Amalia Tankers Inc.

Impact of China real estate slowdown on future cargo demand: is it the turn for the dry bulk sector to disappoint?

2012-02-05T18:56:00.002+02:00

Despite present historically low freight rates, dry bulk owners continue to talk up their book with very rosy demand projections, as demonstrated in a recent Capital Link webinar on the dry bulk sector. Yet China observers see a hard landing coming and already a very serious real estate slow-down. Last November, Chinese steel output was down -8.8% month-on-month, down for the sixth month in row.

Patrick Chovanec, a professor at Tsinghua University's School of Economics and Management, reports that Chinese domestic iron ore prices have plummeted as unused stockpiles have accumulated. In addition, more than one-third of Chinese steelmakers saw serious losses in October and November, and the industry as a whole saw a net loss of RMB920 million ($146 million) excluding investment gains. Chovanec sees real estate affecting as much as 20-25% of Chinese GDP. He makes the case of overall Chinese GDP growth down from 9.2% to 6.6% this year.

Wall Street shipping analysts like Cantor’s Natasha Boyden have begun taking a pessimistic view of 2012, expressing “concerns about a Chinese economic slowdown mean that there are real risks to weaker Chinese steel production growth in 2012” Evercore’s Jonathan Chappell expressed similar concerns about the oil tanker market due to slowing Chinese crude imports.

By contrast, RS Platou like many other shipping industry analysts, projects world trade in dry bulk commodities to increase some 5-6% per annum with iron ore and coal as the strongest drivers for tonnage demand. Participants in a recent Capital Link dry bulk webinar are similarly bullish on dry cargo demand from rising world steel production and fledgling Chinese coastal trade that soaks up dry bulk tonnage.

The conventional dry bulk industry viewpoint is that 2012 will continue to see low freight rates due to order book overhang, rather than any significant drop in demand. The tonnage supply-demand gap will narrow and finally will turn positive in 2013, bringing up rates. Jefferies’ Doug Mavrinac shares this recovery scenario.

No one expected the fall in dry cargo rates to be as large as it has been. Dry cargo owners are now suffering from the same margin pressures as their tanker owner brethren. There is a rash of cargo operators in increasing financial difficulties. The recent Deiulemar case, for example, led to the cancellation of a contract with Paragon for its Supramax tonnage. Paragon’s stock has been below $1 dollar since last fall. Now Cantor is setting a price target of 30 cents for Paragon stock with its Supramax tonnage on the market at rates close to vessel operating costs. Paragon is also facing loan covenant violations from deteriorating loan to hull value ratios.

There are plenty of other listed dry cargo operators who made over-valued purchases in the boom era and are saddled with very high leverage: Eagle Bulk, Excel Maritime Carriers, just to name two. They all have vessel provider business models with heavy exposure to charterer counter party risk and spot rates that cannot cover their debt obligations.

Indeed, 2012 may be the dry bulk sector’s turn to suffer what tanker owners like General Maritime and Frontline have been going through for some time now.

All this makes 2013 a very crucial year. In such a tight scenario, disappointing Chinese growth and lower demand for dry bulk raw materials for its steel and construction industry could mean serious structural market disruption unlike any we have seen in shipping since the 1980’s and aftermath of the petrodollar boom.

Greek Debt Crisis: The EU Political Trilemma and How Greeks have a bankrupt concept of National Sovereignty

2012-02-05T14:36:00.006+02:00

The recent German proposal for an EU commissioner to supplant the Greek government raised a storm of protest in Athens, but in essence it brought home what is already the present status quo: Greece is a vassal state on economic life support from the European Union. Willfully entering what is essentially a greater Deutsche mark zone with a Central Bank in Frankfurt, Greeks mistakenly saw the abrogation of their national currency in 2002 as emancipation. Few Greeks realized their over-dependency on the EU would ultimately lead to loss of nationial sovereignty at great cost to their well-being.

Dani Rodrik (Professor of International Political Economy at Harvard University and author of The Globalization Paradox: Democracy and the Future of the World Economy) has pointed out, economic globalization, political democracy, and the nation-state are mutually irreconcilable – something that the Greek political elite are woefully ignorant!

Greece retaining the nation-state with a borrowed currency and under an EZ bailout program must jettison democracy (as the EU has now done with the Troika and Commissioner proposal). Greece putting itself under direct control of Brussels is the end goal of EU forced integration, driven by the single currency zone.

Unlike Greece, other EU members like the UK, Sweden and Denmark recognized this confronted with Eurozone participation; cognizant that foregoing monetary policy and using a borrowed currency was significant abrogation of national sovereignty. In the UK, Gordon Brown (Chancellor of the Exchequer) advised Tony Blair to avoid Euro membership with severe reservations on room of maneuver, should Britain face a debt crisis. Swedish and Danish constitutions required a plebiscite to abolish national currency. Their people wisely rejected the idea in the face of their politicians. Both countries outperform the EZ. All three enjoy better credit rating.

By contrast, Loucas Papademos, Governor of the Bank of Greece, ignored the risks of entering the Euro when not fully meeting Eurozone criteria, much less Mundell optimum conditions. Greek finance minister Yannos Papantoniou saw the Euro as a means of credit enhancement to reduce cost of borrowing and increase capacity to borrow ever more money. Despite these dreadfully bad policy decisions, they are now both presenting themselves as political reformers.

Unlike other European countries, Greeks never believed in their national currency. They preferred EU transfer money on projects fostering consumption rather than promoting exports like their neighbor Turkey and successful emerging market economies with control of their currency at competitive parities. The free trade zone in Eurozone soon made them a dumping ground for German exports, Greece running up huge commercial deficits. Years of living on EU transfer money and cheap credit created complete structural dependency on the EU.

Greeks, in their present quandary, have a very muddled idea of national sovereignty. They rail about selling public property to private investors as humiliating. Yet many of these same individuals foster the concept of a loan from Russia in return for granting a naval base as emancipation, when this is an even more dependent relationship! Out of fear of public hostility, no major Greek political party dare openly express public positions that foster foreign direct investment, entrepreneurship and a market-driven economy in goods and services that would enable Greece to stand on its own two feet, as Far East emerging market counties did after their debt crises in the late 1990’s.

The Greek political elite cannot understand the importance of production, exports and foreign exchange earnings. Returning to the drachma would increase national sovereignty and give them more tools to do this, but they show very strong signs of “Stockholm Syndrome” sympathy with their jailors (or new jailors like the Russians, naively hoping for better terms than the EU).

Greek pre-packaged sovereign debt cram-down likely to break all precedents in rule of law and fair bankruptcy distribution

2012-01-30T10:47:00.008+02:00

Greek PSI+ negotiations exhibit EU-engineered “survivor bias” making a mockery of core bankruptcy law principles. Capital losses are put on private sector bond holders whilst public bond holders are excluded from mark-downs of their debt. Only those private creditors with interests against outright default (large banks) are represented in the negotiation process. Troika bailout funding to Greece is nothing but a pre-petition Debtor in Possession (DIP) loan, with a first lien and collateral protection. The ECB is essentially conducting a quiet Greek debt-for-equity exchange in the purchase of Greek debt.

European Union (E.U.) policy planners have always shunned transparent market-driven pricing mechanisms in their currency union, showing contempt for rating agencies and market players. They consistently claim the right to be able to set asset prices arbitrarily as it suits them. The Greek PSI+ is a stealthy pre-packed bankruptcy restructuring, without being represented as such.

The main barrier to concluding this pre-packed Greek bankruptcy is the necessity of some majority of bondholders to ratify the final PSI+ debt exchange offer. As the bulk of Greek bonds do not have a collective action clause (CAC) (a framework which says what percentage of favorable votes is needed to enforce a decision), ratification would require 100% of investors to accept the new terms in order to avoid triggering a default, an almost impossible hurdle. Implicitly, the Greek negotiation process requires retroactive imposition of CAC. On one hand, retroactive CAC would facilitate the "exchange offer", however it would create great distrust of any bonds issued under domestic law in other European countries.

This would not, however, be the end of the ratification problem. Greece also has issued a modest amount in bonds, somewhere over €25 billion, under U.K.-law. While Greece could retroactively force local-law bondholders to do pretty much anything under local Greek law, it has no chance of doing this with this U.K. class of bond holders. It is precisely these bonds that allow some form of plurality to be enforced and which override the government's attempt to enforce a unilateral decision of creditor stripping.

Distressed asset investors seek these kinds of opportunities, which historically have had very high recovery rates in subsequent litigation. It is highly likely that some hedge fund cartels have already built up a blocking stake in the U.K.-bonds. It’s no surprise that E.U. policy planners have deliberately shut these creditors out of the PSI+ negotiations.

The E.U. continues to believe that it can shortchange market pricing mechanisms and manipulate its way over financial markets to preserve the currency union and avoid the day of reckoning. Yet demand for risk comes from a sense of stability, of fair and efficient markets, and equitability. A coercive cram down on any one, or all, Greek bondholder classes would make it crystal clear that E.U. authorities will put private sector investors into junior position arbitrarily any time they see fit, adding to the perils of holding E.U. sovereign paper.

A hard sovereign default would make “mark to market” unavoidable, thus exposing the underlying fragility of the banking system and triggering the collapse of the E.U. Ponzi debt structures used to keep weaker members on life support. E.U. policy makers have been calling for a €1.5 trillion rescue umbrella, but are unable to come with any real funding. Predictably, the ECB is rapidly expanding its balance sheet; there is no way to fund their Ponzi debt pyramid other than with massive back-door money printing.

This risks a broad sell-off of indenture bonds of the other PIIGS nations that might eventually lead to the collapse of demand for European paper and severe loss of confidence in the ECB.

Even Germany has a perilously undercapitalized banking system. Already they are discussing a delay in implementing the Basel 3 accords. State recapitalization of the German banking sector would likely lead to a sovereign credit downgrade.

Is it any wonder that institutional investors seem reluctant to take the bait in the face of this fudging, financial manipulation and fraudulent accounting?

Berlian Laju Tankers defaults on US$ 418 million senior debt and lease payments

2012-01-27T19:06:00.001+02:00

Just a few months after major loan restructuring as well as new large leasing deal that led to a credit upgrade, Berlian Laju (BLT) has frozen their debt repayments and is facing a serious financial crisis. The major issue will be recapitalization and restructuring. It may follow its Indonesian compatriot, Arpeni Pratama, into US Chapter 11 proceedings.

If you look at the BLT balance sheet over the years, it has never been a tremendously profitable company. Their expansion was heavily financed by debt. They acquired assets at high prices in the boom years. Accordingly, BLT was the darling of the banking community because it was 1.) too big to fail and 2.) in need of money and willing to pay more than sounder companies to get it. Lenders could get loan pricing with BLT that would be impossible with mature peer chemical tanker operators like Stolt or Odfjell.

The rating agencies had downgraded BLT to CCC by this time last year. BLT was upgraded to B- in spring 2011 after a massive $685 million restructuring plus another $90 million leasing deal. Fitch brought the rating back to CCC last December and very recently C.

The lenders do not appear to have done a very good credit analysis given this massive default less than 12 months later. Indeed they even gave BLT additional funds, increasing their loan exposure to the beleaguered company. There was apparently no request for a significant increase of capitalization nor does there appear to have been any demands for asset sales to reduce exposure. It was very clear that BLT would face serious funding problems in 2012 both for capital expenditure needs and as well as US$ 122 million bond maturities to be refunded.

Now the recapitalization issue is likely to be paramount for BLT. Will the controlling Indonesian shareholder family follow the footsteps of Big John Fredriksen and put up substantial capital of their own to save the company and retain control? Alternately, will they chose the route of Peter Georgiopoulos and find a private equity partner like Oaktree and risk losing control of the company?

One thing that BLT could do to raise cash and deleverage would be to sell their Chembulk operation, one of their most valuable assets. Doug MacShane (the founder and previous owner of Chembulk) is already rebuilding MTM (MTM controlled the Chembulk operation prior Doug MacShane’s divestiture) with fleet expansion at prevailing low tanker prices. MTM’s Singapore subsidiary continued the technical management of the vessels for some time after BLT acquisition. MTM could easily start poaching Chembulk’s customers, with whom Doug MacShane has had 20 to 30 year relationships and where they might feel more comfortable.

Stolt Tankers has the money to buy BLT’s Chembulk operation, if they wish. So could its rival Odfjell, who could potentially secure Lindsay, Goldberg backing. Linday Goldberg, a first class NY-based private equity firm, is already a 49% partner in Odfjell’s chemical storage business.

This possible spin off would allow the Indonesians to concentrate on their cabotage business, Buana Listya, and concentrate on FPSO contracts in its home market. BLT also has smaller chemical tankers suitable for the Asian market as well as a fleet of LPG vessels, some fitted for ethylene.

We will see shortly what route BLT takes to get out of this financial impasse.

U.S. Chapter 11 procedure proves traumatic for Omega Navigation’s senior lenders

2012-01-18T15:10:00.000+02:00

The Bracewell & Guiliani franchise on Chapter 11 proceedings for beleaguered shipping companies is proving a disaster for major shipping banks which are ill prepared for this ‘brave new world’. HSH Nordbank seems to have badly overplayed its hand with poor legal counsel. Bracewell is demonstrating that a shipping company can use these proceedings to stave off for months – or even years, - any bank foreclosures, without producing any credible reorganization plan.

An adverse court ruling for HSH gives Omega until May to produce any reorganization plans, when that was supposed to be the key issue in this hearing since time is of the essence for its Omega’s creditors. Instead, the main thrust was the ‘soap opera’ scenes between HSH, Omega and its directors for which Bracewell & Guiliani seems to have had a cakewalk in denouncing HSH and avoiding any substantive discussion of the financial issues.

Certain parts of the Bracewell presentation, such as their objections to surveys were amateurish, but even this impressed the court. Actually, banks commonly demand physical surveys of vessels to monitor condition in insolvency cases. These borrowers have little money for vessel maintenance and this impacts asset prices and collateral value.

HSH seems to have been incredibly sloppy in throwing allegations on Omega and then flip-flopping. As a result, Karen Brown, the U.S. judge, threw the book at HSH and allowed Omega to kick the can and continue operations with its lenders in limbo.

Remember that Omega went into Chapter 11 with a frontal attack on its senior lenders and without any clear means of recapitalization. By contrast, Omega compatriot General Maritime went into Chapter 11 with support both from its bankers and with fresh equity money from Oaktree. This US court ruling ignoring economic substance illustrates the perils for shipping banks in Chapter 11 proceedings.

Omega’s senior lenders are frustrated and in deep trouble. If the case is as they portray it, they may to lose an immense amount of money. Omega, on the other hand, likely increases its debtor leverage, making bank foreclosure ever more painful for the lenders. The company also buys itself time to continue operations.

Trust seems to have broken down entirely between Omega and its lenders. How or if this will ever be re-established under the circumstances is a big question. The senior lenders do not seem to want to have anything to do with Omega CEO George Kassiotis and his management.

Whether Kassiotis has alternative backers for recapitalization, like an Oaktree in the Genmar case, is another open question. Peter Georgiopoulos, he is going to lose his equity holding in Genmar as Oaktree becomes the major shareholder. Is Kassiotis prepared for this or is he just trying to maximize his personal position at the expense of his creditors? Perhaps he is simply hoping that an unexpected market upturn will get him and his company out of its current mess if he drags out the Chapter 11 legal proceedings long enough? We may have some answers by spring.

The U.S. courts are becoming a major forum in marine bankruptcies, taking such exotic cases as PT Arpeni Pratama, a local Indonesian company, which operates mainly in domestic trades. Foreclosure has become a far more difficult course for marine lenders.

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

2011-12-13T11:00:00.001+02:00

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.

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

2011-12-06T10:48:00.000+02:00

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.

Danaos exposed to counterparty credit risk with large exposure to some of the financially weakest liner companies

2011-11-30T12:19:00.001+02:00

Danaos has been a perennially weak stock since the 2008 meltdown. The company suffers from high bank leverage and a heavy capex budget. Earnings have been marginal at best. In 2010, it racked up a whopping loss of US$ 101 million. This year, Danaos negotiated an excellent restructuring agreement with its senior lenders that also covers its future capex needs. It has significant long term charter cover. Is Danaos now out of the woods?

Danaos has a fleet with an attractive age profile. It has kept pace with changing industry dynamics, with almost 50% of its fleet capacity in the 8,000+ TEU range. Its fleet’s average age is 6.27 years and it has a new building program of 13 containerships to be delivered through mid-2012.

Danaos recently carried out a massive restructuring of its debt. The company raised in excess of $1 billion through a $200 million equity issue and new debt commitments of $818 million. Further, Danaos announced formal completion of the restructuring of its new building capex finance obligations. Fortunately, Danaos is a listed company and has the size and clout to pull off this this operation, underscoring the resilience of the publicly listed shipping company business model.

