Thursday, October 6, 2011

General Maritime close to filing for Chapter 11 for reorganization

For some time now Genmar has been an ailing company, suffering over indebtedness, high interest expense and cash flow problems with a large portion of its fleet without contract coverage and dependent on a weakening tanker market. The issue now is what stand its distressed asset private equity investor, Oaktree Capital, will take in this situation. Will they eventually take full control of the company, seek fresh management to recapitalize like they did with Beluga? Meanwhile, unsecured bondholders are in a parlous situation.

The Group was not well positioned for the 2008 meltdown. It had just absorbed Arlington Tankers, acquiring some attractive assets but at a high price and it was already carrying too much debt. When the window opened in early 2010 on Wall Street for seasoned equity, Peter Georgiopoulos gambled on a large block tanker acquisition deal from Metrostar.

The proved a bad timing decision and a misread of the tanker markets. Georgiopoulos paid a premium for the vessels over the market, but thereafter tanker rates started to plummet, triggering loan covenant violations and even compromising liquidity. Investors, who had bought into Genmar’s deal in the capital raise without discount, have literally lost their shirt with a penny stock today.

Genmar is hemorrhaging with a second quarter net loss of US$ 24 mio lifting losses for the first half to more than US$ 55 mio with time charter cover for the second half of the year falling to 42%. The “too big to fail firm” is funded through two bank facilities totaling US$ 850 mio at Libor plus 400 basis points and two bonds totaling US$ 500 mio with minimum interest rates of 12%. This does not even include the heavy cost of the US$ 200 mio Oaktree facility on top that is being capitalized. Interest costs were seven times higher than the firm’s earnings before interest, taxes, depreciation, and amortization for 2012!!!

Needless to say, Moody’s rating agency cut Genmar's rating three notches to Caa3 with a negative outlook.

Genmar has a young and attractive asset base. If “marked to market” and recapitalized, this would make an attractive investment with a position on eventual improvement in the tanker market. Currently tanker market dynamics suffer from an excessive order book overhang with three new deliveries for every ten existing units. The main demand driver is Asia emerging markets, but there are also adverse structural changes in the US because of increasing use of domestic tar sand and shale gas resources for energy needs as well as ethanol in gasoline blending. It more likely than not another year of miserable rates before a possible recovery in 2013.

It seems difficult to foresee how Genmar will survive in its present form. Oaktree is an experienced distressed asset investor. They might well be better off running their own show with fresh management of their choosing for better value creation and strategy than the past. On the other hand, bondholders may be in for a very big potential ‘haircut” under Chapter 11 proceedings. The bond payments are not sustainable and they’re sucking up value.

To his credit, Peter Georgiopoulos, who secured a stake in a limited partnership related to the Oaktree investment, will assign his interest in the vehicle to Genmar.

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