Sunday, July 3, 2011

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.

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