Normally, for Omega to get a second mortgage for NIBC and Bank of Tokyo-Mitsubishi, HSH Nord-bank would require that these institutions sign a subordination agreement, preventing them from taking any action without HSH consent. Meanwhile there is no evidence that Omega tried to sell units to pay down debt. In their September 2010 investor presentation, it claims financing is in place to fund capex commitments.

Omega was too small to benefit with ATM follow on offerings to increase capital. They had to means to take advantage of the downturn in tanker values so they tried to team up with Glencore in a joint venture for this purpose. At this point in Chapter 11, they lack resources and the future of the Glencore joint venture is in question.

No doubt with such attractive assets, other product tanker companies would be interested to purchase them at present market values, but George Kassiotis is hoping to survive under Chapter 11 and keep control of this operation.

TBSI: a dry parcel liner service beleaguered by losses and financial problems

TBSI (NASDAQ: TBSI) has recently been under pressure with operating losses of US$ 16,7 the first quarter this year and senior lender pressure to increase capital by US$ 10 mio coming. When TBSI went public through Jefferies under John Sind`ers in 2005, its chequered history of its 2000 Chapter 11 reorganization surfaced. The company operates a parcel liner service with a large number of tween deckers and heavy presence in Latin American ports, an unusual trade largely superseded by container vessels.

TBS focuses on multipurpose tweendeckers and smaller dry bulk carriers varying from 17,300 dwt to 45,500 dwt that are able to navigate and efficiently service many ports with restrictions on the size of vessels. It has attempted to create niche markets  focusing on trade routes, ports and cargo that cannot be efficiently served by container and large dry bulk vessel operators. It offers regularly-scheduled sailings along with local teams of commercial agents and port captains who meet regularly with customers to tailor solutions to their logistics needs.

TBS CEO Joseph Royce has a ship brokerage background. He then served as President of COTCO, a dry cargo pool of over 45 vessels before founding TBS in 1993.

Having this parcel liner service means fixed costs and bunker exposure that most dry cargo operators do not carry. Whilst break bulk is a higher cost service than inter-model container feeder competitors, TBS tries to focus on cargo with special handling needs and personalized service. The company also has some handysized bulk carriers in their fleet. They appear to have some of their tonnage (approximately 25%) on time charter, which adds to earnings stability.

Clearly. they have suffering lately from lower freight rates and higher bunker expenses albeit their cargo volume increased slightly over last year. Another problem is the heavy off-hire and repair expenses for the ageing 1980's built tween decker fleet with a need to drydock 17 vessels, requiring about 546 days out of service. Tween deckers today are largely vintage tonnage no longer built. TBS has ordered a new series of Dwt 34.000 tween-deckers for fleet renewal.

Although TBS debt to book value ratio is not high, they have been having serious problems paying their debt and in protracted loan default/ restructuring discussions. Lenders have demanded a US$ 10 mio increase of capital to which Mr. Royce has paid in US$ 7,58 mio of his own funds. They are also planning a rights offering to increase capital. Their financial expense has soared to US$ 8,7 mio in 2011  from US$ 5,5 mio last year aggravating losses.

A major New York investment house is forecasting that the dry cargo sector with its substantial order book overhang will be the slowest to recover. On the other hand, smaller handy size units have been outperforming the larger Capesize and Panamax units in current market conditions.

Tuesday, July 5, 2011

Greek economic crisis in a nutshell

The Greek crisis is a toxic mixture of politics and economics. The show case Eurozone project is in jeopardy by the looming sovereign default of one of their members.

Greece made a Faustian Pact with the European Union that allowed its political elite to freeload the system, using EU transfer money and cheap credit for local political patronage rather than building a sound goods and services economy.

The Euro destabilized the balance of payments. Local production waned and imports soared. Price inflation led to pressure for wage increases. Greece lost competitiveness. Public debt mushroomed to finance never ending public sector deficits. For many years the EU blinked.

The EU elite fearful of the Lehman precedent and protective of their scandalously undercapitalized banking system have chosen a contradictory approach of debt bailouts to cover creditors by musical chairs and wage and price deflation austerity.

