Tuesday, April 10, 2012

GasLog IPO Shortfall: Investors looking at new shipping issues with a great deal of skepticism and growing appetitive for discounted entry pricing

Goldman Sachs seems to have overplayed its hand in the recent GasLog IPO. GasLog completed the deal below its target price range of US$ 16-18. Since then, it proceeded to trade down from its $14 IPO pricing to close its second trading day off a further 11% from IPO price. It is presently trading around $11. Investors have sent a clear message that they will not tolerate overpriced offerings. There is a clear preference for discounted entry prices for shipping IPO’s since the boom years.

GasLog is a latecomer for capital in the LNG space, contracting new LNG tonnage at relatively high levels well after the 2011 upswing in the market. The Livanos family is a top shipping name and there is even minority participation from the Onassis Foundation and an indirect participation from the Radziwill Family. The GasLog IPO appears a plain vanilla LNG story, laced with some well-known shipping names, based on continual rising demand without taking account that this sector has been prone to booms and busts from over investment with historically modest average returns on capital. The LNG story is known from 2011 and most people have already made their bets there.

Investors were left wondering how much upside story was left for the higher asset prices involved and whether this was a good entry level. Indeed GasLog’s charter cover on six of the eight newbuildings in its fleet (averaging approximately US$ 75,000 per day over five years) was not a plus for the IPO because it illustrates limited upside on higher asset prices.

The GasLog have been technical managers for many years with a solid relationship with the BG Group, who charter their present fleet of two LNG units delivered in 2010. Their management suffers by comparison to their peer company Golar because they were late in commercial timing and behind the curve in deal structure. The issue lacked the attraction of high dividend yield or an MLP structure. Arctic Securities analyst Erik Nikolai Stavseth, said from the outset that GasLog was overpriced — at least compared to fellow LNG owner Golar LNG Partners, one of his recommended “buys”.

Of course, Goldman did manage to raise US$ 329 million for GasLog despite the reduced pricing level. There have not been many shipping IPOs in the last five years raise more than US$ 200 million and shortfalls are now more the rule than the exception. Consider that of the last round of shipping IPOs in 2010, all four traded down from their IPO price and only one (Costamare) managed to get investors their money back over the next two years.

Should GasLog cover the shortfall in capital by raising more senior debt, this would be ample justification for the shares to trade down even further. A quick reading of the GasLog prospectus filing with the SEC shows that the company itself warns about substantial debt level. There was US$ 283.11 million of outstanding indebtedness as of December 31, 2011 and GasLog expected to borrow an additional US$ 1.13 billion in connection with the financing of contracted newbuildings. GasLog openly admitted in their prospectus potentially limited flexibility under this debt load to obtain additional financing and pursue other business opportunities. This flexibility is now negatively impacted by the shortfall in the equity raise.

There is no doubt that it is a much more demanding market for investment bankers to raise capital for shipping issues than the heady boom years. People really have to work hard to develop a value proposition in the business plan and it is difficult to find shipping deals with good investment yield at present charter rates.

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