Tuesday, December 13, 2011

Mediterranean Shipping Co (MSC) and CMA CGM join up to stem the Maersk challenge

The latest shipping news is that these former rivals have had to team up on several key liner services in order to compete with Maersk Line on the key Asia-Europe route. As a privately held company, MSC’s financial information is not easily available, but they are just behind Maersk in TEU capacity. CMA is in third place. The partnership is operational for a two-year period. There has not been any discussion of corporate merger.

The direct goal of the MSC, CMA commercial partnership is to offer a liner product comparable to the “Daily Maersk” service.

They are doing this on five Asia-to-Europe services, deploying 53 ships of 9,500 TEU to 14,000 TEU capacity. Four are cover routes to northern Europe (the Swan, Silk, Lion and Condor services) using ships of 11,400 TEU to 14,000 TEU. The fifth is the Asia-to-Mediterranean Jade service using nine ships of 9,500 TEU. Together, the two lines will control one-third of capacity of the over 10,000 TEU fleet (operating and on order), compared to Maersk’s 20%.

This move reflects the lack of volumes in the market as a consequence of the economic crisis and the difficulties of managing the vessels on these liner services. It is likely to make it very difficult to compete on these routes using vessels smaller than 10.000 TEU. Both partners need to bolster their balance sheets and have been selling ships and chartering them back at a time of loss-making Asia-Europe rates. The collaboration will allow both to cut costs and fill ships at the expense of other lines.

It is also likely that this synergy will attempt to tighten the screws on beleaguered vessel provider companies. MSC and CMA are reputed to be among the toughest negotiators in the charter market. There is concern that they might seek to renegotiate charters in the face of falling freight rates, potentially causing overstretched companies like Danaos serious problems. Shippers, on the other hand, are expressing concerns that the two mega lines may attempt to restrict capacity to maintain higher rate levels, making the Asia-Europe route an oligopoly.

There is a window of opportunity in this partnership for the next 12 months as Maersk has no large ships for delivery, while MSC and CMA CGM will receive 21 new buildings of over 13,000 TEU by the end of 2012. This will cause Maersk to lose market share until it starts to take delivery of their 10 Triple-E 18,000 TEU vessels. The Swiss-Italian carrier MSC would keep its fleet employed while allowing CMA CGM to achieve its growth plans, which have been derailed by the crisis and financial problems.

Maersk Line pioneered the advent of larger vessels with its E-class vessels (+15,000 TEU) back in 2006-7 and last year it embarked upon the new Triple E series.

It is clear that the liner industry suffers from serious earning margins problems, and another downturn in expected cargo volume will come with the growing recession in the E.U. Maersk, MSC and CMA are trying to face this challenge with larger vessels for lower unit costs as well as commercial strategies that give them some pricing power over rates, such as this potentially oligopoly of two mega carriers on the Asia-Europe route, squeezing out smaller liner companies.

Tuesday, December 6, 2011

Genmar Chapter 11 reorganization: The importance of distressed asset investors being earnest lenders

Oaktree Capital Management (OCM) has their hands full with General Maritime in bankruptcy. The market is questioning the wisdom of taking a position last March in this beleaguered shipping company just months before this Chapter 11 filing. In the meantime, unsecured creditors are trying to make life difficult; they are opening issues that have implications for other shipping companies contemplating this path. The looming question is what would OCM do with a revamped Genmar?

OCM is now obliged to pump a further $175 million into the Peter Georgiopoulos-led company to shore up its original $200 million outlay. Some might call this throwing good money after bad. A common Wall Street expression when investments go bad is: ‘Don’t frown, double down.’ The European Union is a grand master in these kinds of ‘pretend and pray’ lending practices, but OCM are professionals dealing with a distressed asset situations, where doubling up is generally frowned upon as poor risk management.

The immediate challenges are one minor and one major issue. The lesser issue is the unsecured creditors’ court petition, filed in New York, to get control of the Genmar’s cash flow from all accounts. Genmar’s senior lenders are European-based shipping banks. Nordea Bank is one of Genmar’s lead banks and heads a group providing Genmar with a $75 million in debtor-in-possession (DIP) financing to see the company through the Chapter 11 process, which Genmar hopes to exit in April. This would be a generic issue for any shipping company in Chapter 11 proceedings. Nearly all the major shipping banks are European and based outside New York. We will see whether they can find a temporary solution through a large U.S. clearer like Citibank.

The more substantive issue is the negotiation of the “haircut” for unsecured bondholders. They are being sandwiched between OCM and senior lenders, who already appear to be in pre-agreement with one another.

Genmar was in no position to make the $18 million semi-annual coupon payment on these bonds on November 15; The company was virtually out of operating cash. One key to successful restructuring is to get out from under the bond burden, paying only a fraction of the face amount. It’s telling that Genmar’s bonds were trading at around 10 cents on the dollar just prior to the filing, reflecting the market’s view of their worth.

The unsecured bondholders will try to argue that OCM is not a lender, but in an equity position pari passu with them in distribution. This is a common cause in any bankruptcy situation. We can safely assume that OCM studied this matter carefully with its legal counsel in structuring their first $200 million capital injection into the company. It was done in loan form with warrants and controls on stock dilution.

Once these legal issues are resolved, the really interesting part will be what OCM - presumably the new owner of General Maritime – will do with the company? There are a number of aging vessels close to scrap value. Genmar does not have the comparative advantages of peer tanker operators like TeeKay or OSG. Even Frontline has more options. It will take no small effort to make Genmar competitive again, but perhaps OCM is really looking to sell it off to the highest bidder for profit once the tanker markets improve.