Sunday, August 19, 2012

Will Omega Navigation come out of Chapter 11 as a going concern or be liquidated as per the Marco Polo case?

This week a glimmer of hope surfaced for Omega Navigation (ONAV) in an article in the Tradewinds, where Aaron Kelley reported the signs of a deal where George Kassiotis puts in an additional US$ 2,6 million equity into the company and the company rolls out a rights offering that would give general unsecured creditors and junior lenders a chance to secure a stake in the reorganised company and has agreed to a cash distribution of 10% to unsecured creditors “over time: provided they accept the plan.  Talk of Omega coming out of Chapter 11 with a reorganization plan by November this year.

I have expressed pessimism in the past over Omega, as I saw George Kassiotis’s refuge to Chapter 11 more an defensive act of desperation with his lenders to buy time rather than a serious effort to recapitalize the company. Unlike the successful example of General Maritime (GMR) there was neither any private equity firm ready to provide substantial new funding nor any pre-agreement with senior lenders for a support package. To the contrary, Kassiotis had openly broken with his lenders with a nasty, high profile lawsuit in Piraeus seeking damages.

For Bracewell & Giuliani, Omega’s US attorneys, this was a show case to attract other shipping firms to US bankruptcy court, giving the US legal profession a franchise in maritime bankruptcy. For Jefferies, Omega was a source of badly needed fee-earning business given the collapse of fresh shipping placement deals in capital markets. Hamish Norton, who heads the marine business in Jefferies has a stellar reputation as a knowledgeable and serious investment banker with a high level of integrity and a history of well-structured deals.

Despite this support for Omega, the company financial woes are very challenging with limited room for maneuver. As a smaller listing, Omega lacked the scale of its peers to leverage capital markets and quickly fell behind its peers. The Principal, George Kassiotis, has limited personal wealth from other ventures that he could draw upon to support this Omega. In fact, he seems in an even weaker position than Antonio Zacchello of Marco Polo. All this puts Omega on the same path with a similar fate: move to Chapter 7 liquidation as their senior lenders, HSH Nordbank have already filed for and have been urging.

Meanwhile, whilst Omega has some high powered advisers, they are also some of the highest paid, so there is the specter of mounting costs and legal expenses that are the Achilles Heel in Chapter 11 proceedings. Peter Georgiopoulos had everything in place even before filing in the case of Genmar, to minimize the time and cost in this procedure.

Whilst unquestionably a sign of good faith on the part of Kassiotis, the sum of US$ 2,6 million is a paltry amount for recapitalization of Omega. I am especially intrigued by the rights offering for general unsecured creditors and junior lenders. Is this going to be the main source of funding for company recapitalization along with the sizeable ‘haircut’ to unsecured creditors with promises of the remaining 10% amount paid “over time”? Is not this a sign how bad the situation is?

Who are the largest unsecured creditors? What are liabilities of their advisors Jefferies and legal counsel Bracewell & Giuliani as credtiors. Are unsecured and junior creditors going to be asked to put in new money in this rights issue or will this be a conversion of debt for equity? Why would junior lenders like NIBC and BTMU put more money out on Omega that would in fact benefit HSH Nordbank, who has priority over their position?

Why is not HSH Nordbank sharing the pain in an exchange of debt converted to equity as RBS accepted in their loan restructuring in the case of Eagle Bulk? Would not that give some comfort for a rights offering? Finally who is providing this new restructured senior debt and working capital facility? Has HSH Nordbank changed tack here?

Unquestionably, it would appear that Omega has substantial debtor’s leverage here with creditors in serious jeopardy of severe losses for this formula to be workable. Perhaps it is the magnitude of losses that makes them hesitate to move for the dissolution of the company?

Frankly, the Tradewinds article opens more questions than answers. My reaction is that this tentative agreement is likely still fragile. I am troubled that I do not hear anything about a clear and substantial source of recapitalization for Omega to come out of Chapter 11 as a going concern.

Let’s see what happens by November!

Thursday, August 9, 2012

The Euro sovereign debt crisis finally gets interesting!

After several years of this slow-motion train wreck starting with the saga of Greece and its endless spiral to the bottom, the Spanish and Italian debt crisis is finally shaking things up in Eurozone politics. Greece with its leadership was an easy pushover. Spain and especially Italy as larger countries with more political and debtor leverage as well as better political leadership are a more difficult match for the EU elite. The most painful duet is Monti and Draghi: Draghi pushing for non-conventional monetary policy and Monti, keeping Frau Merkel up until the wee hours of the night for a banking union and debt mutualization.