The fleet is heavily contracted with average length charters between 8 to 10 years. This employment profile facilitated the loan restructuring and capex commitments. Needless to say, the loan repayment was tailored to this cash flow with no bullet payments until 2019. Interest expenses are not negligible with projections of $191/$202/$234 million in years 2011/ 2012/ 2013 respectively, which represent about 50% of anticipated EBITDA (US$ 317/ 433/ 442 million respectively).

The weakest element here would appear to be the 29% exposure to Hyundai Merchant Marine (HMM) and 28% exposure to CMA-CGM as charterers. HMM has a gearing of three times debt to equity. It announced heavy losses of $ 205.080 million for the first semester of 2011. It is a smaller liner company vulnerable to pricing pressures from larger operators like Maerk in the fight for market share.

CMA CGM was downgraded by Fitch to BBB- with negative outlook and then Fitch ceased coverage. Their first semester 2011 profits were down 72% to $237 million from 2010. CMA CGM has been selling vessels at a discount to complete the reorganizing of $7 billion-worth of debt overseen by French court authorities, part of which involved Turkey’s Yildirim Group injecting $500 million into the company in exchange for shares.

Liner companies are generally considered too big to fail (TBTF) businesses. Should a major liner company go into bankruptcy, the fall-out would be substantial given that these companies charter about half their fleet from vessel provider companies like Danaos.

Alternatively, with a deepening recessionary environment, there are prospects of charter party renegotiation as occurs normally in shipping sectors like tankers and dry cargo. Theoretically, liner companies would have substantial negotiating power given the concentration of the industry and total dependence of vessel providers on them for employment.

Will the Maersk gambit succeed in gaining pricing power over the Asia-Europe head haul container route?

2011-11-30T12:16:00.002+02:00

Whilst volume on the Asia-Europe container route is dropping off and competitors are struggling, Maersk is doubling up its efforts to dominate this trade in coming years by placing new building orders for large E class (15.000 TEU) and triple E class (18.000 TEU) ships. Maersk is highly dependent on its container division with almost 40% of its total volume carried coming from Asia-Europe trade. Its strategy is to benefit from better supply-demand fundamentals in late 2012 and into 2013.

Container shipping is increasingly a game of larger vessels with an emphasis on lowering slot costs. The one who has the lowest cost structure is able to garner higher volumes by out-pricing competition.

Maersk Line is the world’s largest container line. At the end of H1 2011 it controlled more than 600 vessels – 245 owned and 376 chartered container vessels – with a total capacity of 2.4m TEU. It also operates a major global port, terminal and inland services business – APM Terminals - operating a geographically diverse portfolio of 61 ports and terminals in 33 countries. It has 16 new terminal development or expansion projects underway and 132 inland services locations in 48 countries.

In the container shipping downturn of 2008-09, Maersk carried out a major restructuring drive in its container shipping division. The goal was to target more than $1 billion in cost savings to provide better operating efficiencies and minimize losses. Reduction and stabilization in unit cost is the key operating matrix in the container industry.

Maersk’s major competitors are Neptune Orient Lines (NOL), Hapag Lloyd and OOIL. Each has more than 7% of the greater than 12,000 TEU orderbook and stand to benefit as they are able to lower the slot costs and improve margins even if freight rates are just seen improving marginally. Maersk has the largest share at 13% whereas the each of competitors holds a 7% share. NOL, presently under pressure of earnings losses, is struggling with a very large capex budget and may be obliged to postpone some new buildings.

The second largest player, MSC, is more or less absent in the larger vessel category, which will help Maersk extend its lead further in coming years.

Hanjin Shipping, Hyundai Merchant Marine (HMM) and CMA CGM are highly leveraged. The two Korean line (Hanjin and HMM) have a gearing of three and two-times debt to equity, respectively. In Europe, the focus is on CMA CGM, which bond-market pundits expect to breach its debt covenants in the near future. It is undergoing considerable debt restructuring.

The long haul market will increasingly be dominated by fewer players with stronger standing and prowess, even in a depressed freight rate environment with very large containerships and low unit costs. The smaller peer operators do not have enough large vessels on order and will have to stick with smaller and less competitive tonnage or pull out of the trades completely.

Maersk Line is making an open gambit to gain the pre-eminent position on the Asia-Europe trade beginning in late 2012. It could out-price competitors and even potentially become a price setter on these trades.

Is Frontline headed for Chapter 11, following Genmar?

2011-11-28T13:41:00.001+02:00

Frontline bills itself as the ‘world’s largest tanker company.” This is definitely not the place to be these days with tanker earnings barely covering operating expenses. After the General Maritime Chapter 11 filing, attention has turned to Frontline and its dismal Q3 results: a loss of $ 166.47 million. Frontline, however, is quite a different story that Genmar. The John Fredriksen shipping empire has far more resources than Peter Georgiopoulos.

Unlike General Maritime, Frontline has not yet run out of cash, but the odds of cash crunch in 2012 are substantial. Most market experts don’t expect a significant recovery until 2013. Platou Capital Markets projects accumulated capex totals of $451 million by the end of 2013 with only $147 million bank debt committed. The group is highly leveraged with term debt of $ 1.163 billion and capital lease obligations of $ 1.173 billion but total equity of only $ 557 million. Frontline’s fleet market value is just at par with the term debt and the trend is downwards on vessel values. Frontline’s operating losses in Q3 (net of substantial vessel impairment charges) were $14.4 million with an interest expense of US$ 32.5 million uncovered.

Ironically, the Frontline Suezmax vessels that created its asset impairment charges were ex-Top Ships vessels that Fredriksen had purchased just before the 2008 meltdown in mistaken hopes of an expanding market for this category of tanker. This transaction saved Top Ships from bankruptcy at the time. They were first generation double hull tankers without transversal bulkheads that raised controversial stability problems. Bulkheads are critical for tanker stability.

The Frontline fleet has a large number of older 1990’s-built tankers that are currently at scrap-level prices. Major oil companies have tightened their age criteria to ten years, creating pressure on these older units. This was reported to be one of the factors that led to the departure of Frontline from the TeeKay managed Gemini Suezmax tanker pool. Frontline and Nordic America had older units and they have now gone off to create a pool of their own.

Frontline Chairman John Fredriksen, nevertheless, has resources that he can bring in to restructure Frontline if he wishes. He remains the wealthiest man in Norway (although he has now taken Cypriot nationality for tax relief). Indeed his investment interest had been waning in the Frontline for a few years as he focuses on more profitable ventures like Golar LNG. The related downstream company Ship Finance International, which leases tonnage to Frontline, is invested in a variety of shipping sectors as well as off-shore drilling rigs.

Already Frontline is selling older vessels to raise cash. Like Eitzen, which was initially in trouble in 2009, Frontline is currently airing a number of alternative restructuring ideas. It is considering splitting the company by separating the trading fleet from the new building orderbook. There is also talk about renegotiating the lease payments to Ship Finance with lower payments now and larger payments in the future.

Generally, “Big John” seems relaxed about the situation. The market is counting on Fredriksen to come up with a creative solution to restructure the company.

General Maritime and Omega Navigation: Two very different approaches to Chapter 11

2011-11-23T18:07:00.001+02:00

This week has seen substantial developments for both General Maritime, which recently filed for Chapter 11 reorganization, and Omega Navigation, which filed some months ago. The companies’ approaches are radically different.

General Maritime (Genmar) and Omega Navigation (Omega) have been ailing for some time. Both incorrectly believed growth would save them.

Omega was the smaller company. It had an expensive asset base and was caught during the 2008 meltdown with loan covenant violations. It tried to grow itself out of its problems with a joint venture with Glencore, but that did not work out. Management was not proactive in increasing outside capital and the company’s small size imposed constraints for institutional investors. As a means of dealing with its senior lenders, Omega took on more debt with second mortgages from NIB Capital and BTMU. This year Omega got into an impasse with the lenders and filed Chapter 11 as a shield.

Genmar was a larger and more mature company with access to capital markets. It entered into the market downturn in 2008 with somewhat high leverage (75%) and some loan covenant violations. It did an unsecured bond offering to improve liquidity. Ultimately, it chose a large block deal with Metrostar that enabled it to raise a substantial amount of capital in 2010 from investors at par without discount and obtain additional bank credit. Unfortunately, the timing and size of the transaction proved disastrous.

The two companies diverge substantially in their approach to restructuring and dealing with creditors. Omega chose to declare open war on its lenders with a dramatic trial alleging that its lenders broke agreements on restructuring. This seems dubious prima-facie, given the way banks normally work in these cases. Omega’s New York legal team seems no less bombastic with this week’s heated exchange between bank and company lawyers over alleged intimidation of Omega directors. Where Omega and their legal counsel seem absent so far is putting forth any coherent plan to reorganize, raise new capital or restructure its debt. In the meantime, Omega’s financial condition seems parlous and with heavy legal fees, consuming valuable company cash flow and mounting unpaid debt service increasing their already negative net worth. NIB Capital and BTMU risk losing their entire loan outstandings.

Genmar, by contrast, is focussed on working with its senior lenders. Earlier this year, Genmar secured an equity injection from Oaktree Capital, which organized a very professional debt restructuring as part of the deal. Genmar also sought to raise capital with a follow-on equity offering. Unfortunately, their operating losses grew and the increased interest costs from the restructuring put severe pressure on their liquidity. This week, Genmar entered Chapter 11 with agreements for additional support from both Oaktree and their lenders paving the way for reorganization. Unsecured bondholders, however, are in a nasty position, facing substantial losses. It will be interesting to see how these approaches fare in coming months. Omega would appear to have much to learn from Genmar.

Ship-owner refuge in Chapter 11 proceedings may prove a game-changer in bank foreclosure actions

2011-11-04T20:20:00.001+02:00

Several high profile moves by beleaguered shipping companies dealing with their lenders by filing Chapter 11 proceedings in US courts may put shipping banks in a difficult position. In both the Marco Polo and Omega cases, the companies have succeeded to hold their senior lenders at bay. Faced with paying large professional fees that eat into depreciating equity on secured vessels already below loan outstandings puts banks in an extremely difficult position with few options.

If one goes by the book, Chapter 11 requires a company to file a credible plan for reorganization, failing that the lenders can move to Chapter 7 for dissolution of the company and disposal of the assets. The problem is that courts in this situation will give distressed owners considerable leeway and are ill equipped to assess the underlying economics. They regard the process as a means of pressing the parties to an amicable solution. In the meantime, the distressed company can finance the legal expenses from having ceased entirely loan payments. On the other side, the senior lenders are forced into high transaction costs in legal expenses.

One asks himself how US courts would have jurisdiction over these cases of foreign senior lenders and shipping companies with vessels under foreign flags on the high seas in the first place? To the shock of Credit Agricole and Royal Bank of Scotland (RBS) last week in the Marco Polo case, the US Court in New York retained jurisdiction, making Chapter 11 viable for international ship-owners even if they have minimal contacts in the US.

The New York law firm, Bracewell & Giuliani, as counsel for both the Omega and Marco Polo cases, have made a franchise in these actions. The US courts and legal profession have suddenly opened up a new bonanza.

Alternatively, the senior lenders could sell off their loans, but the market for distressed shipping debt has been very limited. Loans made under English law generally require ship-owner consent for any transfer of the debt to a party other than a shipping lender.

There are hedge funds and distressed asset investors, who have shown interest in bank portfolios, but at a steep discount. So banks and potential buyers are presently very far apart on price ideas. For distressed asset investors, English law on transfer of debt limits their ability to get control of the assets. Chapter 11 is now a new potential obstacle to this end as well.

Hedge funds increasingly have been scheduling sit downs with distressed owners offering to inject capital into the ailing company in return for an equity stake and a commitment by senior lenders to write down the loans by 10%. It is possible that this might offer a credible means for distressed shipping companies to recapitalize under Chapter 11 proceedings.

What needs to be clarified in the future is how effective US courts prove in facilitating company reorganization under Chapter 11 or they just prolong hopeless cases and make them worse by ‘pretend and extend’ and the US legal profession profits in the value destruction.

Challenges ahead for Greek Shipping

2011-11-04T17:11:00.002+02:00

I recently had an opportunity to address the ICS 7th Annual Forum “Navigating through the Economic Storm – Setting a route in difficult time” in the questions and answers session and wish to share my thoughts on two major structural issues that could drastically reduce the competitive advantages the Greek market in years ahead, starving it of valuable human resources and entrepreneurial incubation.

Greek shipping faces two fundamental and interrelated challenges to competitiveness.

First, Greeks are no longer going to sea. The Greek government and the Greek shipping industry have been entirely indifferent to this and done nothing about it. The accession to the European Union and government policies that encouraged tourism in the islands with subsidies for rented room provided an alternative for Greeks, who normally would have chosen careers in the merchant marine. Social changes in Greece discouraged people from going to sea. Euro accession put Greek seaman at severe cost disadvantage for companies.

Greece once had numerous maritime academies, often in the islands. It also had many private marine schools in Piraeus. Today only one marine academy is still functioning at Aspropyrgos. All the private schools are closed. Greek families of marine tradition are now sending their children to US merchant marine schools for proper education that is not available in Greece. All this is very sad for a country that was one of the greatest seafaring nations in history.

30 years ago Greek ships due crew costs were cheaper on the average than peer Norwegian or Japanese operators. Now Greek companies use the same crewing resources as their peers. Far East and Indian crews with sometimes Russian or East European officers. Their costs are identical.

The Greek crews were a source of middle management for the Greek offices that gave them an unbeatable operational advantage as vessel providers with an indelible bond between the office and the vessel. Today, with fewer and fewer Greek seafarers, the labor pool for middle manager Port Captains and Port Engineers is drying up and is increasing elderly in age. Some Greek companies are beginning to use Indians from abroad, for example, in their headquarters, so why not management from Dubai or Singapore?

Second, Greek medium. small companies are now shut out of bank finance with the Greek banking system locked up in Greek sovereign debt crisis. Typically these companies have small fleets of older units, mainly bulk carriers. They buy elderly tonnage close to scrap-level, trade them a few years, building up net worth. They then roll over their fleets, buying somewhat newer units and selling the older units for scrap. Greek banks were specialists in this kind of lending with higher pricing and shorter tenor. These companies are too small for foreign bank finance and their vessels do not meet bank age criteria.

These companies are a critical entrepreneurial incubation crucible for a continuing renewal of Greek Shipping community. The best of crop become ultimately the Greek shipping powerhouses of the future. The offices are a major source of office employment in Greece. They contribute to the support of a large marine service industry in Greece.

Without the human resources of seafarers and the entrepreneurial incubation of new companies, the future of Greek shipping may well be in jeopardy. Shipping in Greece risks the danger of a mature industry that consolidates with a few major players, but a much smaller base than previously where Far East and other competitors become the growth area of the industry in the future.

Capital profit disappoints, so why is Evercore pushing this stock?

2011-10-31T22:25:00.000+02:00

Since Jonathan Chappell moved to Evercore from JP Morgan, he has been touting the virtues of Capital Products Partners and the management of Evangelos Marinakis. Chappell even went so far as to replace Teekay Tankers in Evercore Partners' conviction buy list. Despite my high personal regard for Chappell as an analyst. I find this viewpoint to be misguided. Recent financial results seem to corroborate my reservations.

Stripping out all of the noise, Capital’s bottom line stood at US$ 1.7 million, well short of the US $6.6 million the market was expecting from vessel operations. Most of its profit was made up of an accounting gain on the takeover of Crude Carriers.

Capital’s CEO Evangelos Marinakis holds the conventional view that the products market is amongst the most attractive in shipping right now. The theory is that this class of vessel, especially MR (medium range) tankers, has less of an order book overhang and will see more demand growth from new refinery projects than the crude sector.

Not everyone shares this viewpoint. DvB Bank, a transportation specialist, warns that product tanker values could fall by a fifth if the European sovereign debt crisis negatively affects all global economic markets and creates a significant drop in demand to ship refined oil products. DvB expects product tanker fleet utilization to remain less than 90% until 2013. Platou Markets - who normally have a fairly positive bias - also do not see relief in tanker markets until 2013. Recent large losses of TORM, an established top tier product tanker operator are ominous for this sector.

What confounds me is why Chappell sees Capital in a more favorable light than methodical players like TeeKay or Scorpio which both have greater depth of management? Compared to these peers, Capital is a relative newcomer without much intrinsic value. It was only last year that Capital began its foray as a listed pure play product tanker company.

By contrast, TeeKay has a proven track record and has made every effort to build intrinsic value in its business. It has a strong presence in higher margin niche businesses like shuttle tankers and LNP and in its cargo book operations where it has built up tanker pools. Scorpio invested in an exceptional chartering brokerage team as well some ex-OMI senior management. It also built a cargo book before entering into capital markets to acquire tonnage.

