Tuesday, July 29, 2014

End run for Berlian Laju Tankers bankruptcy and reorganization and challenges ahead

With KKR and York Capital now owners of 65-70% of the bank debt in Berlian Laju Tankers (BLT), they are likely to come out with a sizeable equity stake in the company.  This would appear to resolve what was a very messy bankuptcy without any clear source of recapitalization or clear outcome when first declared.  Unlikely that the private equity firms would be prepared to accept further involvement of the Surya family in the business.  Obvious direction would be to rebuild the company with Jack Noonan as CEO, which was already built into the restructuring plans. 

Private equity is said to hold presently US$ 500 million of BLT senior debt, which is secured by first preferred mortgages on the vessels in the fleet. 

Only a few months before declaring bankruptcy protection, BLT had completed a massive US$ 685 million restructuring led by banks like Nordea and BNP Paribas.  New banks like Standard and Chartered participated in a large refinancing.  These bankers did not appear to do proper credit analysis of the risks, even willing to extend new money to BLT as part of the restructuring package or Standard and Chartered to refinance problem credits of other banks.  Their claims were that the Surya family was extremely wealthy and would stand by the company with their resources if needed.

The swift fall into bankruptcy thereafter opened controversy about where fresh funds were deployed. Delos, one of the creditors has alleged US$ 135 million diversion of funds.  In any case, the Surya family did not show interest in supporting BLT financially in difficulties.  There were calls at the time about the necessity of keeping them in the management, but this never made any sense to me.

In the end, the private equity firms are said to have bought out the bank debt at discounts between 70 to 80 cents on the US dollar.  BLT has been a zombie company since the declaration of bankruptcy in early 2012.  Since then, there has been a surge of newcomers and new investment in the chemical tanker industry.  Players like Celsius, Navig-8 with an Oaktree partnership and even Peter Georgopoulos have started a new order binge mainly in Chinese yards for stainless Dwt 20-25.000 tonnage, which was the mainstay of the Chembulk operation that BLT acquired from AMA with considerable mark up that eventually brought them down.  

Delos had invested in two BLT stainless units on a lease back deal prior the bankruptcy for which they have since repossessed but kept with the Noonan operation (former Chembulk) on employment.

KKR has been backing Borealis, who specializes in smaller chemical tanker tonnage trading regionally in north west Europe under North Sea Tankers commercial management.  Borealis has recently acquired the Crystal Pool as well as bought two small ethylene carriers at auction.  The BLT operation is not obviously compatible with Borealis.   

The challenge for KKR and York will be rebuilding and rebranding BLT under the former Chembulk operation in Connecticut.  They will have to contend not only with the slew of above-named new comers with more modern, fuel efficient tonnage, but also the chemical tanker majors like Stolt, Odfjell, and Jo Tankers allied with Tokyo Marine in Milestone Chemical Tankers in Singapore.  These are older, operators that have moved into a more diversified logistics provider business model and have built up over the years large contracted customer base with their brand image.  These groups have punted in defense of their earnings margins and need for competitiveness by ordering larger stainless tonnage Dwt 30-38.000 for the long haul routes that risk putting pressure on the freight rates of the smaller Dwt 20.000 units, even those of the newcomers.  

Stolt and Ofjell also have the back stop of a profitable chemical storage and terminals business sheltering them from the vagaries of the transport side.  All the mature groups have looked to diversify into other shipping sectors, particularly the LPG sector in the case of Stolt and Odfjell.

Private equity has poured a lot of money in the chemical tanker sector the last few years.  Triton bought up Nordic Tankers and some other smaller European operators like Herning.  Apollo Global Management has created a new offshoot Princimar Chemical Carriers managed from Connecticut.

It will be interesting to see how these investments perform and how these firms will ultimately divest of their holdings.

Tuesday, July 8, 2014

Waiting for September and the fall rebound in freight markets

We are now only a few months away from the fall period and all eyes are on a confirmation of a widely anticipated rate upturn in freight markets from September onwards.  This will be a key litmus test driving market sentiment.  This has been fundamentally bullish since last year, where there was surge of investment in shipping assets on expectations of a cyclical upturn.

Expectations continue to be bullish for next few years, when investors will be looking to liquidate their positions in shipping assets with profit and move on.  Likewise there are a number of high profile deals based on new orders in bulk commodity vessel tonnage that will be coming into the water from 2015 onwards. The case of Scorpio Bulk - a dry bulk play from Scorpio Tankers based on a very aggressive booking of dry cargo vessel orders without any owned drybulk tonnage in the water - is a prime example.

In an unanticipated repeat of last year, freight markets opened this year with a whimper instead of the much hoped for bang.  There was a premium in period fixture rates, but a downwards correction in spot dry bulk and tanker bulk commodity shipping markets, creating an inverted earnings curve between these two markets.  It was during these inopportune market conditions that Scorpio Bulk entered the market to charter tonnage to build up an operating company in the dry bulk sector until their massive new building orders are delivered.

There are two basic issues that may challenge conventional wisdom in recent shipping placements:

  • Chinese rebalancing.  China is presently the single largest contributor to global consumption growth.  This has been a boon to both the tanker and dry bulk markets.  Chinese rebalancing to more of a service economy may be less positive for the growth potential of Chinese seaborne import volumes.  With a leveling of infrastructure projects, Chinese dry bulk import volumes could reach their short-term maximum potential within the next few years.  This year, dry bulk markets have been badly affected by the ban on mineral exports from Indonesia and high Chinese iron ore inventory levels.  
  • US and EU central bank policies of very low interest rates.  Again there are signs of excess asset inflation without support of underlying demand growth.  Shipping markets this year are a prime example where current freight levels do not support the current surge in asset prices.  As long as there is substantial excess ship building capacity and sluggish demand growth at best on par with GDP growth as opposed to being a multiple in the not so distant past, there is likely to be a continued supply glut of vessels, leading to shorter trading life and depressing resale values. Christopher Rex of Danish Ship Fund predicts possible softening of new building prices as early as next year.
Meanwhile sentiment in shipping markets is evolving.  The latest monthly update from RS Platou takes a more cautious near term demand growth in the dry bulk markets.  Conversely, Plato is more optimistic on crude tanker demand with growing potential of US crude oil exports, short term VLCC demand from potential supply disruptions with the growing turmoil in Iraq and improved Suezmax demand as European refiners return from maintenance.

Soon the fall will be here and then the new year 2015.  With the heavy concentration of long shipping asset positions and new buildings orders coming on stream,  it will be very interesting to see actual investor returns and prevailing asset prices ahead.

Personally I am skeptical of a repeat boom of the last decade.  Demand growth in emerging markets seems to be leveling off and there are not the same liquid credit markets anymore that fuelled asset prices and facilitated sales transactions. There is still a lot of shipyard capacity to turn out more vessels at marginal prices.  Apart from cyclical volatility and the noise that it creates, earnings margins in shipping companies continue to be under pressure.  I am concerned that the upturn may be short and poor quality weaked by too much asset arbitraging and current fundamentals.

The old Wall Street adage “Sell In May And Go Away” may possibly take on a new meaning, but then again perhaps asset prices will continue to firm as per expectations.