The growing economic divergences from the Eurozone policy makers’ self-inflicted debt deflation coupled with their dubious techniques of "internal devaluation” is taking its economic and social toll. The Europhiles have created macabre Great Depression-level GDP collapses in places like Greece with appalling levels of unemployment and private sector bankruptcies. Whilst you hardly hear a peep from the Greek political elite, who continue to be ardent believers in the confidence fairy of Eurozone economics, this mess is causing the political leadership in Spain and Italy to balk and resist a similar fate, seeing what is in store for them where the EU has left scorched earth.

Private investors remain highly skeptical, looking at all this carnage.  Bill Gross of PIMCO recently wrote an interesting piece in the Financial Times, where he reveals the obvious: EU policy makers are looking for private sector money to reflate and cover their growing mountain of bad debt, but against a dismal track record where they have not hesitated repeatedly to bilk investors and leave them with significant losses to promote their political agenda.

Ambrose Evans-Pritchard, the business editor of the Telegraph has been very astute early on to see that Northern and Southern Europe are not compatible in a common currency zone. The crisis is accelerating the structural divergences and this is leading to growing political fractures.

Italy’s Silvio Berlusconi has already threatened the Eurozone that either Germany must leave or Italy will depart with a growing coalition of industrialists, who see the solid advantages of Euro exit for Italy as confirmed in a recent Merrill Lynch study. Mario Monti on the other side of the spectrum wants to keep Italy in the Euro project, is trying to muscle Germany to accede to debt mutualization and more flexible monetization policies by the ECB to deal with the debt overhang.

Clearly, as economic conditions deteriorate, the die is cast: either the Eurozone needs substantial structural changes so North and South can co-exist or there must be an amicable divorce. No political union of diverse peoples has every taken place without mass repression.

The Soviet Union that the predecessors of the present generation of Europhiles adored as a model of human progress in the 1930’s is a good example. The Austro-Hungarian Empire prior World War 1 with its efforts of benevolent reforms echoes the German domination today in the EU and policies towards the EU Periphery. By its nature, forced political integration and dissolution of the nation state means the end of the right of self-determination for diverse peoples and forced collectivization.

Indeed today’s utopia of a European super state with a common currency has an eerie resemblance to the Communist utopia of the Comintern, otherwise known as the 3rd International. The European Union operates by unelected officials, who currently dictate the majority of laws of its members and drive this sovereign debt crisis that is deepening in the Periphery and moving to the Eurozone Core. 

Whilst it not hard to understand how the European Left has embraced this concept, it is surprising how easily the European Right has capitulated to this forced collectivization and abandonment of the nation state together with the abrogation of civil and economic liberties as well as the right of national self-determination.  Their stand reminds one of the Girondists and let's not forget the chilling fate that they met in their time.

Greece is an astonishing case where the conservative New Democracy Party is leading a coalition government with two parties of the Left, embracing economic programs that are impoverishing large sectors of the population, especially in the private sector.  Most European parties of the Right behave in a similar ambivalent fashion.  Consider the present Spanish government in its current dilemma.  Even the UK Tories continue naively to believe that somehow they can build a firewall from this growing storm by promises of vague renegotiation of their EU membership.

Already the Eurozone has shown an iron fist of political and economic repression, making debt slaves of its weaker members like Greece, Ireland and Portugal; drastically reducing economic freedom and national sovereignty. Confronted with a similar fate, the larger Eurozone members of the Periphery are beginning to realize that these issues have real political substance. Remaining in the Eurozone, accepting the loss of national sovereignty, civil liberties and economic freedom is a question of balancing costs and benefits of Eurozone membership, something that was always taboo in the past.

If there is a break up, the costs would be different in terms of who is the first to leave. If the Germans leave and revalue, the costs will be less for the South. The larger PIGS like Spain and Italy are beginning to realize that they do not have much to lose, taking aggressive stands with the Germans.

On the other hand, the Germans for the first time now begin to feel Eurozone malaise and the burden of the costs. Debt mutualization will certain result in a credit downgrade, having to carry the burden of the over indebted South. Already Germany has been put on negative watch list. Monetization and non-conventional monetary policy would market the end of a comfortable system where the ECB is in Frankfurt and under rules that have made it a Bundesbank clone accommodating German needs, until Mr Draghi has begun to shake things up.