Marinakis has been more of a Greek wheeler and dealer with his Olympiakos football team involvement. I do not see the same management depth at Capital. Does it belong in the same league as the above mentioned peers? Marinakis tends to be very mercurial in his decisions. After launching his pure product tanker play, he then used company funds to buy a bulk carrier that he chartered to Cosco. A year later, he decided to merge his crude tanker listing into this venture, adding VLCC’s and Aframaxes with significant spot exposure.

Although Chappell is cautious in his market projections in both dry and tanker sectors, there seems some irrational exuberance in betting on Capital over other peer companies with more solid management.

Major Chemical Tanker Operators continue to expand in liquid storage with new acquisitions and innovative financial partnerships

2011-10-25T16:35:00.001+03:00

Both Stolt Tankers and Odfjell AS continue to leverage their considerable franchise in chemical transportation expanding in the chemical storage business. Both have a chemical logistics operation with sizeable cargo books. They control a major share of the chemical transport market. Liquid storage is a healthy growing business with good return on asset and attractive risk profile. This diversification enhances bottom line results, provides increased earnings stability and gives them competitive edge over peer competitors.

The chemical sector is traditionally a very low margin business with high operating costs and asset values, suffering from poor returns on investment. These companies have created a valuable franchise in chemical transportation, but they need earnings stability and improved returns on investment for their investors.

They have built up a global presence in chemical storage facilities that assists in meeting these goals. Sometimes, they have gone into new facilities alone like the recent Stolt acquisition of Den Hartogh Holdings bulk-liquid storage terminal in the Netherlands, other times in partnership with peer storage operators like VOPAK, Oiltanking and Vitol in select locations.

Odfjell chose a novel approach to finance the expansion of their terminal business in Europe and North America: a strategic partnership with Lindsay Goldberg LLC, a U.S.-based private equity firm. This firm has been involved in chemical projects in the past with their holdings in PL Propylene LLC (an evolution of an earlier Lindsay Goldberg sponsored venture, PetroLogistics). PL Propylene is now constructing the largest propane dehydrogenation plant in the world to service Gulf Coast propylene consumers. Lindsay Goldberg first entered the PetroLogistics venture by supporting their purchase of an ethylene pipeline.

It will be interested to see how the Odfjell-Lindsay Goldberg partnership evolves in the liquid chemical storage business.

Eagle Bulk once a Wall Street darling now facing forced sales

2011-10-06T17:12:00.003+03:00

At the outside of the 2008 meltdown, Eagle Bulk with its emphasis in handymax tonnage was considered one of the safest bets of shipping stocks. Sophocles Zoullas was well-regarded in NY financial circles. Kelso, who originally banked the venture, had made very good money. Yet the business model had flaws and this is now coming to light.

Eagle Bulk concentrated on supramaxes, where there has been excessive ordering. The smaller vessels in handy sector with more flexibility in port access and variety of cargoes are outperforming.

It was a start-up company with little initial intrinsic value. It has been heavily dependent on charterer counter parties for fleet employment. Only recently has it been developing a commercial department for a contract base. Eagle has always been very secretive about its management, vessels and employment compared to peer companies. Early this year Eagle received considerable adverse publicity when it was discovered the company had significant exposure to Korean Lines, a major charterer who went bust, declaring reorganization.

Shipping is a capital and labor-intensive business with basically low returns on asset. The historical benchmark has been between 10-15% with leveraging. The challenge is how to bring this up to acceptable levels for investors, who are looking for 20-30%. Since shipping is a cyclical business, this can be done in part with timely investment and divestment decisions.

Capital cost is very important. These dry bulk issues, however, were structured with generous dividend payouts, precluding significant reinvestment of free cash flow. New business had to be financed by costly new equity raises. Eagle had few options but a large block purchase strategy to scale up and claim accretitive returns on multiples from a rapidly growing fleet.

The company chose to buy the business from another owner who had ordered a large block of vessels and wanted to resell them at a considerable premium for profit. The expectations from the transaction propelled Eagle’s share price to new highs. This was very good for Kelso, the private equity firm, which sold off shares in timely fashion; but not very good value for investors who bought into low margin business with marginal returns on residual value.

When conditions changed from fall 2008, Eagle had a high cost asset base and too much debt. This precluded any bargain hunting for vessels at lower prices. They put their efforts trying to rearrange and rationalize their order book, where they were over exposed. They had the financial capacity to do new business only through a joint venture through Kelso.

Eagle has a high break-even for its vessels due mainly to very high administrative expenses and interest cost. Executive compensation has been lavish over the years. Despite this, the Group managed to stay in the black until recently. The bad market conditions this year have depressed asset values leading to loan covenant violations. At present, their net worth is close to negative. Presumably the pressure from lenders is to encourage timely recapitalization or asset sales to reduce debt. Oaktree recently bought a small share. Eagle has got a long and risky road ahead of them for recovery.

General Maritime close to filing for Chapter 11 for reorganization

2011-10-06T17:10:00.002+03:00

For some time now Genmar has been an ailing company, suffering over indebtedness, high interest expense and cash flow problems with a large portion of its fleet without contract coverage and dependent on a weakening tanker market. The issue now is what stand its distressed asset private equity investor, Oaktree Capital, will take in this situation. Will they eventually take full control of the company, seek fresh management to recapitalize like they did with Beluga? Meanwhile, unsecured bondholders are in a parlous situation.

The Group was not well positioned for the 2008 meltdown. It had just absorbed Arlington Tankers, acquiring some attractive assets but at a high price and it was already carrying too much debt. When the window opened in early 2010 on Wall Street for seasoned equity, Peter Georgiopoulos gambled on a large block tanker acquisition deal from Metrostar.

The proved a bad timing decision and a misread of the tanker markets. Georgiopoulos paid a premium for the vessels over the market, but thereafter tanker rates started to plummet, triggering loan covenant violations and even compromising liquidity. Investors, who had bought into Genmar’s deal in the capital raise without discount, have literally lost their shirt with a penny stock today.

Genmar is hemorrhaging with a second quarter net loss of US$ 24 mio lifting losses for the first half to more than US$ 55 mio with time charter cover for the second half of the year falling to 42%. The “too big to fail firm” is funded through two bank facilities totaling US$ 850 mio at Libor plus 400 basis points and two bonds totaling US$ 500 mio with minimum interest rates of 12%. This does not even include the heavy cost of the US$ 200 mio Oaktree facility on top that is being capitalized. Interest costs were seven times higher than the firm’s earnings before interest, taxes, depreciation, and amortization for 2012!!!

Needless to say, Moody’s rating agency cut Genmar's rating three notches to Caa3 with a negative outlook.

Genmar has a young and attractive asset base. If “marked to market” and recapitalized, this would make an attractive investment with a position on eventual improvement in the tanker market. Currently tanker market dynamics suffer from an excessive order book overhang with three new deliveries for every ten existing units. The main demand driver is Asia emerging markets, but there are also adverse structural changes in the US because of increasing use of domestic tar sand and shale gas resources for energy needs as well as ethanol in gasoline blending. It more likely than not another year of miserable rates before a possible recovery in 2013.

It seems difficult to foresee how Genmar will survive in its present form. Oaktree is an experienced distressed asset investor. They might well be better off running their own show with fresh management of their choosing for better value creation and strategy than the past. On the other hand, bondholders may be in for a very big potential ‘haircut” under Chapter 11 proceedings. The bond payments are not sustainable and they’re sucking up value.

To his credit, Peter Georgiopoulos, who secured a stake in a limited partnership related to the Oaktree investment, will assign his interest in the vehicle to Genmar.

Greece should default and restructure but the EU prefers a debt prison and the Greeks suffer Stockholm Syndrome

2011-10-06T17:08:00.002+03:00

It is pretty obvious that Greece is insolvent, the EU/ IMF bailouts are increasing debt and the fiscal imbalances are deteriorating with the austerity measures that are pulling the country into a deep depression. The shrinking GDP reduces capacity to repay debt, so why these self-destructive policies and Greek government capitulation?

Rationally the Greek government would have long ago followed the road of Iceland, defaulted, abandoned the Euro and restructured its public debt in drachma. This would have facilitated necessary structural changes by creating favorable economic conditions for a recovery so everyone in Greece would have something to gain in rationalizing the public sector and opening up closed professions. This process would require reasonably five to ten years.

External devaluation is far less socially destabilizing than horizontal wage cuts and bilking pensioners, which is the infernal EU/ IMF remedy of ‘internal’ devaluation. The new currency would remove the vicious circle of the Euro and EU monetary policies that benefit the Core by undervaluation and gut the Periphery economies by bloating their trade balances.

What is unique to the Eurozone is that it employs deliberately deflation as a means of becoming 'competitive', considering flexible exchange rates as démodé. Conventional currency devaluation makes foreign imports more expensive, but local goods with high domestic content remain at same prices. Nobody has a direct salary cut, etc. It can be done overnight and immediately, there are results. It fosters domestic production and exports.

Admittedly devaluations do not address underlying structural problems, but they buy time for correction without undue social disruption. The EU system of 'internal' devaluation creates immediate social disruption, but actual improvement in competitiveness may take years. An insolvent member with a high debt load may collapse in the process.

Greece has a disproportionately large number of self-employed people. These people like their counterparts abroad tend to hold on to their income and under report for taxes. Choking these people to death economically not only destroys the heart of the Greek economy, but also Greek social fabric. Whatever income squeezed out of them is lost from other taxes like VAT in the deflationary spiral. Today these hapless Greeks face a similar fate of the Kulaks in Stalin’s farm collectivization.

The Eurozone has grave structural problems making it very unattractive for its members. Unlike the United States and England whose central banks were founded to facilitate the government debt, the European Central Bank serves the commercial banks, making government dependent on them for their debt operations. Basic criteria of statehood are the powers to create money, levy taxes, and declare war. Written by EU bank lobbyists, Europe’s constitution deprives Eurozone members of the money-creating function.

The locked up currency parities led to huge trade imbalances between the Core and Periphery, bankrupting a large part of the Periphery. The EZ economy is shrinking, and its own commercial banks are close to insolvency thanks to these foolish EU policies. This is creating a horrible train wreck. Even the US is heavily involved through the derivatives markets that cover sovereign default risk to backstop these weak EU banks.

The EU has been bailing out Greece to cover their commercial banks as a policy response to buy time for an elusive recovery. This also gets the US investment banks off the hook for the derivative default risk. The IMF/ EU/ ECB will eventually become the sole creditor buying out all the commercial bank debt.

The dilemma is that they will be holding worthless paper of countries that are totally barren economic landscape and perhaps even failed states from social disintegration. This why Victorian debt prisons were eventually abolished. History repeated is often a farce!

Lessons learned from this:

1.) Eurozone membership comes at significant social costs: less economic and political freedom for its members.

2.) Permanently lower living standards at least for the EZ periphery countries.

Generally the whole EU system suffers from chronically high unemployment and economic stagnation from the sovereign debt overhang that it generates. It is one of the worst performing regions of the world. It cannot compete either with the Far East nor the US.

Cosco losses could lead to charter renegotiation in the containership sector

2011-09-24T11:25:00.000+03:00

Macquarie Capital analyst, Janet Lewis, predicts that Cosco might continue in losses for two years or more. Cosco’s container wing, which was also loss-making in the first half, is set to take delivery of 28 new vessels in the near future. Will Cosco follow suit with containership owners to renegotiate down charter rates as they have done in the dry bulk sector?

There is considerable evidence that financial results in the containership sector are weakening this year. After the restocking boom last year in fight for market share, Maersk (OMX: MAERSKB) announced aggressive new building program for ever larger containership vessels in their on-going efforts to expand market share at the expense of peer companies.

Seaspan (NYSE: SSW), which has a pure vessel provider model and investor darling, followed suit with a new building program of their own. This group held on to all their new building contracts booked prior the 2008 meltdown, managed to cover their capex needs and take delivery. They turned heavily to Cosco (Coscon) and CSCL for employment. Seaspan is inordinately dependent on Cosco as their largest liner company customer relationship (in the order of 50% or more of their fleet from recent investor presentations).

Should Cosco be obliged to refuse delivery of new units or renegotiate existing time charter for lower rates, this would have a profound effect on Seaspan’s fortunes as well as other containership companies, who service their needs.

Seaspan shares have been falling in value since April. They have never fully recovered in share value from their pre-2008 levels.

Omega Navigation appears to be insolvent

2011-09-10T19:29:00.000+03:00

Omega Navigation senior lender HSH Nordbank filed a petition to dismiss Chapter 11 reorganization proceedings or convert them to a Chapter 7 liquidation. With his back to the wall, Omega CEO and major shareholder George Kassiotis has launched offensive lawsuits in Greece claiming bad faith by his lenders. Simple math indicates that his company is insolvent with negative net worth. This legal fight makes any recapitalization hope Omega had look very unlikely.

HSH Nordbank obtained an Omega fleet valuation from CW Kellock at $ 239 million for their court filing. From recent sale reports, I would charitably value Omega’s eight mortgaged units (six LR - Long Range product tankers built in the mid-2000’s and 2 MR -Medium Range) product carriers built in 2006) at US $270 million maximum. This still does not cover Nordbank’s total outstanding loan of $ 278.7 million. (HSH is owed US$ 242,7 mio plus another US$ 36 mio owed to NIBC Bank and Bank of Tokyo as 2nd mortgagees).

The debt dynamics look poor. Omega has not been servicing its debt as interest payments and legal expenses are mounting. The mounting interest liabilities are eating into Omega’s weak net worth.

There is no cushion for inevitable transaction expenses that would reduce the realized value. There are the imponderables of trade debt, unpaid crew wages and maintenance level of the vessels. Second mortgage lenders like NIBC Bank are in a precarious position.

Omega has been clamping down on financial information since their dispute with lenders, which is not helpful to their investors. Yet Omega was profitable in 2009 and declared dividends, so it is hard to understand exactly how relations broke down with their lenders.

We would guess that HSH Nordbank pressed for additional equity, but George Kassiotis, out of personal resources after his previous cash infusion, decided to balk. Presumably he was unable to inspire private equity or distressed asset investors like Oaktree or unwilling to accept their (Oaktree) conditions for participation, provided that he explored alternatives for recapitalization.

Omega is hoping to raise an additional US$ 30 million from the sale of the remaining share of the Megacore joint venture with Glencore. The senior lenders are contesting alleged diversion of funds from their cash flow to fund this project. They do not feel the amount is sufficient to secure their debt and turn the company around.

It is difficult to see at this point how the parties are going to come together. After the lawsuits, the senior lenders would likely not wish to support and work with Mr. Kassiotis any further. It seems unlikely that a private equity firm like Oaktree would be willing to step in to offer substantial recapitalization plus oversight of Mr. Kassiotis management, but that seems to me the only way that might allow an orderly reorganization.

Greece and its political oligarchs: shooting the messenger....

2011-09-02T18:09:00.009+03:00

Today marked a mini crisis where the newly-formed Greek fiscal council warned a high primary deficit and the deep recession have boosted to the extreme the debt dynamic, now "out of control”, offsetting the impact of the first €159 bn bailout loan. Finance minister Evangelos Venizelos said the report lacked validity of equivalent international reports, resulting in the resignation of Ms. Stella Balfousia, head of the Budget Office. Welcome to Greece, land of political oligarchs and the wonders of Socialist Democracy!

Unfortunately, the political restoration in 1974 sowed the seeds of the present Greek debt crisis and national bankruptcy. Institutionally instead of a sound democracy, an ugly, rapacious political oligarchy was created that was based on crony state corporatism financed by EU transfer money and loans. The main driver was the Pan-Hellenic Socialist Party (PASOK), who gained power in 1981 and started ‘socializing’ lame duck Greek companies. These companies had become lame ducks because of the inelastic labor laws and heavy state bureaucracy preventing them from restructuring during the late 1970’s, as the economic climate deteriorated under pressure of the rising Greek Socialists. The Socialists adopted a policy of expanded entitlements and maintained employment by taking over these companies financed by deficits and public debt.

Politics in Greece became a family name franchise to make money based on relations with the Greek State. Unsuccessful party candidates became senior management in state-controlled companies. State procurement went to favored Party customers. The state corporations generally lost ever greater sums of money, but they were given state guarantees to ensure further private bank lending - a major factor in Greek over-indebtedness. Even EU privatization became a party picnic where the Socialists maintained state control of many of these entities through public pension funds and state-controlled entities. Some say state entities were even used to buy the shares and pump up the prices in rampant insider trading deals. Much of the private economy is based on business with the public sector or granting of concessions that are in effect monopolies.

Consequently politics in Greece became a highly lucrative career path leading to substantial personal wealth. Some of the most coveted positions are in Brussels in senior political positions as well as key state ministries like Defense, Education and Telecommunications and Transport. Major party members evolved into a sort of ‘landed’ aristocracy with these positions as their ‘domains’. Today, the key party members of the Greek political elite are all very wealthy, living in large walled enclaves. Party “barons” have built large manor houses like this photo on various Greek islands sometimes with private beaches. Two-thirds of the Greek police serve as their guards.