The Devil is now seeking its due. Greece is locked into an ever growing debtor's prison with a shrinking GDP causing its tax base to implode and a rising mountain of debt that is currently 140% GDP shortly to rise to 170% with the next bailout loan on the pyramid. Unemployment is skyrocketing, shops and businesses are closing. The government cracks the whip cursing its own people every time its unrealistic tax revenue projections fall short, creating ever more draconian penalties for tax evasion. This climate seeds an increasing flight of capital and lack of investor confidence.

EU policies are terrorizing periphery countries with deep recessions and mounting unemployment, creating disorderly default risk from rising social unrest. Northern European taxpayers are also growing restless and upset over ever growing demands for bailout money from Brussels, as the periphery sinks under the growing debt overhang. They are concerned that these are stealth transfers with growing doubts that the periphery has the capacity ever to repay the money.

Nobody in the EU is happy. The more EU voters see Brussels asking taxpayer money to bail out banks and socialize losses, the angrier they get. This causes growing discontent with the whole EU system. The EU elite seem smugly sure of themselves, appointed with secure positions rather than democratically elected. Politicians in member countries face a rising storm. Few however have the courage to express openly their discontent from fear being ostracized by the Brussels elite for daring to question them.

So far the EU elite refuses to discuss rationally successful restructuring techniques in past emerging market crises. The markets presently see 80% prospects of a Greek default. Their emotional outbursts against default or debt restructuring are directly related to their exposure to sovereign toxic debt and weak balance sheets. After their own meltdown in 2008, the US authorities want to keep this mess under the rug as long as possible, basically turning over the IMF to them as a European bad bank.

As it stands presently, there are basically two trends of thought. The EU elite seem intent on the EU public sector picking up an ever increasing share of Greek sovereign debt. In a few years’ time, there will be one sole public creditor with the private creditors paid off and Greece will have a very high debt GDP ratio, likely in excess of 200%. There is no clear plan thereafter what to do about this mountain of debt. There is a vague hope that somehow Greece will grow its way out of the debt. Structural reforms have been discussed for the last 20 years in Greece but the many stakeholders in the present system create substantial resistance to change. Locked into a hard Euro and compulsory wage and price deflation, it is hard to see from where this growth will come.

The other school of thought comes from mainly American economists like Simon Johnson, Nouriel Roubini and Paul Krugman, heavily influenced by the disorderly Argentine debt default and emerging market debt restructuring. They have support from German economists concerned about Greek debt sustainability and capacity to repay. They are calling for orderly and coercive debt restructuring as soon as possible to remove the default risk and provide relief from the huge debt overhang. Such action may make the structural reforms more palatable, gaining the good will of the Greek public with burden sharing and allowing more gradual adjustment. Both structural reforms and debt renegotiation are necessary conditions to resolve the Greek debt crisis.

Unless the EU elite realize that they must meet periphery needs, the divergence between the core and periphery will grow so large that it may lead to a breakup of the currency zone. It may take generations to restore the credibility of EU institutions after such an aftermath. Moody's in the latest downgrade of Portugal cited poor EU crisis management as a major risk factor, angering many EU politicians. The truth frequently hurts.

Top Ships revisited in recent bulker sale

Top Ships recently sold the 'Astrale' for US$ 23 mio, which seems low compared to the recent sale of a sister vessel. They bought this unit in August 2007 for US$ 72 mio (peak boom-era prices) in hopes of diversification to dry cargo in response to massive losses that they were taking on the tanker fleet. This company became a penny stock. I was among the first to signal the risks in an article in April 2008. Events so far appear to have vindicated my views.

The original TOPS IPO was sponsored by Cantor Fitzgerald with Hibernia taking a significant share. It was considered the work of Anthony Argyropoulos, who was then working at DvB Bank after leaving Jefferies. He sold the deal to Marc Blazer at Cantor later joining Cantor himself. Everyone considered the deal a breakthrough proving that Wall Street access to shipping issues was open to all.

The proximate cause for the decline to the company was a lease finance deal with DvB bank for a large portion of its fleet and a massive dividend payout to shareholders. This weakened the company financially and left a highly leveraged fleet. A downturn in the tanker market in 2007 put them into operating losses, causing a signficant drop in share price.

