Monday, June 3, 2013

Peter Georgiopoulos tries to regain his lost credibility with a US$ 23 million follow-on offering to expand Baltic Trading

Investors seem to have given a warm welcome to Peter Georgiopoulos’s (Peter G) latest gambit, raising US$ 23 million to scale up in the dry cargo market, looking towards a cyclical recovery.  Representative of this sentiment was Doug Mavrinac of Jefferies, who thought that this was “well-timed play” for Baltic to “realize its potential for shareholders as a consolidator in the dry bulk shipping sector” Does this argument make any sense for a company of nine vessels that has never turned a profit and is managed by another Peter G company - Genco  at high transaction costs that has 50% chances of bankruptcy, running out of liquidity later this year - if the dry bulk markets do not turn up? 

Peter Georgiopoulos reminds us of Nassim Taleb’s anti-hero John – a high yield trader – who was perceived as a financial genius and made a vast fortune - until he blew up as market conditions turned against him. Are we fooled by randomness? Is Peter G a skilled investor and ship owner/ manager in the shipping space or was he simply (to paraphrase Taleb) a lucky fool  successful in the pre-2008 shipping boom, now trying to repeat the same formulas again with investors riding his coat tails?

To be honest, what is any different in the approach of the Oaktree venture with Petros Pappas from the premises of the Baltic gambit, except for scale, money and wider shopping list of the Pappas venture? Both cases are asset plays based on arbitrage, rather than any effort towards a serious business plan to build a credible shipping business with competitive market position, servicing end user customers. Both Peter G and Petros Pappas tend to view shipping as trading in floating assets. In turn, their financial backers like Oaktree view them as high yield traders, who share in the risks by putting some personal skin in the game.

The investment thesis is a hefty return on asset appreciation, having bought in at low prices with the object to sell out as the market rises. The eventual sale could be in terms of shares as NAV rises or vessels in the fleet or an eventual merger with another shipping company. Transaction costs are relatively high in terms of management fees and hefty executive compensation. It is a vessel provider business model. Employment is largely by time charter to cargo operators, often at indexed rates. The enterprise really does not have much intrinsic value beyond the physical assets and the gut instincts of its management in timing decisions.

With a US$ 23 million war chest even with bank leverage, Baltic will likely never be much of an industry consolidator or a shipping enterprise of scale. At best, Baltic might expand by two or three units. Already speculative money pouring into shipping assets in pursuit of yield in a ZIRP world have pushed up dry bulk prices by 10%, without any appreciable increase in demand for these vessels. Further, as RS Platou Markets pointed out: “shares printed at below net asset value,” are “expensive growth”, albeit “historically low asset values mitigate a large portion of the dilution in a mid-cycle perspective”. In short, the acquisition prices will be at a premium with expensive funding and vessel operating expenses will have to cover high transaction costs – requiring a hefty future market upturn to make a profit. I wonder whether Doug Mavrinac pointed any of this out in his above-quoted analysis to would-be investors.

Nassim Taleb points out some of the negative traits of traders:

• Overestimation of the accuracy of their beliefs. This was what led Peter G to disaster in the 2010 Metrostar block tanker deal for Genmar. It was a carbon copy repeat of previous deals that went well. Investors bought the story and suffered major losses.

• Tendency to get married to positions. Peter G has always stuck to commodity shipping, ignoring other growth areas like LNG or offshore. The tanker deal was a repeat of two previous deals. This dry bulk deal is a repeat of his first attempts with Baltic that did not meet expected results.

• No precise idea what to do in case of losses. In fairness, Peter G handled the General Maritime debacle quite well putting Oaktree into the business at an early stage and then pre-packing the Chapter 11 reorganization with support of his senior creditors. The issue with Baltic and Genco is whether or not Peter G is running out of resources to afford another losing position. After all, Peter G is no John Fredriksen in terms of personal wealth or scope of shipping empire to back stop his losses.

• Absence of critical thinking expressed in their stance with “stop losses”. Peter G has never been involved in any pro-active business restructuring to consolidate; sell assets and redeploy capital more productively like a Fredriksen, Maersk or TeeKay Shipping. In the case of Baltic Trading – like the Genmar misstep – he is looking to double up his position for a cyclical market recovery, even to point of share dilution by raising expensive capital with Baltic shares trading below NAV to grow himself out of his present woes.

Peter G’s management of Aegean Petroleum Network demonstrates some of these same tendencies. For example, the marine bunkering has some of the poorest margins and lowest returns in the fuel business. Peer companies like Chemoil - backed by giant Gencore - want to expand in more profitable sectors like aviation fuel and reallocate assets by selling off storage facilities. By contrast, Aegean Petroleum insists on expanding in the bunker fuel sector and craves for investment in low yielding related physical assets like bunker vessels. Further Aegean Petroleum has no problem borrowing money with a new massive US$ 800 million loan (despite  debt covenant problems not long ago) to boost low margin incremental bunker business.  By contrast, better capitalized competitors like World Fuels are virtually debt free and heavily diversified in more profitable aviation fuel and land fuel business with a mean and lean balance sheet. The results are that Aegean’s share price consistently trails its peer competitors.

Like a trader and many peer Greek market vessel providers, Peter G really does not care about his operating margins or returns on asset because he expects to make up for this by taking a long position and make a killing in cyclical market upturn. The facts are that Baltic has been consistently making losses. Just compare Genco and Baltic stock performance since the 2008 meltdown with Pacific Basin, an integrated and well managed dry cargo company operating from Hong Kong that considers its business transport.

This does not present a flattering picture for Peter G management for the pockets of its shareholders. Likewise, Aegean Petroleum under Peter G management exhibits same poor share performance with peer competitors. 

None of the above is meant to condemn this strategy. If there is a recovery in the dry bulk markets, buying into Baltic Trading stock could prove to be an extremely profitable play. Peter G will certainly regain his aura of a shipping tycoon. That would be nice for everyone.

What concerns me personally is that current mass of speculative capital pouring into the shipping space - particularly Greek companies - chasing the same cyclical asset plays and even pushing up asset prices in current dismal market conditions. It would be a terrible mess if markets ultimately disappoint. This could lead to a substantial shake up in the Greek maritime industry, especially with major dry bulk players like Eagle Maritime and Excel Maritime Carriers on the verge of bankruptcy along with Genco, which is interconnected with Baltic Trading.

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