They enjoy lavish jet-set life style and revel in Yuppyish behavior. Their world is increasingly distant from the average Greek, whom they tend to see more and more as their serfs not hesitating ever higher levels of taxation in hopes of maintaining their privileges. They largely see the IMF/ EU loan money as a means of preserving their financial, social and political status as the expense of the general Greek population. How can anyone protest, since they are elected officials and above all Socialists…..

Greece is a country where the keys to political power are tightly under lock except to a privileged few. The Greek political elite have done everything possible to consolidate their power. Institutional controls are virtually non-existent. Greek Deputies enjoy Parliamentary immunity from even common traffic tickets. The Greek Presidency is solely symbolic. The President is obliged to sign whatever is put before him without personal responsibility, even if the document has forged signatures or dubious legality. Elections are at the sole discretion of the Prime Minister for any reason whatsoever. The political party in power has an absolute parliamentary majority and routinely rubber stamps any legislation at the discretion of the party leaders. There is no separation of powers in Greece. The government generates nearly all the legislation. The judiciary risk their careers and promotion should they dare overturn any government laws.

Not surprisingly there are no institutional spending controls in Greece on public deficits and national debt. Greek politicians have always had a complete carte blanche to borrow and spend as they see fit. The problem with this system is that it has created unsustainable deficits and debt levels. The size of the public sector is too large for the private sector tax base to support. This process has driven underground a significant portion of the Greek economy. Taxation in Greece is largely retrogressive and arbitrary based on how much the State deems one’s income by the size of house, make and model of car, etc. VAT rates are extremely high. Likewise fuel tax, etc.

Thus, we have the spectacle today of the dismal report above that they reject, shooting the messenger….

Are shipping markets heading for another leg down?

2011-08-22T09:48:00.008+03:00

Recently private equity group First Reserve bankrolled the Diamond S deal in which 30 product tankers were acquired from ship management company CIDO at a significant premium over prevailing market levels. This speculative spirit reminds me of the General Maritime block deal last year. Similar lust for quick profits of shipping in the early 1980’s led to ill-timed, mispriced major investment decisions and a series of major shipping bankruptcies, and period of severe market disruption. Will the Chinese Eldorado and Fed financial engineering save the day for Wall Street flip-over deals or are we at the end of the 1980’s economic cycle and age of asset inflation?

The major growth driver for cargo demand has been emerging market economies. This year started badly and all sectors are presently suffering. There has been lately some interest in containership and product tanker asset speculation. The only sector really making money is LNG where there is a healthy supply/ demand gap.

Despite the dicey economic environment, the shipping industry staged an unexpected recovery in 2009 and 2010. Dry Bulk benefitted heavily from Chinese stimulus infrastructure projects and commodities stockpiling. Tankers benefitted by oil price arbitraging and storage demand. The container sector managed to reflate demand artificially by slow steaming and then benefitted from a pick-up in Chinese exports.

There is nothing ‘miraculous’ or unique about the Chinese growth model. Well-known China observers like former Morgan Stanley star Andy Xie and political economist Victor Shih at Northwestern University have long maintained that the Chinese growth model is an input driven economy fuelled by cheap money through financial repression to increasingly marginal investments subject to diminishing returns.

Everybody is banking on opportunities of a giant boundless consumer market in China, but as Michael Pettis (senior associate in the Carnegie Asia Program, based in Beijing) has recently written: “Low consumption levels are not an accidental coincidence. They are fundamental to the growth model, and the suppression of consumption is a consequence of the very policies – low wage growth relative to productivity growth, an undervalued currency and, above all, artificially low interest rates – that have generated the furious GDP growth. You cannot change the former without giving up the latter.”

China funds almost all of its major investments with bank debt. It long ago ran out of obvious investments that are economically viable, so any marginal increases in investment must be matched by increases in debt, resulting in an unsustainable debt overhang. Meanwhile, with the US economy at stall speed and the EU imploding into recession, Chinese trade surpluses are no longer desirable with its trading partners.

Rebalancing is not an option for China and it is likely to be very disruptive and for a prolonged period of time. All historical precedents are for a sharp down downturn in economic growth. The decline in Chinese growth will fall disproportionately on investment and this will severely impact the price of non-food commodities.

A sharp Chinese slowdown will have a severe impact on cargo demand and freight rates. The drop in steel consumption from the infrastructure projects will adversely impact the economics of emerging market exporters of raw materials. Liquidity will start to dry up in all emerging market economies. Finally, decline in steel prices will adversely affected vessel values. Scrap prices will fall and replacement cost for new vessels will decline. Vessel prices could drop dramatically.

All shipping sectors will suffer. A recession in the EU and US will quash any increase in demand in the products markets. Emerging markets will not pick up the slack. The larger bulk carriers are very exposed with dependency on China and its steel industry. Container overcapacity will again plague the industry. Recent speculative Greek issues like Boxships and Diana containerships riding on hopes of increased demand for feeder services will fizzle as liner companies reduce their chartered fleet. The most painful aspect will be the drop in vessel values.

In such a scenario, it may take years before any recovery, totally changing speculative business plans and discounted cash flows where time is the biggest enemy to profitability. The nightmare of any short-term player is to be stuck with a losing proposition as a long-term investor. In many cases, the best option is to liquidate in timely fashion not to ride the market down to the bottom. That will be difficult with such a large positions. Maybe this is already being reflected in the recent pressure on shipping shares, even large well-capitalized tanker companies like OSG and TeeKay.

On the other hand, depressed market conditions would facilitate industry consolidation and clean-up of over-leveraged, deadwood companies with failed management. Since the 2008 meltdown, there is a growing list of zombie shipping companies swimming in debt and heavy consumers of lease financing at any cost. This would benefit the financially solid long term players and eventually give them better market pricing power. Lower vessel prices would make the industry leaner and more competitive.

Of course, nobody is a prophet. Next year, we could have a booming shipping markets, a new vessel ordering boom, and the Dow back over 12.000…. Imagine DryShips again trading over US$ 100 per share! George Economou has been a leading advocate of the Chinese unlimited growth story.

Diamond S. a new business model for shipping?

2011-08-17T17:18:00.002+03:00

The Diamond S deal with Cido for a US$ 1 bn block purchase of product tankers has been the talk of the town, especially with the involvement of 'King of Bankruptcy' Wilbur Ross who has decided to enter shipping and bankroll a large portion of this project. From the feel of this venture backed by private equity First Reserve and Ross, it seems more likely to be a flipover asset play rather than an effort to create a long-term shipping business like TeeKay with intrinsic value.

The venture starts with some very positive factors. Craig Stevenson is a successful, proven CEO in the shipping sector with an enviable track record. First Reserve successfully backed the Corbin Robertson venture Quintana, which was sold at a very timely moment to Excel Maritime (who has been struggling under the asset impairment and weight of the purchase debt leverage ever since).

The CIDO assets are young and come with period employment said to be on the average 5-years. The project is well capitalized with US$ 600 mio equity and US$ 400 bank debt. If the market takes a further leg down, they can withstand the drop in asset values on their existing fleet and they have ample reserves to purchase additional assets at lower values. If the market starts to improve, they will reap the benefits of higher asset values so that they can float an IPO at a premium for First Reserve to exit with some profits for the risks and lighten up on its holding.

Craig Stevenson sold OMI and lost his key people for which he is now busily trying to rehire. It is unlikely that he is going to have any trouble in building a new shipping organization.

Stevenson openly states that he means to keep the product carriers on period charter for secured income and will put his larger Suezmax newbuilding to the spot market to take advantage of spot market volatility.

The only case where this venture could disappoint is with a double dip recession that delays significantly the timing of a market recovery. The premium paid on the Cido assets will begin to seem a liability and the investors will face time and opportunity losses on their position unable to liquidate according to plan. Flipping the business over for a quick profit would start to feel illusory. They might find themselves as long term investors that they had not anticipated.

It is still far too early to tell how this venture will fare. Personally, I am not sure that asset speculation and quick flip-over deals are good for the long term health of the shipping industry. In the past, this has led to chronic overcapacity and low rates. The companies that purchase the marked up assets usually have problems unless the timing of the deal is very early in the cycle so that they can ride a further leg up.

NewLead in forced asset sales

2011-08-17T17:14:00.000+03:00

NewLead is reported to be offloading the 135,000-dwt Newlead Spartounta (built 1989) and the 34,700-dwt Newlead Prosperity (built 2003) after breaching a loan with FBB-First Business Bank. They recently hired the Moelis & Company and Fried, Frank, Harris, Shriver & Jacobson to help it fight its debts, which stand at US$ 581.9 mio. The bad news adds to an ever longer list of struggling shipping companies: TBSI, Omega, Top Ships, Zachello, etc. selling assets or fighting with their creditors.

Initially I was not a fan of the GrandUnion - Aries merger, posing a number of questions. Thereafter, I felt sympathy to the efforts of Michael Zolotas to clean up the mess at Aries and make a turnaround in NewLead.

The basic issue is that Aries was always a big lemon. I pleaded with Stephanie Kasselakis and John Sinders at the time of this controversial IPO and offered in good faith to assist Jefferies. The facts are that their investors got badly burned from this IPO and now the successor NewLead is in jeopardy. I always felt strongly that this could have been avoided.

Looking back at the time of the GrandUnion merger, really no one else would have accepted to take on Aries. Certainly not Scorpio Tankers, which is healthy company with conservative management, who forthrightly warned investors last fall of coming tanker market turbulence.

Aries suffered from horrible technical management, lousy assets and overleverage. GrandUnion was not a strong company in terms of its ability to recapitalize Aries from its losses. They financed the merger with drop down assets and more debt. They made a valiant effort to shed bad assets, clean up the technical management and restructure, but the losses continued. They had no advantages of capital market access to dilute with additional equity or to refinance existing debt with a bond issue, but all the administrative and reporting overheads.

When the dry cargo market started to collapse this year, they were badly exposed with their elderly Capesize tonnage and high debt levels. Their current debt load is crushing. Senior lenders are forcing sales to reduce debt.

It seems to me that NewLead is going to face a difficult fight for survival. The issue for them is to save as much as they can of the GrandUnion resources put into this merger. The risk of two weak companies merging is that this drives both of them to oblivion.

TOP Ships: a lemon or an Apple?

2011-08-04T20:12:00.000+03:00

Top Ships is probably the antithesis to Apple. Apple CEO Steve Jobs was a Reed College drop out who could not live in a structured environment and became a creative entrepreneur for new products. Jobs made millions for himself and his shareholders. Apple is now trades at US$ 384. Evangelos Pistiolis has gone from one ill fated business decision to another. TOPS is currently trading at US$ 2,59 after two reverse splits and just announced US$ 103 mio quarterly losses - a spectacular lemon!

We have discussed the history of TOPS in prior articles. It is well documented.

Currently we have seen two contradictory moves. Last May, TOPS announced the desire for a US$ 100 mio follow on offering despite the fact their share price was then trading as a penny stock. Since then, we have seen a series of bulker sales at current prevailing bargain basement prices, where the company has been taking huge losses. Pistiolis says that he is taking these losses to 'protect' his shareholders from the bad bulker markets and future trading losses.

Of course, it is questionable that any company with a strong balance sheet would be selling these fairly modern assets like this. A normal company would continue to trade and hold them until the market improves. There are plenty of peer companies and you do not see them selling off their assets like this.

The irony of this is that back in 2007, the move from a tanker company to a bulker fleet was Pistiolis's brain child to save the company. Sort of Steve Job's i-phone idea! TOPS closed on a series of bulkers at top of the market prices on bullet loans. They thought they could cover the investment with a follow-on offering. In the end, they got caught in the subprime crisis. Their efforts to raise capital were not sufficient for the investment.

Much to wrath of their major institutional investors, they were obliged to sell shares at lower and lower prices with dilution. They started selling off tanker vessels and even one of the bulkers that they had just bought. The only positive aspect is that they fixed their bulker fleet on period charter. Unfortunately, the charters were hardly sufficient to amortize the premium prices paid for acquisition; thus, the current substantial losses on disposal.

Asset sales like this are normally a sign of liquidity problems and even possible pressure from senior lenders to reduce their loan exposure. TOPS, however, did a successful loan restructuring earlier this year with Alpha Bank.

Their product tanker fleet does not seem to be faring much better. TOPS contracted these units in good times, it has had some problems with charterers, seeking rate renegotiation.

At present, it seems very unlikely that TOPS could raise further capital in public markets. If markets do not improve soon, it could risk following its product tanker peer Omega in a Chapter 11 filing.

Does the CIDO deal mean tanker values are on the upside?

2011-08-03T20:18:00.003+03:00

Jonathan Chappell argues that Craig Stevenson's massive US$ 1 bn product tanker acquisition deal to purchase the 30-vessel CIDO fleet is good news for tanker asset values. He estimates a US$ 40 mio price tag per vessel up from his previous US$ 36-37 mio valuation for a three year old tanker. He believes that supply and demand will improve in this sector this year and in 2012 seeing this a 'smart money' deal. I am more skeptical.

We saw last year Peter Georgiopoulos's block tanker acquisition deal with Metrostar at premium prices and how bad timing resulted in drastic fall in the Genmar share price and a dramatic capital injection/ loan restructuring with Oaktree.

The Cido fleet had been up for sale for some time. CIDO has been steadily shedding off assets for months. There were numerous rumored suitors for this deal including Navios. Stevenson's company Diamond S. Shipping was the highest bidder and fixed the vessels at a premium price. Whether this is really a good deal depends on future events.

Until now, Diamond S had no ships in the water. Diamond S currently has eight 158,000-dwt tankers and two 105,000-dwt product carriers on order from yards in South Korea for delivery between next year and in 2012. His ex-OMI senior management - Robert Bugbee and Cameron Mackey - moved to Scorpio. The Cido acquisitions is a transformatory development making it a functional ship owning company that operates 30 tankers.

Scorpio by contrast is not a company that would bet on such a big move. Emmanuele Lauro first built up a cargo operation and then started scaling up incrementally. Craig Stevenson is buying assets before building his commercial or technical management capability.

Presently things in the product tanker market are bad. The transatlantic market is flat and east of Suez is slow. Big ships are in dire straights. Earning margins are poor. Operating expenses are high. Bunkers are capping any returns potential. There is very limited free cash flow to pay debt and dividends.

The product tanker story revolves on new refinery capacity coming on stream in Asia and the Middle East to catalyze CPP exports and boost ton-mile for product tankers. But the timing of this development is dependent on when a major pick-up in demand is seen for gasoline/diesel in the West, combined with the movement in CPP inventories in the latter region. For 2011, distance-adjusted demand is expected to advance 6% and the product tanker fleet is expected to grow by 5%. Rates may not improve meaningfully until 2012 and even 2013.

Whilst there is a positive general consensus on the product tanker market as a good long-term investment, such a notion could change dramatically if the fundamental outlook changes (through macroeconomic disappointments, structural changes in the industry etc).

Omega in bankruptcy: Test case for other weak listed shipping companies

2011-07-26T17:18:00.002+03:00

Omega Navigation (NASDAQ: ONAV) is a product tanker play with fleet of 12 vessels plus a joint venture with Glencore (LSE: GLEN) . Most of its fleet on time charter to Glencore. The fleet is divided between MR and LR 1 units all built in Korea. The company only had really one good year in 2007. It was hard hit by the 2008 meltdown. It had been filing for delays in publishing accounts, but known to be in protracted debt restructuring and suffering from high leverage.

Since this was a vessel provider business model with a relatively small fleet, it was dependent mainly on fleet growth and favorable market conditions to generate profit and value for shareholders. It has one very large customer, Glencore. It remains to be seen what will happen to the Glencore joint venture companies, which have not been included in the Chapter 11 reorganization filings.

Omega entered the product tanker market in boom market conditions, acquiring assets at high prices with leverage. Its CEO Kassiotis had been commercial director of Target Marine S.A. He tried to lock in some benefits of the firm charter rates, but its 2009 accounts show a significant drop in time charter equivalent earnings. Further its capital gearing on book value was already over 70%.

Omega's main senior lender in 2008 was HSH Nord-bank of Germany. Apparently HSH Nord-bank intervened early in the game when cashflow problems first emerged. Omega under pressure reworked its credit facility and prepaid principal owed under the main facility with a second-lien infusion of US$ 42.5 mio from new lenders NIBC Bank of Holland and Japan’s Bank of Tokyo-Mitsubishi NFT. Perhaps they were enticed by the fact that this was a public company, the asset quality and the charters; but second lien lending is a highly risky business. Also, this undoubtedly led to a significant increase in financial expense for the service.

Normally, for Omega to get a second mortgage for NIBC and Bank of Tokyo-Mitsubishi, HSH Nord-bank would require that these institutions sign a subordination agreement, preventing them from taking any action without HSH consent. Meanwhile there is no evidence that Omega tried to sell units to pay down debt. In their September 2010 investor presentation, it claims financing is in place to fund capex commitments.