The company management reacted by doubling up on a bulk carrier expansion plan that was badly timed at the peak of the dry cargo boom. They did not have liquidity for such massive asset expansion so they financed it by short term loans that would be repaid with a follow-on share offering. Unfortunately, the subprime crisis in the fall 2007 hit Wall Street and their efforts to raise capital proved difficult with a succession of public and private offerings at ever deeper discounts. TOPS had to sell assets for liquidity to make the bulker transaction work.

This angered one of their major hedge fund investors, who requested the company to appoint two directors of their choosing to the BoD. The company refused flatly and the investor started a shareholder activist action with the SEC.

"Tradewinds" published an article referring to my work on the company, which angered TOPS. Later the publication wrote a retraction, claiming that I misspoke but not referring to anything specific. They were wrong. My warnings were reflected in subsequent analyst questions.

At a very early stage in the game, TOPS found themselves with covenant violations. They sold off a large portion of their Suezmax fleet at a critical moment in 2008 just prior the fall meltdown. Other problems continued to plague them such as covering CAPEX needs for their product tanker newbuildings for which they ultimately covered by bareboat chartering the vessels. Ultimately senior board members left them. Their CFO resigned.

It is difficult to see where TOPS is heading these days. We hope they make a comeback for sake of their weary investors.

Sunday, July 3, 2011

Awilco LNG listing with promising business plan

The AWILCO LNG start-up is attracting investor interest from blue-chip investors. The Awilco Group of the Wilhelmsen family in Norway is well known for Wilhemsen Marine Services, a major ship management company as well as their investment in Royal Caribbean Cruises. The business plan to enter the LNG market was conceived last fall. They made a debut in March and April this year purchasing three elderly LNG units from NYK LNG. In June, they closed an order at Daewoo for two new LNG units.

AWILCO has strong technical expertise in offshore, heavy lift transport and drilling. In each of these areas, they have created value for investors with imaginative business plans sometime involving major conversions of sophisticated marine assets like heavy lift vessels for drilling rig transport and upgrading/ reactivation of drilling rigs. They have been innovative in arranging the finance and successful in securing profitable employment. AWILCO Offshore was sold off to China Oilfield Services in 2008 for US$ 2,5 bn.

AWILCO LNG's purchase of the NYK LNG units provcd propitious timing, just prior the Japan Tsunami disaster. In March, the Wilgas (ex Dewa Maru) built 1984/ Wilpower (Bishu Maru) built 1983 were purchased for US$ 25/ 23 mio respectively. In April, the Wilenergy (Banshu Maru) built 1983 was purchased for US$ 23 mio. The Daewoo newbuilding deal was reported in early June, where they closed firm on two vessels with delivery August and November 2013 plus two options for 2014.

AWILCO plans to trade the older units on short term time charter and then replace them with the new building deliveries. They have already fixed the Wilpower for six months with three addition 6-month options. Ultimately, they plan to convert these older units into FRSU's or possibly G2W units. The Norwegians have considerable expertise for a FRSU conversion. These Moss tankers are well suited for conversions due to their self-supporting aluminum tanks, which do not deteriorate and do not structurally weaken the hull.

A major capital markets group is forecasting for the LNG sector a startling 17.7% advance in fleet utilization this year. This sector has been a very thin 'boom and bust' market, where last year due oversupply, earnings were so marginal that a number of units went into layup. Nakilat, a Qatar LNG export project, ordered a series of mammoth Q-max (266.000 m3) vessels for US export, which has collapsed due shale gas technology. The units remain laid up white elephants for the time being.

Natural gas should see increased market share in the global energy market due to its attractive price compared with oil, as well as more environmental friendly features. Combined with a low orderbook, this will likely lead to strong growth for LNG carriers. Already spot rates have surged to levels over US$ 100.000 per day from the marginal 2010 levels of US$ 20.000.

Shake up at Dahlman Rose

Dahlman Rose, a premier shipping growth story, has seen a major management shake-up. The firm is undergoing senior management changes with Simon Rose retiring and Kim Fennebresque, replacing him as chairman. His partner Ernie Dahlman opted out as a manager a month earlier to devote his time to sales and trading. They also lost their top equity analyst, Omar Nokta. Dahlman Rose faces some serious challenges ahead.