Leaving the Euro, the Germans would be forced to revalue, losing their comfortable advantage in exports and to revise their policies. They would be compelled to recapitalize their banks for the sovereign loan losses of the South. Long term that might be preferable than the present course of endless bailout loans to the South and taking on endless liabilities to carry a failed and dysfunctional currency zone, but few in German political elite are eager for this bitter pill to be swallowed up front.

Meanwhile, the Greeks live in an Alice in Wonderland state where the political elite still clings to the Eurozone concept even as a colony with limited sovereignty, political and economic freedom. Ultimately their outcome in the Eurozone as well as the fate of the Eurozone itself is not in their hands, but most of the Greek political elite – at least in their mindless public statements - seem hardly cognizant the major battles that are raging outside of Greece.

Monday, August 6, 2012

Is Box Ships latest purchase charter back deal with Overseas Orient really as rosy as claimed?

Michael Bodourglou’s Box Ships (TEU) has been a considerable reprieve from current woes of his bulk carrier business Paragon (PRGN), now a penny stock struggling with sagging profits, charter party defaults and loan covenant breaches from declining hull values. By contrast, Box Ships has seen its revenues double from last year and recently had a successful fund raiser.

We have expressed in the past our reservations on Bodouroglou’s diversification play because we see it as a pure asset and market cyclical play without any inherent competitive advantage. Containerships are attractive because they are very cheap. Charter-free 15-year old containerships are going for scrap value, probably the cheapest shipping assets of any sector of the marine market. The vessels require charters from major liner companies, who have had their own problems with stagnant box rates, price wars for market share and investment in ever large tonnage to lower unit costs and defend operating margins.

The Overseas Orient deal is instructive. It is a purchase-charter back transaction from Orient Overseas (OOIL), which is a solid liner operator concentrating on inter Asia, Australia and trans-Pacific container routes and limited exposure on the currently problematic Asia Europe head haul route suffering from the Eurozone’s self-inflicted recession and debt deflation woes. The two 5.344 TEU vessels acquired by Box Ships are built 1995/ 1996.

Whilst charter free box ships of similar age are valued at scrap levels, Box Ships is paying the handsome price of US$ 62,3 million for these two aging units because OOIL will charter back the vessels at rates of US$ 26.800 per day for three years. Nominally assuming continuation of these rate levels on a five-year basis, this business brings returns on equity in the order of 16% per annum, which is very good performance in these difficult markets. After administrative expenses (namely the sizeable vessel management fees to AllSeas Maritime - Bodouroglou's privately held management company) the actual discounted cash flow returns to investors would be somewhat lower, but still this outshines returns on dry bulk and tanker business presently.

The issue is whether these rate levels are sustainable on renewal in three years’ time. There is as well as the matter of potential impairment charges on vessel values on a charter-free basis. So far the impressive revenue increases in Box Ships are mainly because Bodouroglou has been aggressively buying vessels and expanding the fleet. Yet the Box Ship share price has been steadily declining, initially around the US$ 10-11 level and now trading at the US$ 6-7 range.

Like all shipping transactions, these moves are a wager in hopes that the markets will turn around favorably and the cyclicality will boost returns. Bodouroglou could be well be correct in his investment timing.  Certainly he is getting plenty of banking and investor support in tough capital market conditions.

On the other hand there is tail risk here. In an expansion phase of a start-up venture like this, you double the number of vessels and get twice the revenue but does that is not the same as doubling your revenue on your existing fleet earning twice the freight income over the same expenses. Time will tell whether this strategy works out or Box Ships will disappoint and underperform expectations.

OSG in the doldrums: Is Morten Arntzen really one of the worst CEO’s in any industry?

Overseas Shipholding Group (OSG) is a blue chip tanker company that is currently in crisis with 13 quarters of operating losses, plummeting share value, rating downgrades (CCC+) and ominously its unsecured bond debt trading far below nominal value. Morten Arntzen claimed in the recent 2nd quarter earnings conference that OSG defensively drew to the maximum its current US$ 1,5 billion liquidity facility. With current market fixation on this facility expiring in February next year to be replaced by a smaller US$ 900 million facility, Arntzen did not provide much comfort to investors. To add insult to injury, Motley Fool named him one of the worst CEO's for the dismal stock performance and sizeable investor losses over the past year.