Omega was too small to benefit with ATM follow on offerings to increase capital. They had to means to take advantage of the downturn in tanker values so they tried to team up with Glencore in a joint venture for this purpose. At this point in Chapter 11, they lack resources and the future of the Glencore joint venture is in question.

No doubt with such attractive assets, other product tanker companies would be interested to purchase them at present market values, but George Kassiotis is hoping to survive under Chapter 11 and keep control of this operation.

TBSI: a dry parcel liner service beleaguered by losses and financial problems

2011-07-26T17:17:00.000+03:00

TBSI (NASDAQ: TBSI) has recently been under pressure with operating losses of US$ 16,7 the first quarter this year and senior lender pressure to increase capital by US$ 10 mio coming. When TBSI went public through Jefferies under John Sind`ers in 2005, its chequered history of its 2000 Chapter 11 reorganization surfaced. The company operates a parcel liner service with a large number of tween deckers and heavy presence in Latin American ports, an unusual trade largely superseded by container vessels.

TBS focuses on multipurpose tweendeckers and smaller dry bulk carriers varying from 17,300 dwt to 45,500 dwt that are able to navigate and efficiently service many ports with restrictions on the size of vessels. It has attempted to create niche markets focusing on trade routes, ports and cargo that cannot be efficiently served by container and large dry bulk vessel operators. It offers regularly-scheduled sailings along with local teams of commercial agents and port captains who meet regularly with customers to tailor solutions to their logistics needs.

TBS CEO Joseph Royce has a ship brokerage background. He then served as President of COTCO, a dry cargo pool of over 45 vessels before founding TBS in 1993.

Having this parcel liner service means fixed costs and bunker exposure that most dry cargo operators do not carry. Whilst break bulk is a higher cost service than inter-model container feeder competitors, TBS tries to focus on cargo with special handling needs and personalized service. The company also has some handysized bulk carriers in their fleet. They appear to have some of their tonnage (approximately 25%) on time charter, which adds to earnings stability.

Clearly. they have suffering lately from lower freight rates and higher bunker expenses albeit their cargo volume increased slightly over last year. Another problem is the heavy off-hire and repair expenses for the ageing 1980's built tween decker fleet with a need to drydock 17 vessels, requiring about 546 days out of service. Tween deckers today are largely vintage tonnage no longer built. TBS has ordered a new series of Dwt 34.000 tween-deckers for fleet renewal.

Although TBS debt to book value ratio is not high, they have been having serious problems paying their debt and in protracted loan default/ restructuring discussions. Lenders have demanded a US$ 10 mio increase of capital to which Mr. Royce has paid in US$ 7,58 mio of his own funds. They are also planning a rights offering to increase capital. Their financial expense has soared to US$ 8,7 mio in 2011 from US$ 5,5 mio last year aggravating losses.

A major New York investment house is forecasting that the dry cargo sector with its substantial order book overhang will be the slowest to recover. On the other hand, smaller handy size units have been outperforming the larger Capesize and Panamax units in current market conditions.

Greek economic crisis in a nutshell

2011-07-05T17:08:00.037+03:00

The Greek crisis is a toxic mixture of politics and economics. The show case Eurozone project is in jeopardy by the looming sovereign default of one of their members.

Greece made a Faustian Pact with the European Union that allowed its political elite to freeload the system, using EU transfer money and cheap credit for local political patronage rather than building a sound goods and services economy.

The Euro destabilized the balance of payments. Local production waned and imports soared. Price inflation led to pressure for wage increases. Greece lost competitiveness. Public debt mushroomed to finance never ending public sector deficits. For many years the EU blinked.

The EU elite fearful of the Lehman precedent and protective of their scandalously undercapitalized banking system have chosen a contradictory approach of debt bailouts to cover creditors by musical chairs and wage and price deflation austerity.

The Devil is now seeking its due. Greece is locked into an ever growing debtor's prison with a shrinking GDP causing its tax base to implode and a rising mountain of debt that is currently 140% GDP shortly to rise to 170% with the next bailout loan on the pyramid. Unemployment is skyrocketing, shops and businesses are closing. The government cracks the whip cursing its own people every time its unrealistic tax revenue projections fall short, creating ever more draconian penalties for tax evasion. This climate seeds an increasing flight of capital and lack of investor confidence.

EU policies are terrorizing periphery countries with deep recessions and mounting unemployment, creating disorderly default risk from rising social unrest. Northern European taxpayers are also growing restless and upset over ever growing demands for bailout money from Brussels, as the periphery sinks under the growing debt overhang. They are concerned that these are stealth transfers with growing doubts that the periphery has the capacity ever to repay the money.

Nobody in the EU is happy. The more EU voters see Brussels asking taxpayer money to bail out banks and socialize losses, the angrier they get. This causes growing discontent with the whole EU system. The EU elite seem smugly sure of themselves, appointed with secure positions rather than democratically elected. Politicians in member countries face a rising storm. Few however have the courage to express openly their discontent from fear being ostracized by the Brussels elite for daring to question them.

So far the EU elite refuses to discuss rationally successful restructuring techniques in past emerging market crises. The markets presently see 80% prospects of a Greek default. Their emotional outbursts against default or debt restructuring are directly related to their exposure to sovereign toxic debt and weak balance sheets. After their own meltdown in 2008, the US authorities want to keep this mess under the rug as long as possible, basically turning over the IMF to them as a European bad bank.

As it stands presently, there are basically two trends of thought. The EU elite seem intent on the EU public sector picking up an ever increasing share of Greek sovereign debt. In a few years’ time, there will be one sole public creditor with the private creditors paid off and Greece will have a very high debt GDP ratio, likely in excess of 200%. There is no clear plan thereafter what to do about this mountain of debt. There is a vague hope that somehow Greece will grow its way out of the debt. Structural reforms have been discussed for the last 20 years in Greece but the many stakeholders in the present system create substantial resistance to change. Locked into a hard Euro and compulsory wage and price deflation, it is hard to see from where this growth will come.

The other school of thought comes from mainly American economists like Simon Johnson, Nouriel Roubini and Paul Krugman, heavily influenced by the disorderly Argentine debt default and emerging market debt restructuring. They have support from German economists concerned about Greek debt sustainability and capacity to repay. They are calling for orderly and coercive debt restructuring as soon as possible to remove the default risk and provide relief from the huge debt overhang. Such action may make the structural reforms more palatable, gaining the good will of the Greek public with burden sharing and allowing more gradual adjustment. Both structural reforms and debt renegotiation are necessary conditions to resolve the Greek debt crisis.

Unless the EU elite realize that they must meet periphery needs, the divergence between the core and periphery will grow so large that it may lead to a breakup of the currency zone. It may take generations to restore the credibility of EU institutions after such an aftermath. Moody's in the latest downgrade of Portugal cited poor EU crisis management as a major risk factor, angering many EU politicians. The truth frequently hurts.

Top Ships revisited in recent bulker sale

2011-07-05T16:48:00.000+03:00

Top Ships recently sold the 'Astrale' for US$ 23 mio, which seems low compared to the recent sale of a sister vessel. They bought this unit in August 2007 for US$ 72 mio (peak boom-era prices) in hopes of diversification to dry cargo in response to massive losses that they were taking on the tanker fleet. This company became a penny stock. I was among the first to signal the risks in an article in April 2008. Events so far appear to have vindicated my views.

The original TOPS IPO was sponsored by Cantor Fitzgerald with Hibernia taking a significant share. It was considered the work of Anthony Argyropoulos, who was then working at DvB Bank after leaving Jefferies. He sold the deal to Marc Blazer at Cantor later joining Cantor himself. Everyone considered the deal a breakthrough proving that Wall Street access to shipping issues was open to all.

The proximate cause for the decline to the company was a lease finance deal with DvB bank for a large portion of its fleet and a massive dividend payout to shareholders. This weakened the company financially and left a highly leveraged fleet. A downturn in the tanker market in 2007 put them into operating losses, causing a signficant drop in share price.

The company management reacted by doubling up on a bulk carrier expansion plan that was badly timed at the peak of the dry cargo boom. They did not have liquidity for such massive asset expansion so they financed it by short term loans that would be repaid with a follow-on share offering. Unfortunately, the subprime crisis in the fall 2007 hit Wall Street and their efforts to raise capital proved difficult with a succession of public and private offerings at ever deeper discounts. TOPS had to sell assets for liquidity to make the bulker transaction work.

This angered one of their major hedge fund investors, who requested the company to appoint two directors of their choosing to the BoD. The company refused flatly and the investor started a shareholder activist action with the SEC.

"Tradewinds" published an article referring to my work on the company, which angered TOPS. Later the publication wrote a retraction, claiming that I misspoke but not referring to anything specific. They were wrong. My warnings were reflected in subsequent analyst questions.

At a very early stage in the game, TOPS found themselves with covenant violations. They sold off a large portion of their Suezmax fleet at a critical moment in 2008 just prior the fall meltdown. Other problems continued to plague them such as covering CAPEX needs for their product tanker newbuildings for which they ultimately covered by bareboat chartering the vessels. Ultimately senior board members left them. Their CFO resigned.

It is difficult to see where TOPS is heading these days. We hope they make a comeback for sake of their weary investors.

Awilco LNG listing with promising business plan

2011-07-03T20:59:00.004+03:00

The AWILCO LNG start-up is attracting investor interest from blue-chip investors. The Awilco Group of the Wilhelmsen family in Norway is well known for Wilhemsen Marine Services, a major ship management company as well as their investment in Royal Caribbean Cruises. The business plan to enter the LNG market was conceived last fall. They made a debut in March and April this year purchasing three elderly LNG units from NYK LNG. In June, they closed an order at Daewoo for two new LNG units.

AWILCO has strong technical expertise in offshore, heavy lift transport and drilling. In each of these areas, they have created value for investors with imaginative business plans sometime involving major conversions of sophisticated marine assets like heavy lift vessels for drilling rig transport and upgrading/ reactivation of drilling rigs. They have been innovative in arranging the finance and successful in securing profitable employment. AWILCO Offshore was sold off to China Oilfield Services in 2008 for US$ 2,5 bn.

AWILCO LNG's purchase of the NYK LNG units provcd propitious timing, just prior the Japan Tsunami disaster. In March, the Wilgas (ex Dewa Maru) built 1984/ Wilpower (Bishu Maru) built 1983 were purchased for US$ 25/ 23 mio respectively. In April, the Wilenergy (Banshu Maru) built 1983 was purchased for US$ 23 mio. The Daewoo newbuilding deal was reported in early June, where they closed firm on two vessels with delivery August and November 2013 plus two options for 2014.

AWILCO plans to trade the older units on short term time charter and then replace them with the new building deliveries. They have already fixed the Wilpower for six months with three addition 6-month options. Ultimately, they plan to convert these older units into FRSU's or possibly G2W units. The Norwegians have considerable expertise for a FRSU conversion. These Moss tankers are well suited for conversions due to their self-supporting aluminum tanks, which do not deteriorate and do not structurally weaken the hull.

A major capital markets group is forecasting for the LNG sector a startling 17.7% advance in fleet utilization this year. This sector has been a very thin 'boom and bust' market, where last year due oversupply, earnings were so marginal that a number of units went into layup. Nakilat, a Qatar LNG export project, ordered a series of mammoth Q-max (266.000 m3) vessels for US export, which has collapsed due shale gas technology. The units remain laid up white elephants for the time being.

Natural gas should see increased market share in the global energy market due to its attractive price compared with oil, as well as more environmental friendly features. Combined with a low orderbook, this will likely lead to strong growth for LNG carriers. Already spot rates have surged to levels over US$ 100.000 per day from the marginal 2010 levels of US$ 20.000.

Shake up at Dahlman Rose

2011-07-03T20:47:00.001+03:00

Dahlman Rose, a premier shipping growth story, has seen a major management shake-up. The firm is undergoing senior management changes with Simon Rose retiring and Kim Fennebresque, replacing him as chairman. His partner Ernie Dahlman opted out as a manager a month earlier to devote his time to sales and trading. They also lost their top equity analyst, Omar Nokta. Dahlman Rose faces some serious challenges ahead.

Dahlmans rose as a startup from scratch in 2004 to a 200-person bank. It achieved rapid growth, doubling staff every 24 months and expanding from shipping into adjacent sectors like oilfield services, metals and mining and agriculture.

The 2008 meltdown had profound consequences for their core shipping boutique business. Shipping stocks plummeted. Most of them have since been underperforming the market. Equity sales fell back and the IPO market was shut for about a year. The brief window that opened last year for new IPO's proved largely a sucker rally. Several of the new issues subsequently tanked due bad investment decisions and poor timing. Investors again got badly burned.

The result this year is an increasingly selective and demanding investor market. Existing issues have a high dependence on retail investors. New money is restricted to limited shipping sectors and institutional investors are careful about entry prices, often demanding deep discounts.

The new chairman, Kim Fennebresque, most recently served as chairman and chief executive of Cowen Group with earlier stints at UBS and at Lazard Freres.

Searching for new opportunities, the firm recently teamed up with Blackstone to do shipping restructurings, hoping for a potential growth area in corporate restructuring of distressed companies. Of course, they are not alone in the idea of distressed asset investing. Peter Georgiopoulos (with personal experience in owning a company in distress from bad investment decisions last year) has created Maritime Equity Partners with Blackstone and Oaktree for distressed asset investments.

With the collapse in market capitalization, some are again calling for merger-and-acquisition (M&A) activity in the shipping space. Shares are often trading below NAV, but there is the deterrence of taking on the liabilities. Witness the trials and tribulations of the NewLead reverse merger with Aries, where there were substantial hidden liabilities with trade debt, bad operations and dicey assets. Why not simply pick up good vessels at low values and start clean?

It will be interesting to see whether other Wall Street brokerage firms face similar fall out. There has been major management reshuffling in Wall Street shipping with the turbulent markets. Some well-known shipping investment bankers have already changed firms several times in just a few years.

Wall Street investment banking firms face bear market in shipping issues

2011-07-03T20:40:00.002+03:00

The IPO market this year is dead except for LNG and containerships. Latest containership issues for the Diana and Paragon spin-offs have barely been placed. Only the TK LNG Partners and Golar LNG issues went well. Public-equity issuance in the first six months of the year — which includes follow-on shares sales and IPOs — fell 51% from last year. This is creating stress on the investment banks (and their managers) active in shipping deals.

Equity sales have fallen dramatically. The headline figure was a total issuance of US$ 823 mio, as against US$ 1.6 bn in the first half of 2010. There were 10 offerings by nine issuers, including just one IPO, against 14, including three IPOs, in the 2010 stretch. Yet 2010 was a recovery year where a window opened for new IPO's that has been closed since the 2008 meltdown. Investors in issues like General Maritime and Crude took haircuts with Genmar now trading in the US$ 1 dollar range struggling for survival with Oaktree participation. Crude is merging internally with Capital Product Partners.

Offerings themselves were smaller. A US$ 80 mio average and US$ 71 mio median, as against US$ 116 mio and US$ 90 mio, respectively, a year ago. In the current period, Teekay LNG Partners raised more through a follow-on (US $144 mio) than Michael Bodouroglou’s Box Ships did by the only IPO (US$ 132 mio).

The vast majority of shipping issues from the boom years have underperformed the Wall Street recovery since the crash. Investor darlings like Dryships, which were trading up to US$ 130 a share with market capitalization that exceeded established blue-ship companies like OSG, are now trading at levels of US$ 3,5-4,50. Dryships has also seen massive dilution. In weaker cases like Top Ships, investors have literally lost their shirt! Shares once trading at US$ 30-40 became penny stocks and it is difficult to trace the value because TOPS has undergone two reverse mergers!!!.

Success begets more success with new issues and higher valuations, but failure leads to inextricable decline. The laggards have increasing difficulties to raise additional capital, facing share dilution and deeper discounts to the point that it frustrates the purpose of a public listing. The zombies get dropped from coverage and lose all prospects of raising money in capital markets, but they are saddled with all the high administrative expenses and reporting requirements.

Ownership of shipping shares has largely become the province of retail investors and short-term players like hedge funds, after an exodus of rueful institutions that got burned in the financial crisis.

With the collapse in market capitalization, some hope for merger-and-acquisition (M&A) activity among the existing companies, but so far this has attracted little interest. Investment bankers in shipping face difficult days.

PT Arpeni Pratama staves off bankruptcy: Pyrrhic Victory?

2011-06-28T14:03:00.022+03:00

Just months after Arpeni narrowly staved off bankruptcy proceedings last October initiated by Korea Securities for US $2.25 mio, Keppel yard arrested a half-converted FSO project over unpaid bills. The Group is in technical default on principal repayments of debt obligations with its senior lenders. It has been discussing an acquisition plan with Saratoga Capital and it has appointed N.M. Rothschild as financial advisors. Is Arpeni insolvent and beyond the brink?

