Saturday, September 24, 2011

Cosco losses could lead to charter renegotiation in the containership sector

Macquarie Capital analyst, Janet Lewis, predicts that Cosco might continue in losses for two years or more. Cosco’s container wing, which was also loss-making in the first half, is set to take delivery of 28 new vessels in the near future. Will Cosco follow suit with containership owners to renegotiate down charter rates as they have done in the dry bulk sector?

There is considerable evidence that financial results in the containership sector are weakening this year. After the restocking boom last year in fight for market share, Maersk (OMX: MAERSKB) announced aggressive new building program for ever larger containership vessels in their on-going efforts to expand market share at the expense of peer companies.

Seaspan (NYSE: SSW), which has a pure vessel provider model and investor darling, followed suit with a new building program of their own. This group held on to all their new building contracts booked prior the 2008 meltdown, managed to cover their capex needs and take delivery. They turned heavily to Cosco (Coscon) and CSCL for employment. Seaspan is inordinately dependent on Cosco as their largest liner company customer relationship (in the order of 50% or more of their fleet from recent investor presentations).

Should Cosco be obliged to refuse delivery of new units or renegotiate existing time charter for lower rates, this would have a profound effect on Seaspan’s fortunes as well as other containership companies, who service their needs.

Seaspan shares have been falling in value since April. They have never fully recovered in share value from their pre-2008 levels.

Saturday, September 10, 2011

Omega Navigation appears to be insolvent

Omega Navigation senior lender HSH Nordbank filed a petition to dismiss Chapter 11 reorganization proceedings or convert them to a Chapter 7 liquidation. With his back to the wall, Omega CEO and major shareholder George Kassiotis has launched offensive lawsuits in Greece claiming bad faith by his lenders. Simple math indicates that his company is insolvent with negative net worth. This legal fight makes any recapitalization hope Omega had look very unlikely.

HSH Nordbank obtained an Omega fleet valuation from CW Kellock at $ 239 million for their court filing. From recent sale reports, I would charitably value Omega’s eight mortgaged units (six LR - Long Range product tankers built in the mid-2000’s and 2 MR -Medium Range) product carriers built in 2006) at US $270 million maximum. This still does not cover Nordbank’s total outstanding loan of $ 278.7 million. (HSH is owed US$ 242,7 mio plus another US$ 36 mio owed to NIBC Bank and Bank of Tokyo as 2nd mortgagees).

The debt dynamics look poor. Omega has not been servicing its debt as interest payments and legal expenses are mounting. The mounting interest liabilities are eating into Omega’s weak net worth.

There is no cushion for inevitable transaction expenses that would reduce the realized value. There are the imponderables of trade debt, unpaid crew wages and maintenance level of the vessels. Second mortgage lenders like NIBC Bank are in a precarious position.

Omega has been clamping down on financial information since their dispute with lenders, which is not helpful to their investors. Yet Omega was profitable in 2009 and declared dividends, so it is hard to understand exactly how relations broke down with their lenders.

We would guess that HSH Nordbank pressed for additional equity, but George Kassiotis, out of personal resources after his previous cash infusion, decided to balk. Presumably he was unable to inspire private equity or distressed asset investors like Oaktree or unwilling to accept their (Oaktree) conditions for participation, provided that he explored alternatives for recapitalization.

Omega is hoping to raise an additional US$ 30 million from the sale of the remaining share of the Megacore joint venture with Glencore. The senior lenders are contesting alleged diversion of funds from their cash flow to fund this project. They do not feel the amount is sufficient to secure their debt and turn the company around.

It is difficult to see at this point how the parties are going to come together. After the lawsuits, the senior lenders would likely not wish to support and work with Mr. Kassiotis any further. It seems unlikely that a private equity firm like Oaktree would be willing to step in to offer substantial recapitalization plus oversight of Mr. Kassiotis management, but that seems to me the only way that might allow an orderly reorganization.

Friday, September 2, 2011

Greece and its political oligarchs: shooting the messenger....