OSG is one of the oldest US tanker listings. It was founded back in 1948 by the Recanati family and listed in the US stock exchange in 1973. The Recanati are American Israeli with origin from Italy where they took their family name. Two of the Recanati family remain on the Board of Directors: Ariel and Oudi Recanati. Aside from shipping the family has a long tradition in banking and finance, having founded the Israel Discount Bank.

Morten Arntzen became CEO in 2004, coming from a banking background in New York. He ran the global transportation group for Chase Manhattan and Chemical Bank. Then he served as CEO for American Marine Advisers, a boutique NY marine merchant bank group with close associations with OSG and the Recanati family. Arntzen and the OSG finance director, Miles Itkin are mature executives both getting on in age and this is probably the first time that they ever been in an underdog crisis situation. Their strategy so far seems to have been to ride out the storm, hoping for a market improvement rather than making any serious sacrifices. At time goes on without market improvement, OSG’s alternatives get more costly and unpleasant so it is a difficult wager.

On the other hand, with over US$ 2 billion in debt, OSG has considerable debtor leverage. Given lenders accommodative stand towards lame duck shipping companies like Eagle Bulk and Berlian Laju Tankers, a “blue-chip” lame duck like OSG should merit equal or better treatment. This may be a fact that Arntzen is playing strongly behind the scenes.

OSG compared to peer tanker operators was slow to diversify into higher growth alternative marine investments like LNG or the offshore sector with better profit margins. To his credit, Arntzen succeeded early on as CEO in a merger with Stelmar that allowed the group a sizeable position in the product tanker sector in addition to their large fleet in crude oil. OSG’s investments in LNG and offshore have been timid and very conservative. In both cases, they opted for joint ventures and their position is relatively small. In fact, OSG has staked a lot in the US domestic tanker market, which until recently was making losses and limited in prospects.

Under US cabotage, the market is sort of an oligopoly with a limited number of operators, but several of them barely eking out an existence struggling with Chapter 11 reorganization. Lately with the Motiva Refinery project in Houston and US shale oil developments, the US domestic market has started to pick up, but Motiva is now shut down due construction problems.

OSG is counting on substantial MARAD Title 11 money for their US fleet that has been delayed. This subsidized loan money cannot be commingled in their overseas operation, but it is a very valuable resource in an exceeding difficult credit market conditions. Indeed, MARAD created recently some stir by its rejection of rival American Petroleum Tankers' (APT) application for Title 11 loan guarantees despite the company backing from Blackstone.  With the difficult conditions in the OSG international fleet, however, the profit from the US flag operation is unlikely to compensate and cover for the losses even with improved rates.

There is a lot of optimism for a turnaround in the product tanker sector. OSG is concentrated mainly in the MR size with focus on trans-Atlantic trades, but this sector has underperformed expectations. In the end, if new refinery projects come on stream and there is an increase in tonnage miles, it is possible that the LR size will benefit more than the smaller vessels.  Both Blackstone and the Prime/ Perella Weinberg Partners are concentrating on these larger units.  So is Scorpio Tankers, a financially much healthier company than OSG.

Otherwise, OSG share price currently around US$ 5 is not an attractive level to raise fresh equity and this would likely entail substantial share dilution in current Wall Street conditions. A bond issue would be expensive with OSG’s credit downgrade and require security given the current discount on its unsecured bond debt. OSG could sell and lease- back some of their unencumbered units, but this will be very expensive and the lease payments will weight on their cash flow and liquidity. Finally OSG could sell out its share in its LNG and FSO joint ventures.

Is it any surprise that Arntzen stresses over and over again that the tanker markets have reached their floor? He could be correct and in fact OSG 1st quarter results gave some comfort in this direction, but losses widened in the 2nd quarter.

Undoubtedly, it would be a big blow for Arntzen and Itken with their stature and age to be compelled to actual sacrifices, should tanker markets continue in the doldrums and OSG liquidity dries out. I believe, nevertheless, that OSG still has substantial support from its lenders, who will bend over backwards to keep them afloat until better days come.

Whether it is a profitable to own OSC common stock or take a position in its unsecured debt right now is another story. This depends on how quickly one expects a global turnaround in shipping markets. If freight markets remain at present levels into 2013, OSG will face some stressful times.