Arpeni is an Indonesian dry cargo cabotage operator and ship agency business with a substantial 25% share of the domestic market. More than 70% of its annual turnover from intra‐Indonesian coal transportation. The group also transports general cargo like pulp and paper products, agricultural products, and heavy equipment; and liquid cargoes, such as crude oil and clean petroleum products. Its fleet consists of tugboats, barges, vessels, and floating cranes. The dry cargo vessels are mainly over-age Panamax units. Most of the tankers are small coastal vessels over 15 years age.

Arpeni's liquidity deteriorated rapidly from early 2009 as a result of weak credit control, crystallization of significant derivative liabilities, and a general softening in the operating environment, particularly the international dry‐bulk shipping market to which the company is partly exposed and has worsened this year. Net losses in 2010 widened to Rp1.64 trillion (US$ 190 mio) from Rp 670.61 billion losses in 2009. This includes asset impairment charges.

The outlook for the Indonesian economy is favorable for the next two years, but it would be badly exposed to slow-down or hard-landing in China, should there be a reduction of infrastructure projects likely to take place in 2013-4 as projected by RGE.

Saratoga Capital was reported to be discussing an acquisition deal last October including the purchase of US$ 60 mio convertable bonds. They would bring in synergies. They manage a coal barging investment, related to their Adaro business. They could be a driver for revitalized management. The obstacles are looming insolvency and legal actions.

Arpeni is carrying a lot of unsecured debt that cannot easily be verified. Its secured debt is increasing due capex (note Keppel arrest above) and bank facilities to fund working capital requirements due perilously low liquidity. Restructuring appears quite complex given the large number of constituencies involved.

It is currently seeking US$ 95 mio issuing convertible bonds, warrants, and new shares through non-preemptive rights in part of a company rescue plan.

With a CCC credit rating, senior debt default, legal actions, operating losses and a dicey fixed asset base; this seems a highly risky play for investors to put new money, unless there were substantial involvement of Saratoga Capital with their tight control to revitalize management.

Lack of transparency and honesty in the EU on bailouts

2011-06-23T21:32:00.000+03:00

The Eurozone crisis is largely a hidden banking crisis rather than a currency issue per se. Europe has a chronically undercapitalized banking system of which the Germans are among the largest offenders. EU politicians have addressed this as a liquidity problem with its Periphery in order to hide these issues and avoid any open discussion on the ultimate costs involved in transferring risk from the financial industry to public balance sheets and ultimately to EU taxpayers.

The EU elite and ECB want to deny they face any serious long-run problems. They prefer to address the problems of Greece and other EU countries as a liquidity crisis, ruling out debt renegotiation because it gives the illusion to the EU public that their bailout loan schemes are only temporary and the money is recoverable with interest, so that various Eurozone members can secure Parliamentary approval.

In the case of Greece, they are forcing the country to go to about 170% or 180% o its GDP in debt. Greeks to dig themselves out on that path, will have to put maybe 7% to 10% of GDP in just paying interest. Meanwhile the wage and price deflation austerity are causing massive economic dislocation and unemployment that is shrinking the GDP. Latvia, for example, achieved only a nominal devaluation at the price of severe GDP compression and a large rise in external debt.

In the current debate, there are two opposing camps. The establishment camp is the ECB, EU elite supported by the EU financial industry. They want to avoid any debt restructuring or default event and kick the can down the lane with public money country bailouts that repay the private creditors on schedule. They argue debt renegotiation would be a default event risking uncontrollable contagion and banks need more time to build up their balance sheets.

What they hide deliberately is how they will deal with their huge public money holding of debt stock of insolvent countries like Greece with unsustainable debt loads. Will they eventually write off huge amounts of this debt or hold these countries in a permanent debtor's prison in years of economic stagnation?

The opposing camp led by Nouriel Roubini is that official view is in self denial and increases the risks of a large, messy disorderly default with uncontrollable losses. Roubini argues for Greek debt restructuring now to remove the market pressure from default risk with debt relief to facilitate the structural reform. Politically it will be easier to sell this to EU voters when they see the shared sacrifice of the EU financial industry.

Wharton's Franklin Allen, who organized in April a seminar in Florence, argues that leaving the Eurozone would be a better option for Greece leading to a speedier recovery and forcing a debt renegotiation. Economists like Paul Krugman point to Iceland and how they have recovered nicely after default.

Debate and shaky start for Diana containerships IPO

2011-06-22T13:55:00.003+03:00

Diana Containerships recently completed a US$ 107 mio follow-on shares offering in New York last week at a steep discount to the company’s net asset value (NAV) and its previous share price. This new IPO follows the Paragon Boxships offering and has many of the same inherent defects as a pure asset speculation play rather than a coherent entry into the containership business.

Credit Suisse recently downgraded the parent drybulk company, Diana Shipping, to 'underperform' status due its exposure to larger bulk carriers in present lackluster market conditions. Rates have plummeted from the the beginning of the year and the over supply of tonnage is significant with the order book overhang.

Diana Shipping came into the 2008 meltdown with one of the strongest balance sheets and has been considered a favorite by many analysts. Investor pressure for profit expectations led management to move into containerships given the deep slide in containership values in 2009 and the comeback in container market last year.

Like Paragon, Diana has no history in the containership sector and would be solely a vessel provider to liner companies with little added value, very similar to the German KG market, which is heavily invested in this sector. Indeed their strategy is potentially to pick up container vessel assets from beleaguered German KGs.

Both are late in the game to their established and successful peer, Seaspan. Diana management lacks the charism of Gerry Wang and his almost mythological Chinese business connections. It lacks the investor backing/ Far East connections clout of the Tiger Group, related to Seaspan.

Diana Containership NAV before the offering was estimated between US$ 15-16, but the offering was priced at US$ 7,50 to attract investors. The huge discount made the offering popular with investors; but a disaster for shareholders, who bought into the company at the initial price of $15. More significant is that Diana originally had expected to raise as much as US$ 250 mio in fresh funds in the offering led by FBR Capital Markets of the US. But with interest lacking, its own US$ 50 mio contribution to the spin-off wound up giving it a majority stake in the new venture. The result left Diana without sufficient capital to be a player of any size in boxships.

All this makes you wonder what FBR Capital had in mind to back such a venture. In any case, Jefferies, Cantor Fitzgerald and Wells Fargo are touting this nascent "Seaspan" as a 'buy' ostensibly to feed the retail investor 'ducks' on Wall Street.

Whilst they have a plausible argument on low share valuation and container market expectations, Diana Containerships is one of many vessel providers and new ordering by the likes of Seaspan and other established players may leave this company at the station for an adventure that could potentially turn out more like some of the German KG's.

Seaspan aiming for another giant containership order

2011-06-22T12:21:00.000+03:00

After penning a US $2.5 bn deal at China’s Jiangsu Yangzijiang Shipbuilding for seven firm 10,000-teu vessels plus 18 options and then inking a letter of intent for 10 vessels of 14,000 teu at STX Offshore & Shipbuilding plus 10 options at $140m apiece, Seaspan is showing interest in 18,000-teu vessels and has approached South Korea’s Daewoo Shipbuilding, Hyundai Heavy Industries and Samsung Heavy Industries. There are never enough container vessels deals for its CEO Gerry Wang!

Seapan is a story of unlimited Chinese export growth. Despite the 2008 container market crash and massive losses of major liner companies in 2009, Seaspan avoided any cancellations in its newbuilding program. Since the market recovery last year, Seaspan has been aggressively ordering additional tonnage.

Whilst box rates have been under pressure, time charter rates have been rising with a moderate, steady increase that is now stabilizing. Margins have been satisfactory. Demand growth is expected to outpace supply with a forecasted 1,7% increase in fleet utilization this year as well as 5% appreciation in asset values.

Liner companies are moving to ever larger tonnage to escape the pressure on box rates and gain market share over competitors by shipping a larger number of containers on the same vessel.

Seaspan has successfully tied up some long-term charters with Hanjin Shipping for several newly contracted TEU-10.000 newbuildings. Hanjin normally fixes in small to medium-size ships for around seven years and large vessels for more than 12 years. Hanjin was a breakthrough for Seaspan given its past close relations with German KG containership investors.

Seaspan has attracted a lot of investor interest this year. As with all listed companies, these large block expansion deals attract investor interest on future expectations. Its shares soared to excess US$ 20 levels in April, only to fall back to present US$ 15 levels. The company has been slowly recovering from it lofty pre-2008 meltdown levels, but it remainsl far away yet.

The question is where Seaspan is going to employ these envisaged TEU-18.000 units? The group has been relying increasingly on Chinese state controlled liner companies COSCO and CSCL to back its new orders.

More woes for Genmar shareholders in potential ATM share offering

2011-06-22T12:03:00.001+03:00

General Maritime (NYSE: GMR) stumbled badly last year in the timing of its massive Metrostar block tanker acquisition deal. Earlier this year, it made a US$ 200 mio recapitalization agreement with Oaktree Capital for needed funding. Now Genmar management is considering an additional US$ 50 mio ATM share offering for additional liquidity.

Oaktree is well known in shipping for its Beluga takeover. Beluga was a beleaguered German heavy lift company on which Oaktree earlier this year decided to pull the plug, take control of the company, fire the old management with plans to build it up into a major player in the heavy lift market.

Since Oaktree holds a similar share option trigger with Genmar if things do not turn out to their liking, Genmar likely has limited room for much share dilution. This follow-on offering represents only about 25% of its current US$ 200 mio or so in overall shares value.

Genmar management argues that funds will be used as a safety net as it enters the traditionally softer rates climate of summer. They seem concerned about a loan covenant requiring the tanker owner to maintain a minimum cash balance of US$ 50 mio. It has some cushion on other covenants following the Oaktree injection and a refinancing with lenders, but admitted it was close on the cash benchmark on 31 March at US$ 62 mio.

Genmar was recently downgraded to sell by a major Scandinavian capital markets group. They see a potential for 10% lower asset values implying a 60% reduction in NAV. The company suffers very high gearing and 36% of its debt is financed at a cost of 12% or more.

Berlian Laju losses widened significantly in 2010

2011-06-22T11:54:00.003+03:00

Berlian Laju Tankers (BLT) delays in releasing latest corporate earnings never boded well for investors There is a lot of money out on this too big to fail company with its recent massive US$ 685 mio senior debt restructuring by a 6-bank consortium plus a US$ 90 mio sale leaseback deal with Standard & Chartered (S&C). What if these lenders are wrong on their turnaround story and market recovery does not come as anticipated?

Albeit BLT was hampered by computer glitch, there certainly was not much incentive for a timely release of the results.

This beleaguered, over-indebted group dropped deeper into the red in 2010 as finance and operating costs stacked up. Losses were substantially higher than analysts had predicted. The net loss for 2010 amounted to US$ 150 mio, versus a loss of US $117 mio in 2009. Its chemical operating profits were down by US $7 mio from last year. Even its much touted FPSO arm recorded an operating loss of US $11.8 mio compares with a gain of just over US$ 14 mio a year ago.

What is very scary is that the loan restructuring and lease deals will increase substantially the finance costs that plagued them last year even if operating profits do improve. BLT will get some liquidity relief from senior lenders, but a larger share of their operating income will be sucked up by finance charges.

BLT management has always seemed very indifferent about its cost of capital. Whilst is peer rival Stolt is paying only 6,63% on its latest bond issue. BLT revels in high leverage and expensive leases with ever mounting finance charges. Whilst Stolt has good collateral earnings from a very profitable liquid chemical storage business that is complimentary to its parcel chemical tanker operation, BLT is making losses on its FPSO venture. Its spin-off Indonesian cabotage business is only a very small operation to soak up the magnitude of losses in the parent company.

BLT is a turnaround story because of its high financial and operating leverage. Its management has a firm expectation of a killing in a coming boom in the chemical tanker market and its bankers seem to agree in maintaining and even increasing their exposure to the group.

Does Greece have more leverage with the EU than perceived?

2011-06-22T11:34:00.000+03:00

As the EU dithers in interminable discussions, it seems to be digging themselves into an ever bigger hole. Yesterday acting IMF head John Lipsky told them to cut short debate on private sector involvement. US authorities seem terrified of a Greek default event. Likewise the ECB trembles at the mere reference of the 'R" word. In this backdrop, what if Greece turns down the new bailout facility, refusing to accept more austerity, shrinking GDP, massive unemployment and rising public debt?

The Americans seem worried that their CDS derivatives market is underfunded. If there is a call by a Greek default, those American institutions underwriting these derivatives will be thrown into insolvency. The ECB is rapidly becoming one of the largest bad banks in the world with heavy Greek sovereign debt exposure.

So far the Greek Socialists have been trying to accommodate the EU and IMF to the letter without much concern for the deep recession, mounting unemployment and rising public debt, which is slowing becoming a tremendous political albatross to carry. They - like other EU Socialists - are wed to the Euro and EU integration concept. The Greek conservative party vetoed last year the IMF/ EU bailout. It is insisting on renegotiation of the second bailout facility terms.

At this point, Greece hardly needs another new loan facility that it cannot pay. The government has been overreaching its tax base. The arguments about tax evasion are mainly an excuse to justify overstated, unrealistic revenue projections in order to take pressure off reduction of spending. With the deep recession, tax receipts are falling.

The EU privatization ideas may well be a Hail Mary pass. Many of state corporations hide significant liabilities. The past history of privatization in Greece has been difficult. Foreign investors have often been burned. COSCO has yet to turn a profit in its Piraeus terminal facilities. Deutsche Telecom has been generally disappointed with their Greek telecommunications investment results.

What if the Greeks refuse the new bailout facility, admitting that they cannot meet the conditions? What if the Greeks admit their insolvency and formally ask for relief in loan restructuring?

What will the US and the EU authorities do? Will they leave Greece to default? If there is a Greek credit event, who will face the biggest damages - the US CDS market, the EU banking system, the ECB or Greece?

It may well prove that the damages to Greece will be far less than the counterparty losses or at least this seems to be the general perception of the US and EU authorities. Their thrashing around and threats to Greece may be more of a sign of their weak position rather than strength.

The worst case scenario of debt default, return to Drachma, and deep external devaluation might even speed up recovery. EZ membership is losing its allure to The Americans seem worried that there is nothing behind their CDS derivatives market.  If CDS are called by a Greek default, those American institutions underwriting these derivatives will be thrown into insolvency. The ECB is rapidly becoming one of the largest bad banks in the world with heavy Greek sovereign debt exposure.

So far the Greek Socialists have been trying to accommodate the EU and IMF to the letter without much concern for the deep recession, mounting unemployment and rising public debt, which is slowing becoming a tremendous political albatross to carry. They - like other EU Socialists - are wed to the Euro and EU integration concept. The Greek conservative party vetoed last year the IMF/ EU bailout. It is insisting on renegotiation of the second bailout facility.

At this point, Greece hardly needs another new loan facility that it cannot pay. The government has been overreaching its tax base.   The arguments about tax evasion are mainly an excuse to justify overstated, unrealistic revenue projections in order to take pressure off reduction of spending.  With the deep recession, tax receipts are falling.

The EU privatization ideas may well be a Hail Mary pass. Many of state corporations hide significant liabilities. The past history of privatization in Greece has been difficult.  Foreign investors have often been burned. COSCO has yet to turn a profit in its Piraeus terminal facilities. Deutsche Telecom has been generally disappointed with their Greek telecommunications investment results.

What if the Greeks refuse the new bailout facility, admitting that they cannot meet the conditions? What if the Greeks admit their insolvency and formally ask for relief in loan restructuring?

What will the US and the EU authorities do? Will they leave Greece to default? If there is a Greek credit event, who will face the biggest damages - the US CDS market, the EU banking system, the ECB or Greece?

It may well prove that the damages to Greece will be far less than the counter party losses or at least this seems to be the general perception of the US and EU authorities. Their thrashing around and threats to Greece may be more of a sign of weakness rather than strength.

The worst case scenario of debt default, return to Drachma, and deep external devaluation might even speed up recovery.   A double standard Euro is becoming toxic to the EU Periphery.

Greece and EU: Glasnost and viable policy decisions

2011-06-16T14:11:00.010+03:00

Time for coherent policy in Greece based on three propositions: 1.) urgent need to restructure national debt to avoid disorderly default 2.) need to reduce public expense and restructure the public sector for a developmental model based on direct private investment and 3.) new EU/ EZ/ ECB monetary policy that addresses the EU Periphery rebalancing needs or a departure of the EZ periphery to flexible exchange rates with the Eurozone restricted to Core members, so their straight jacket is removed.

ECB monetary policy undermines EZ
Periphery country economies

The EU/ Eurozone elite in the core countries seem to be adopting the Mr. Micawber principle towards its Periphery members, stubbornly adamant to any debt restructuring and insisting on wage and price deflation to recover mountains of bad sovereign debt compounded by Ponzi bailouts - policies that reduce their capacity to carry this rising debt stock and condemn them to Debtors Prison.