Today marked a mini crisis where the newly-formed Greek fiscal council warned a high primary deficit and the deep recession have boosted to the extreme the debt dynamic, now "out of control”, offsetting the impact of the first €159 bn bailout loan. Finance minister Evangelos Venizelos said the report lacked validity of equivalent international reports, resulting in the resignation of Ms. Stella Balfousia, head of the Budget Office. Welcome to Greece, land of political oligarchs and the wonders of Socialist Democracy!

Unfortunately, the political restoration in 1974 sowed the seeds of the present Greek debt crisis and national bankruptcy. Institutionally instead of a sound democracy, an ugly, rapacious political oligarchy was created that was based on crony state corporatism financed by EU transfer money and loans. The main driver was the Pan-Hellenic Socialist Party (PASOK), which gained power in 1981 and started ‘socializing’ lame duck Greek companies. These companies had become lame ducks because of the inelastic labor laws and heavy state bureaucracy preventing them from restructuring during the late 1970’s, as the economic climate deteriorated under pressure of the rising Greek Socialists. The Socialists adopted a policy of expanded entitlements and maintained employment by taking over these companies financed by deficits and public debt.

Politics in Greece became a family name franchise to make money based on relations with the Greek State. Unsuccessful party candidates became senior management in state-controlled companies. State procurement went to favored Party customers. The state corporations generally lost ever greater sums of money, but they were given state guarantees to ensure further private bank lending - a major factor in Greek over-indebtedness. Even EU privatization became a party picnic where the Socialists maintained state control of many of these entities through public pension funds and state-controlled entities. Some say state entities were even used to buy the shares and pump up the prices in rampant insider trading deals. Much of the private economy is based on business with the public sector or granting of concessions that are in effect monopolies.

Consequently politics in Greece became a highly lucrative career path leading to substantial personal wealth. Some of the most coveted positions are in Brussels in senior political positions as well as key state ministries like Defense, Education and Telecommunications and Transport. Major party members evolved into a sort of ‘landed’ aristocracy with these positions as their ‘domains’. Today, the key party members of the Greek political elite are all very wealthy, living in large walled enclaves. Party “barons” have built large manor houses like this photo on various Greek islands sometimes with private beaches. Two-thirds of the Greek police serve as their guards.

They enjoy lavish jet-set life style and revel in Yuppyish behavior. Their world is increasingly distant from the average Greek, whom they tend to see more and more as their serfs not hesitating ever higher levels of taxation in hopes of maintaining their privileges. They largely see the IMF/ EU loan money as a means of preserving their financial, social and political status as the expense of the general Greek population. How can anyone protest, since they are elected officials and above all Socialists…..

Greece is a country where the keys to political power are tightly under lock except to a privileged few. The Greek political elite have done everything possible to consolidate their power. Institutional controls are virtually non-existent. Greek Deputies enjoy Parliamentary immunity from even common traffic tickets. The Greek Presidency is solely symbolic. The President is obliged to sign whatever is put before him without personal responsibility, even if the document has forged signatures or dubious legality. Elections are at the sole discretion of the Prime Minister for any reason whatsoever. The political party in power has an absolute parliamentary majority and routinely rubber stamps any legislation at the discretion of the party leaders. There is no separation of powers in Greece. The government generates nearly all the legislation. The judiciary risk their careers and promotion should they dare overturn any government laws.

Not surprisingly there are no institutional spending controls in Greece on public deficits and national debt. Greek politicians have always had a complete carte blanche to borrow and spend as they see fit. The problem with this system is that it has created unsustainable deficits and debt levels. The size of the public sector is too large for the private sector tax base to support. This process has driven underground a significant portion of the Greek economy. Taxation in Greece is largely retrogressive and arbitrary based on how much the State deems one’s income by the size of house, make and model of car, etc. VAT rates are extremely high. Likewise fuel tax, etc.

Thus, we have the spectacle today of the dismal report above that they reject, shooting the messenger….