Dahlmans rose as a startup from scratch in 2004 to a 200-person bank. It achieved rapid growth, doubling staff every 24 months and expanding from shipping into adjacent sectors like oilfield services, metals and mining and agriculture.

The 2008 meltdown had profound consequences for their core shipping boutique business. Shipping stocks plummeted. Most of them have since been underperforming the market. Equity sales fell back and the IPO market was shut for about a year. The brief window that opened last year for new IPO's proved largely a sucker rally. Several of the new issues subsequently tanked due bad investment decisions and poor timing. Investors again got badly burned.

The result this year is an increasingly selective and demanding investor market. Existing issues have a high dependence on retail investors. New money is restricted to limited shipping sectors and institutional investors are careful about entry prices, often demanding deep discounts.

The new chairman, Kim Fennebresque, most recently served as chairman and chief executive of Cowen Group with earlier stints at UBS and at Lazard Freres.

Searching for new opportunities, the firm recently teamed up with Blackstone to do shipping restructurings, hoping for a potential growth area in corporate restructuring of distressed companies. Of course, they are not alone in the idea of distressed asset investing. Peter Georgiopoulos (with personal experience in owning a company in distress from bad investment decisions last year) has created Maritime Equity Partners with Blackstone and Oaktree for distressed asset investments.

With the collapse in market capitalization, some are again calling for merger-and-acquisition (M&A) activity in the shipping space. Shares are often trading below NAV, but there is the deterrence of taking on the liabilities. Witness the trials and tribulations of the NewLead reverse merger with Aries, where there were substantial hidden liabilities with trade debt, bad operations and dicey assets. Why not simply pick up good vessels at low values and start clean?

It will be interesting to see whether other Wall Street brokerage firms face similar fall out. There has been major management reshuffling in Wall Street shipping with the turbulent markets. Some well-known shipping investment bankers have already changed firms several times in just a few years.

Wall Street investment banking firms face bear market in shipping issues

The IPO market this year is dead except for LNG and containerships. Latest containership issues for the Diana and Paragon spin-offs have barely been placed. Only the TK LNG Partners and Golar LNG issues went well. Public-equity issuance in the first six months of the year — which includes follow-on shares sales and IPOs — fell 51% from last year. This is creating stress on the investment banks (and their managers) active in shipping deals.

Equity sales have fallen dramatically. The headline figure was a total issuance of US$ 823 mio, as against US$ 1.6 bn in the first half of 2010. There were 10 offerings by nine issuers, including just one IPO, against 14, including three IPOs, in the 2010 stretch. Yet 2010 was a recovery year where a window opened for new IPO's that has been closed since the 2008 meltdown. Investors in issues like General Maritime and Crude took haircuts with Genmar now trading in the US$ 1 dollar range struggling for survival with Oaktree participation. Crude is merging internally with Capital Product Partners.

Offerings themselves were smaller. A US$ 80 mio average and US$ 71 mio median, as against US$ 116 mio and US$ 90 mio, respectively, a year ago. In the current period, Teekay LNG Partners raised more through a follow-on (US $144 mio) than Michael Bodouroglou’s Box Ships did by the only IPO (US$ 132 mio).

The vast majority of shipping issues from the boom years have underperformed the Wall Street recovery since the crash. Investor darlings like Dryships, which were trading up to US$ 130 a share with market capitalization that exceeded established blue-ship companies like OSG, are now trading at levels of US$ 3,5-4,50. Dryships has also seen massive dilution. In weaker cases like Top Ships, investors have literally lost their shirt! Shares once trading at US$ 30-40 became penny stocks and it is difficult to trace the value because TOPS has undergone two reverse mergers!!!.

Success begets more success with new issues and higher valuations, but failure leads to inextricable decline. The laggards have increasing difficulties to raise additional capital, facing share dilution and deeper discounts to the point that it frustrates the purpose of a public listing. The zombies get dropped from coverage and lose all prospects of raising money in capital markets, but they are saddled with all the high administrative expenses and reporting requirements.

Ownership of shipping shares has largely become the province of retail investors and short-term players like hedge funds, after an exodus of rueful institutions that got burned in the financial crisis.

With the collapse in market capitalization, some hope for merger-and-acquisition (M&A) activity among the existing companies, but so far this has attracted little interest. Investment bankers in shipping face difficult days.