The recent Mario Draghi statement supporting the position of ECB Chief Trichet in his bitter M.A.D fight with Wolfgang Schaeuble is a shocking demonstration of the EU system. Draghi, destined to succeed Jean-Claude Trichet, assumes the Trichet position locking him into his predecessor's policies before even assuming his new role! Is this healthy? Why should not Draghi be permitted to review past ECB policies and make new ones as he sees fit? Why should policy debates in the EU be forbidden and EU economic orthodoxy be an iron rule for which any opposition results in ostracism or nuclear war?

Skyrocketing unemployment in
deepening recession erodes
tax revenue

The choice of Vangelis Venizelos as new economics minister to replace failing economics minister Papaconstantinou in this largely cosmetic Greek government reshuffling shows that George Papandreou seems to be doubling up on Micawberish EU orthodoxy with their "go along to get along" Soviet-style leadership style.

The only serious policy debates are currently on the RGE Monitor where Nouriel Roubini and colleagues like Michael Pettis and Ed Hugh are making a mockery of the EU elite and the ECB. Yet EU Periphery political leadership remains immobile and passive. I have sent proposals to my party and encouraged them to hire competent economists to assist them but I do not see any results.

The Greek government could easily adopt the first two propositions in their negotiations with the EU. On debt restructuring, they could leverage their position working closely with Mr. Schaeuble. Adopting a market friendly developmental policy based on FDI would help reestablish their credibility in the EU, provided serious demonstration of commitment in follow through, cleaning up the public sector.

The broader policy debate on new Eurozone policies to meet EU periphery rebalancing needs (otherwise leaving the EZ straight jacket) will take time. It requires close cooperation with other Periphery countries in tough negotiations with EZ Core members, who will not easily relinquish their privileged position.

First Ship Lease looks to bootstrap itself by bailing out beleaguered TORM

2011-06-10T12:48:00.006+03:00

The recent First Ship Lease (FSL) purchase and lease back deal of two LR2 product carriers with TORM is an alliance of two weak market players trying to shore each other up in difficult market conditions. FSL lost US$ 928,000 in 4th Q 2010 and got whacked with credit rating downgrades, whilst TORM expects a gloomy pre-tax loss of up to US$ 125 mio for the current year. FSL is doubling up on a TORM turnaround to bootstrap itself from its prior losses out of a failed MR deal with Groda Shipping.

Lease finance is one of the first moves for overleveraged shipping companies, facing liquidity problems. They sell vessels to the leasing company for cash and then commit to long term bareboat charter deals to continue to operate the vessels in their fleet. The lease payments generally leave very little margin for any surplus between operating income and expenses. Frequently the leases go underwater and have to be covered elsewhere in the company. The company gets badly needed cash and a book profit on the vessel sale. They bet on a turnaround in the market to cushion them in the lease payments.

Leasing companies are looking for higher returns on investment than commercial banks. They normally aim for a low double digit return on the lease payments and 20-25% return on equity. Well capitalized shipping groups shun this high-priced finance and are not keen to share residual value gains on their vessels. The ideal client for a leasing company is a shipping group with a big balance sheet who is willing to pay a higher price for finance because it is already overleveraged and hopes to grow itself out of its financial problems. A healthy, lean growth company lacks the balance sheet.

FSL made a bad placement on two MR product carriers, the ice-classed 47,470-dwt Nika I (built 2005) and the 47,496-dwt Verona I (built 2006) that were leased to Groda Shipping. In the falling product tanker market, Groda struggled to make the lease payments and the ships were arrested by their bunker suppliers. FLS was forced to repossess the vessels and pay off the creditors. The ensuing losses on this transaction led to credit downgrading and an S+P creditwatch 'negative' outlook for FSL.

Despite strong growth in demand for refined oil products, the product tanker market is still struggling to absorb the large inflow of tonnage seen in 2008 and 2009. A major Scandinavian ship finance group is forecasting that this may continue well into 2012. FSL seems to be betting that the projected 6% distance-adjusted demand advance for 2011 and expected 5% product tanker fleet growth will support rates and values.

With 16% contract coverage in the tanker division, TORM needs more equity to allow for amended amortization with its senior lenders until the market returns. They are happy to absorb the additional finance costs for fresh cash to assist them with their liquidity problems.

Stolt in enviable position to issue bonds and lower its cost of capital

2011-06-09T22:20:00.009+03:00

Stolt Nielson is chemical tanker leader with a strong contract base, consistently good P+L results and moderate financial leverage. They recently tapped the bond market to fund expansion opportunities and raise general corporate funds. After a swap, this results in a low fixed-rate US Dollar obligation. How are beleaguered peers like Eitzen Chemical and Berlian Laju Tankers (BLT) under the weight of their heavy debt loads/ leasing obligations with high finance costs going to compete with Stolt?

The Oslo-listed chemical tanker company has placed NOK 1.6 bn (US$ 300 mio) of five-year senior unsecured bonds. These bonds, which will be listed on the Oslo Stock Exchange, carry a coupon of three-month NIBOR plus 4.75%. Stolt has converted them though a swap to a fixed-rate US Dollar obligation of 6,63%.

The chemical tanker sector has less tonnage overhang supply problems that most other shipping sectors. Demand is expected to outpace supply as long as global GDP grows by 3% or more. The IMF forecasts 4.4% growth for 2011. Supply side characterized by newbuilding delays and high entry barriers. On a base case scenario, this would call for a 2,6% increase in fleet utilization that could lead to a 20% rise in asset values.

The only negative aspect for Stolt is that due their heavy contract book, rate increases would lag in their P+L results until contract book roll-over and rate renewal.

Presently time charter rates are flat in the chemical tanker market with stainless Dwt 19.900 tonnage fixed at rates of US$ 12.500 for twelve months. This business climate continues to favor Stolt over its weaker peers in the sector like Eitzen and BLT, who have to absorb the high financing costs, live with the slim margins and hope for upturn.

Aside from its chemical tanker business, Stolt also has a very lucrative chemical storage business that has a higher return on assets than the shipping business and a stable long term secured cash flow that adds earnings stability.

Eitzen and BLT are totally dependent on the vagaries of chemical tanker market and are paying easily double the financing cost of Stolt on a much higher debt load.

Should there be an unexpected double dip recession, their lenders will be facing some very nasty losses. Further if their financial position deteriorates, then Stolt will pick up market share from their end-user customers worried about rising contract performance risk. Stolt would be in the enviable position of picking up their better assets at cut rate prices.

Scorpio successfully pulls off a second public offer for US$ 68,4 mio

2011-05-25T13:57:00.002+03:00

Investors snapped up all the 6 million shares of Scorpio common stock on offer at $10,50 each and underwriters grabbed 900,000 over allotments at the same price. Since the first IPO last year, Scorpio has been trading in a fairly tight range between US$ 9.80 - 11,90. It started out at the high level but fell hard to the lower range in later December 2010. The New York-listed owner is on the brink of booking five medium-range (MR) products tankers in South Korea.

Scorpio has a multi-step plan that includes the above MR new building order with delivery of the five ships in late 2012 with the options to follow a year later if taken, opportunistic second-hand vessel purchases and chartered-in tonnage for its contract book needs.

The company is a pure play product tanker listing. Scorpio is an old company with roots in New York from the Lollighetti family, who moved their operations to Monte Carlo. Scorpio CEO Emanuele Lauro is third generation. During the boom years, he concentrated on building a tanker pool with a strong team of brokerage professionals rather than leveraging up and acquiring tonnage at top of the market prices. He took on ex-OMI management, making Robert Bugbee President of his US operation and bringing to capital markets last year. Bugbee warned investors last year that recovery for the tanker market might come later than expected.

Scorpio lost money in 2010, closing the year with a US$ 2,8 mio loss. The company reported a loss of US$ 1,4 mio in 1st quarter 2011, reversing a US$ 1,2 mio profit posted a year ago. The result, which amounted to a deficit of $0.06 in basic and diluted earnings per share, was three cents ahead of the consensus forecast. Scorpio said the addition of new ships helped vessel revenue increase by US$ 10,9 mio to US$ 17 mio in the first quarter, but admitted the gain was offset by a decrease in time charter equivalent rates which slipped to US$ 14.997 per day on average from US$ 22.798.

The product tanker market has been struggling to absorb the large inflow of tonnage seen in 2008 and 2009. This may continue well into 2012. Rates and values remain low as demand fell short of supply in the product tanker fleet. For 2011, distance-adjusted demand is expected to advance 6% and the product tanker fleet is expected to grow by 5%. This might support rates and values, but this all depends whether demand will large enough finally to surpass the growth in fleet capacity, the persistent problem that has been plaguing the product tanker sector for years.

If Scorpio’s newbuilding plan pans out, the company will control a fleet to 22 products tankers in addition to options for the three MRs and a pair of 2008-built panamaxes.

Full speed ahead for Seaspan targeting a US$ 105 mio preferred offering

2011-05-25T13:52:00.002+03:00

Seaspan is continuing its aggressive expansion plans and looks to use the new funds from this offering for further vessel acquisitions. It has been mulling an giant order of 20 units of 14.000 teu vessels at South Korea’s STX Offshore & Shipbuilding yard. The offering is priced like a junk bond with accrued dividends of 9.5% per year.

Seaspan last ordered vessels in 2007. Its fleet currently numbers 55 containerships with 12 newbuildings due for delivery by April 2012. Since the 2008 meltdown, Seaspan held on to its orderbook and made strenuous effort to take delivery all tonnage as ordered. They covered these new units with period employment from Chinese Coscon and CSCL, which now comprises 70% of their total revenue.

Two months ago, Seaspan signalled its intention for up to 22 post-panamaxes of 10,000 teu at China’s Yangzijiang Shipbuilding in a deal worth up to US $2.1 bn. But the company will only firm up orders once it has long-term charters in place.

Seaspan's bottom line only recently turned back into the black. The company said it made US$ 50,55 mio to 31 March on a net basis, from a loss of US$ 36,61 mio in the same three months of 2010.

The company future is intimately tied to insatiable Chinese demand with the strategy of its now almost legendary CEO Jerry Wang.

BLT successfully spins off its domestic cabotage/ FPSO business

2011-05-25T12:30:00.002+03:00

Berlian Laju's domestic cabotage spinoff Buana was up 11% on debut and over subscribed 16,77 times. This marks the third step in the group restructuring initiative this year. Previously, the company did a massive US$ 685 mio debt restructuring with senior lenders as well as a US$ 90 mio sale and lease back deal for four chemical tankers with Standard Chartered bank. These initiatives buy time for this over financially overstretched group until underlying market conditions improve.

The new credit facility will be used to refinance ten loan facilities of US$ 593 mio and fund capex on 3 of 4 newbuildings for delivery in 2011. The refinancing will reduce total instalments over the next three years with US$ 167 mio in total. BLT will mortgage forty of its existing vessels as well as the 3 new deliveries for security.

We believe that separately listing the Buana entity will enhance the imbedded value of their cabotage business better than currently reflected in the BLT share price. In any case, this much touted Indonesian cabotage business accounts for only a relatively small part of their total turnover.

Buana just recently turned to positive operating profits after making losses the previous year. It is a relatively small operation with three tankers and one FPSO unit, but BLT wants to scale up the operation.

Meanwhile, BLT has consolidated the commercial management of their fleet in the Chembulk operation that they purchased several years ago from American Marine Managers. Chembulk CEO Jack Noonan has been making an upbeat case about the chemical tanker market, arguing that ‘bleeding has stopped’.

BLT has high financial and operating level that makes it a speculative play should the chemical markets turn up. The order book overhang for chemical tankers is presently the smallest in the tanker sector, albeit Stolt Tankers - a market leader and outperformer in the sector - has been taking a cautious view, not expecting any major relief on rates until the second semester 2012.

Greece and Eurozone: between a rock and a hard place!

2011-05-23T12:35:00.013+03:00

Black Friday 20th April saw another Fitch downgrade to B+/ negative outlook, the ECB vehemently rejecting any debt restructuring and Norway suspending a Euro 42 mio grant to Greece. Spreads soared to 1.340 basis points equivalent to 17% market-level interest rates. Total disaster for beleaguered and inadequate Greek Finance minister George Papaconstantinou, a man well over his head. Will Greece avoid default and survive in the Eurozone?

Last year at the annual Minsky Conference at the Levy Economics Institute, Rob Parenteau demonstrated in his presentation why fiscal austerity will fail in Greece and lead to a Fisher debt deflation vortex. The prerequisite for the EU/ IMF program to work is a surge in exports that counter balances the demand compression from austerity to achieve high private net savings. Otherwise reducing the fiscal deficit will irreparably erode the domestic private sector and the tax base will implode.

In fact this seems to be happening as there is a massive drop in revenues 1st quarter this year from the recession. Now Mr. Papaconstantinou in "Hail Mary" desperation wants to raise taxes in part to make up for the shortfall. So far his record in containing public expenses has been dismal despite all the noise. Clearly he never had the opportunity to read the work of Arthur Laffer in his studies at LSE and fails to comprehend that raising tax rates does not bring a linear increase in revenue, but rather the curve is parabolic and at a certain point revenues start to fall.

Normally trade deficits are corrected by external currency devaluation, but Greece suffers from the problem of the Impossible Trinity. It is locked into a Eurozone straight jacket that leaves minimal room for a current account surplus . ECB monetary policy is not accommodative to this effort. In fact, it is counterproductive with its hawkish stance recently raising interest rates.

Already Greek public debt is at unmanageable levels. Yet the ECB is maintaining a Taliban stand on any debt restructuring, with Jean-Claude Trichet, ECB president, rudely storming out of a finance ministers meeting and threatening to deny Greek banks access to the ECB’s refinance operations after any restructuring. The threat would force Greece out of the eurozone within days, creating mayhem.

Herein lies the conundrum: Greek public debt is constantly expanding and the Greek GDP is rapidly contracting. Mathematically, the fiscal deficits will never close and create surpluses in time to contain the debt explosion. Greek debt needs restructuring because it it is at unsustainable levels and cannot be paid down.

Greek banks survive by short-term funding from the ECB/Eurosystem, using mainly Greek sovereign debt as collateral. When the value of the Greek sovereign debt declines in the secondary market, the mark to-market value of the collateral offered by the Greek banks to the ECB/Eurosystem declines and triggers margin calls (demands for additional collateral to make up for the reduced value of the existing collateral). European banks, especially Eurozone banks, are seriously exposed to Greek risk. This has terrified the ECB and has led Mr. Trichet to take such emotional positions on Greek debt restructuring.

Of course, Greece in a new national currency free from the shackles of counterproductive ECB monetary policy could make an immediate sharp nominal and real currency depreciation with gain in competitiveness, which would be most welcome and would take years by internal devaluation with risks of insurmountable social revolt.

The spoiler here is that unless the balance of economic and political power in Greece is changed fundamentally, a depreciation of the nominal exchange rate would soon lead to adjustments of domestic costs and prices that would restore the old uncompetitive real equilibrium. The key rigidities in small open economies like Greece are real rigidities, not persistent Keynesian nominal rigidities, which are necessary for a depreciation or devaluation of the nominal exchange rate to have a material and durable impact on real competitiveness.

The existing political system is based on state-sponsored capitalism, a rampant spoils system and a parasitic, rent-seeking cronyism with the private sector. The status-quo interests are wed to these rigidities and see leaving the Eurozone as a means of maintaining their privileges. Whether or not Greece leaves the Eurozone, it still has enormous fiscal problems that cannot be cured without substantial institutional changes and a new political culture.

On the other hand, for Greece to live and survive within the Eurozone would require the ECB to accept Greek debt restructuring along the lines of Brady Bonds and more accommodative monetary policies as well as Euro depreciation to facilitate the fiscal restructuring efforts by the periphery countries to restore competitiveness. Ironically a managed Greek default and debt restructuring with the ECB continuing to finance Greek banks with 'C' ratings might well achieve this depreciation. No one could possibly accuse the ECB here of any manipulation!

The ECB rules and the reigning mentality of its current members precludes this. The EU elite is badly divided on these issues. Major EU core members fear rating downgrades and paying higher interest rates on their debt. Many are dead set against this even if it means sending the Eurozone periphery countries to disaster. The Eurozone would have to reach an common denominator for the periphery countries that they are so far not prepared to do.

The failure of the current Greek government to inspire any confidence and their deteriorating credibility with the IMF/ EU do not help to make these decisions any easier. Why should EU core members throw more of their taxpayer money and sacrifice their credit rating for what seems a bottomless hole in Greece?

So it is presently a Mexican stand off: Greece is between a rock and a hard place on the edge of disaster.

Box Ships: the ultimate in asset management business models

2011-04-09T19:54:00.006+03:00

The Paragon Shipping offspring: Box Ships Inc. is the ultimate in the asset management business model. Michael Bodouroglou's private company Allseas serve as the managers, earning substantial fees and commissions for their services. Apart from vessel technical management, Paragon/ Allseas have no intrinsic value to offer as they have just recently entered the containership sector on a vessel provider basis. They have no special containership industry relationships.

The whole venture depends on speculative improvement in asset values in container vessels and charter rates levels from liner companies. The role that Paragon/ Allseas play in this matter as technical managers is no different than a V.Ships or Bernard Shulte Shipmanagement, except that their pricing for services is a lot higher than a normal third party ship management company.

Their technical management fees are in the order of US$ 310.000 per vessel per annum for investor-owned Box Ship compared to the US$ 150.000 - 160.000 that a third party professional manager would normally charge. They will also earn an address commission of 1,25% on any charter party that they negotiated and 1% on any vessel sale and purchase transaction, which are normal going rates by industry standards.

Paragon's only existing liner company relationship is currently with CMA-CMG. After the IPO and acquisition of the additional units, they will add charters to CSAV Valparaiso for three units and one unit to Maersk. CSAV holds a purchase option in one of the charters. Bodouroglou is purchasing the new tonnage thorough Paragon and his private companies and the two existing Paragon containerships will be dropped down to Box Ships.

Basically, Michael Bodouroglou is the ultimate vessel asset manager for shareholders in this containership venture. His companies earn substantial fees for their services. He gets to decide what vessels to buy, sell and how to charter for them and is nicely compensated for this work with some skin in the game, but most of the risks on the shareholders. It is the dream of anyone in the shipping business!

UBS Investment Bank and Morgan Stanley are the lead underwriters and will be lining up the investors for this IPO. They will have to convince them why to place their money in a Box Ships as opposed to a solid liner company like Maersk, Orient Overseas or Neptune Orient Lines with far more added value in their cargo systems or vessel provider competitor Seaspan with Jerry Wang's China connections.

What will convince the investors that this is good deal beyond the asset speculation? Will they accept this sale pitch without asking for any discounts?

For that matter, investors could go out and buy their own vessels and hire V.Ships to run them with lower transaction costs. It might be cheaper and more effective to hire an ex-liner company CEO to run the operation for them than Bodouroglou.

Rapidly deteriorating conditions in Greece

2011-04-06T19:11:00.001+03:00

The latest EU 'Grand Bargain' illustrates how temptations and denial of individual responsibility is transforming the Eurozone into a pure Hell for its member states. The new ESM is pitifully underfunded and requires unanimous consent of its members to grant a facility, making it a colossal joke. The ECB is taking a hawkish stand on interest rates when its periphery laggards are insolvent and held alive by 'pretend and extend' loans that they refuse to restructure. Greece is about to collapse. Nouriel Roubini's RGE forecasts Greek debt restructuring within 2011, which would mark a watershed for the EZ.

The Greek clientee-based political system has created a crushing national debt burden of 130% GDP and still rising. Their politicians systematically use public money to buy votes and have created a vast, corrupt state bureaucracy. They unleashed a class warfare mentality extremely hostile to private investment and entrepreneurship, which they view subservient to the state and their political purposes. They promised the people endless entitlements to be paid by other people's money. The Eurozone was seen as as means of perpetuating this dysfunctional system, where their European partners would cover them paternalistically.

As a result, Greek people were totally unprepared for austerity. Their politicians after years of dependency on the EU as a pseudo 'developmental' policy are terrified and have no idea how to face the present reality. They desperately need new money to fund the overbloated public sector.

The IMF is increasingly frustrated with the slow progress of their efforts to rebalance public finances and control public debt levels. Internally they seem to be pressing for immediate debt restructuring, but the EU is terribly afraid of a Greek default and refuses to discuss the issue. So as in previous EZ cases, the IMF and EU are at loggerheads.

With debt servicing needs of 6,4% GDP, it is hard to believe how growth will ever cover such a debt load, which is twice the amount in the late 1990's Russian default. The growth rates for Greece would have to exceed China for a sustained period of time in a circular situation where the debt load and default risks inhibit productive investment. The Euro 50 bn privatization plan seems dauntless given the slow progress and poor history of previous privatization efforts, where there is considerable political and local resistance.

Meanwhile the ECB is adding misery by its hawkish stand on interest rates despite little evidence of potential inflation, the deep recession and deteriorating financials of its laggard members. They seem to be firmly in favor of 'pretend and extend' and unconcerned about the massive debt pyramid that they are creating within the EZ.

Core Eurozone members like Germans, who are the payers in the system, are beginning to worry that their contingent liabilities on the mountains of debt in the system will lead to credit downgrades and increased funding costs for them. They are positioning themselves to limit their losses by reducing the initial paid-in capital to the new ESM facility and extending subscription over time. They have also pressed for a mechanism that would force debt restructuring on laggard EZ members and private creditors would share in the losses.

The Greeks domestically see the IMF/EU as an 'occupying' force. The composer Mikis Theodorakis has created a political movement 'Spitha " (spark) calling openly for overthrow of the system, debt repudiation and Cuba-style nationalizations. The PASOK (socialist) government is in increasing disarray where Vaso Papandreou, a leading MP openly called for debt restructuring. Politicians are frequently facing street attacks in public appearances.

Dryships in record US$ 2 bn loan bonanza

2011-04-04T12:34:00.002+03:00

Dryships has had an incredible run recently with banks lavishing credit on the group. A consortium led by Nordea Bank and ABN AMRO has coughed up US$ 800 mio to pay for the Ocean Rig Corcovado and Olympia. DVB Bank, Deutsche Bank, National Bank of Greece and Norway’s export credit agency GIEK are also in the deal. Deutsche Bank agreed to restructure a US$ 1.1 bn loan, of which US$ 495 mio has been earmarked to pay for the Ocean Rig Poseidon. The drillship is on hire to Petrobras.

Dryships has taken some hits from the Korean Line bankruptcy on a Capesize bulker and two Panamax vessels, marked down to spot rates from substantially higher time charter levels, deflating some of their 82% contract coverage for this year. Their 4th quarter results disappointed the Street at 20 cents a share by 6 cents below consensus forecast.

On the other hand, their drilling activities as they come on stream have provided a ten-fold increase in fourth quarter profits on the back of increased revenues. Dryships successfully raised US$ 500 mio by private placement for Ocean Rig in their plans discussed now for several years eventually to spin this off as a separate listing.

Added to this is an additional US$ 770 mio deal for tanker new buildings, where there have surfaced again some trust issues between the listed company and Economou's private company Cardiff related to how this order was originated and booked for the listed company. Economou had pledged no more intercompany transactions between Dryships and Cardiff.

Economou recently pulled in US$ 45 mio stock grant from his DryShips business in New York. The stock grants have allowed him to rebuild his share position in the business despite the substantial share dilution from repeated at the market follow-on offerings over the last two years.

Ocean Rig appears to be well capitalized. The financial risks from the tanker foray seem manageable, but it remains a speculative play when there is already a challenging market in the dry cargo sector and the company has suffered recent hits. Again Economou is challenging the 'pure-play' approach as he has done in the past.

Investors seem happy with the company albeit its shares trading currently at US$ 4,80 are far from the heady days of US$ 80-100 per share, but they have improved from previous lows in the US$ 3 range and even briefly traded in the US$ 6 range last December.

Genmar restructuring and its costs

2011-04-04T12:27:00.004+03:00

Genmar is one of those companies too big to fail because of borrower leverage from the high quantum of loss in case of default. Also as a publicly listed company, it has the option of raising equity to cover its senior lenders as a sort of private bailout facility. In this case, Genmar (NYSE: GMR) seems to be pursuing both avenues with a Oaktree Capital taking a pricey US$ 200 mio secured position with priority and warrants plus a US$ 53 mio follow-on offer. Peter G's aura seems still there.

The Oaktree deal appears to be dependent on Genmar refinancing existing senior bank debt. Ostensibly, Oaktree wants to see the payments pushed out and no risk of covenant violations in the near future since it looks unlikely that the company will be able to make an cash payments over the next two years and the principal amount will rise with the accumulated compound interest. Oaktree also holds warrants to purchase up to 19.9% of common stock. Perhaps this is a measure to get control of the company should market conditions worsen, but also to reap profits should the shares ultimately rise in value if the company survives in its present form.

I would expect the existing senior creditors to play along with these moves for increased liquidity, even the new priority position of Oaktree over existing bondholders. The troubling thing is that debt and leverage will continue to rise and debt service costs will go up. A more classical approach would have been debt for equity swaps or more asset sales to get the leverage down, but today debt is king and debt pyramiding is the fashion.

The proposed follow-on equity offering is priced US$ 2 (at par) with the proceeds to pay a portion of the remaining purchase price for a Suezmax tanker that was booked at a high price by last year's levels, which would be very likely less today. Personally I cannot understand why investors would accept to buy in at par for a deal like this. Adding to the risk, there is dilution from the Oaktree warrants, the high debt servicing costs and the restriction on dividend payout. Would not they want a steep discount for their money? The alternative of reselling the unit would probably mean Genmar taking balance sheet losses on the transaction.

None of these announcements has resulted in share price improvement, but there is stabilization at the US$ 2 level for the time being.

BLT continues to leverage up and does not seem concerned about risks or cost

2011-04-04T12:00:00.004+03:00

Berlian Laju Tankers has made a news splash with its recent US$ 685 mio senior debt restructuring by a 6-bank consortium plus a US$ 90 mio sale leaseback deal for four chemical tankers including one new building with Standard & Chartered (S&C). S&C also participated in the consortium deal that refinanced US$ 593 mio debt to repay 10 outstanding loans. Another too big to fail company with substantial borrower leverage.

In addition to its 65 chemical tankers, BLT also operates a fleet of 14 gas tankers and 14 oil tankers. It has an oil tanker subsidiary Buana Listy Tarna owning three tankers and an FSPO. BLT is hoping to get benefit of new Indonesian cabotage rules in the FSPO sector. The company is expected to have negative free cash flow this year but a surplus next year.

There is talk about selling off a 40% interest in Buana as well as two Suezmax crude tankers as early as spring this year.

In the market place, it is said that BLT is almost as good as sovereign risk with a prominent Indonesian family as controlling shareholders. The banks seem eager to lend to them more money despite the high leverage. On the other hand, the company seems delighted to pay the increased financial cost from the high leverage, betting on a market turnaround bonanza.

Management continues to have an extremely bullish view on the chemical tanker sector. This year there has been some stabilization in rates and from 2012 the orderbook overhang will be substantially reduced, so perhaps there lies ahead a silver lining for the sector.

BLT is the most leveraged play in the chemical tanker market so they will profit the most in an upturn, but they will face potential problems should there be further unexpected downturn. The senior lenders seem to be betting on the rosy scenario.

Greece, the Eurozone and the Garden of Eden

2011-04-04T11:53:00.009+03:00

Once upon a time there was a country in the Balkan peninsula, living in the Eden of the Eurozone. They were told to keep the Stability Pact to avoid deficits and debt. Instead they succumbed to temptation of low interest rates, generated huge trade deficits and ran up public debt to 130% GDP plus. Now with the IMF/ EU bailout, they are suddenly in Eurohell. The question is whether God was right in expelling Adam and Eve or should he have simply killed the snake? Let us consider below.

Their politicians were always spending money to buy votes and creating deficits financed by rising public debt for which the citizens cheered, promised that others would foot the bills and they would get endless benefits. They were delighted to discard their national currency and give up their monetary policy. They saw this as a national emancipation.

Ideally they would have liked the EU to guard their borders and undertake their national defense so they could spend less in doing so themselves. They consider that this another reason why it is the fault of the EU that they are so much in debt and they have been had.

Some think that the Russians would give them a cheaper loan in exchange for military bases and they did not actually need the IMF/ EU facility in the first place. Others say that this would be a viable alternative to liberate themselves from the Euro 50 bn privatization suggested by the IMF and made mandatory by the EU. They feel feel that private investment is bad and most entrepreneurs are crooks, but at the same time they should pay for all their entitlements.

They are furious and feel that IMF/ EU Memorandum is illegal and has robbed them of their national sovereignty. They are also upset that the Germans and other EU trading partners made profits on selling them their goods. They consider their high spreads from declining credit rating to be usury, unfair and grounds for walking away from the debt.

Generally everyone else is to blame but themselves. They just want some more 'cheap' debt without conditions. They cannot understand why they cannot continue to live on other people's money. How outrageous for those who pay to have any rights to impose their terms! They should be the ones to decide how to spend the money of others.

Here they have bitten the forbidden fruit of unlimited cheap credit, but they have yet to gain from the Tree of Knowledge. Contrary to the biblical version of Eden, they think that they are still wearing clothes and there is further paradise in the EU, but actually they are increasingly naked......

Also their creditors are naked because they do not seem concerned enough about limiting their losses rather than still dreaming about getting out whole.

Will there be open revolt in the Eurozone?

2011-03-29T13:49:00.002+03:00

Massive loan bailout facilities that pyramid Ponzi level public debt together with austerity programs that cause recession and shrink GDP, reducing capacity to service public debt are among the many contradictions in the thinking of the EU elite to preserve their currency union at all costs. Yves Smith compares EU methods of internal (infernal?) devaluation to Medieval torture. Will voters in EU laggards like Greece and Ireland ultimately revolt and this debacle end in sovereign default?

Classic economic theory of the unholy triangle illustrates the impossibility of having at the same time:

A fixed exchange rate.
Free capital movement (absence of capital controls).
An independent monetary policy.

Eurozone members like Greece and Ireland gave up an independent monetary policy for a fixed exchange rate in an environment of free capital movement. The result was uncontrollable credit bubbles and price distortions under the ECB one-size-all monetary policy locked by fiat to the rules of the German Central bank. Greece and Ireland have very different paths to their present insolvency, but both cases illustrate the tension between European integration and democracy. EZ policies have exacerbated the growing divergences between the core and periphery countries, resulting in this ongoing crisis that threatens the future of the currency union experiment.

As Bernard Connolly explains in his book "Rotten Heart of Europe", the single currency project was designed to generate an irresistible momentum for full scale political union in Europe, dominated by an implicit power-sharing agreement between the German and French political elites.

The problem is that democracy, national sovereignty and global economic integration are mutually incompatible. Deep economic integration requires the elimination of all transaction costs in cross-border dealings. Nation-states are a fundamental source of such transaction costs. They generate sovereign risk, create regulatory discontinuities at the border, prevent global regulation and supervision of financial intermediaries, and render a global lender of last resort a hopeless dream.

The EZ currency union illustrates the limits of global federalism. Making hapless EZ member countries responsive only to the needs of the ECB at the expense of domestic objectives is inherently incompatible with democracy. We could return to something like the post-war Bretton Woods regime with its capital controls and limited trade liberalization as alternative, but that would negate EU free trade. Finally, we could resolve this trilemma maintaining free capital movement, abandoning the currency union and reverting to flexible exchange rates with independent monetary policy.

I would suggest that the least painful and most desirable path would be breaking up the EZ currency union, preserving the nation states and democracy.

The Genmar saga rolls on with equity infusion and restructuring package

2011-03-28T17:40:00.008+03:00

In vessel provider business models, there is little any private equity firm can add in efficiencies. Success is largely a matter of the freight market cycle and asset speculation. The only means for high returns is scaling up in huge leveraged block purchase deals, arguing expanded earnings multiples despite marginal (often diminishing) returns on asset. Peter G managed last year to raise capital for Genmar on such expectations without discount. The timing was bad. Now Genmar is in a mess.

Genmar's share price has been in steady decline since the heady days of 2007 when it was trading close to US$ 40. It stabilized after the 2008 meltdown just above US$ 7 and even briefly exceeded the US$ 8 level on the euphoria of the ill-fated Metrostar block deal and capital raise.

The Group is now in a fight for survival with weak cash flows, unfunded capex, mounting debt maturities and a requirement of new equity by year end by its beleaguered senior lenders. The Company has been trying to sell unencumbered vessels to raise cash via leading, which is the first resort when a shipping company faces financial problems. This brings a nice cash infusion that later slowly erodes with the payment of the lease obligations that reduce free cash flow.

The likelihood of a dilutive equity offering increases day by day with the prospects of the entry of a private equity financial investor. Oaktree Capital is a prospect. Other names mentioned include the Blackstone group and Maritime Equity Partners. Oaktree is deeply involved with the Beluga bankruptcy. Another option for Genmar shareholders would be a firm like Advent with its system of operating partners that would bring new blood into Genmar management. As Paul Slater has remarked, it is time that underperforming shipping companies are compelled to fire management in the same way as other listed companies when shareholders lose money and value is impaired. As usual, only the senior leaders have any clout and shareholders are at the mercy of the management and its lenders.

Platou Markets estimate Genmar has no equity value, assuming a 10% decline in asset values in their current supply/demand outlook. Genmar has severe cashflow and liquidity problems. There are two credit facilities: the 2005 credit facility of US$ 745 mio still outstanding (LIBOR + 250 bps, but US$ 580 mio swapped at 4.2%) and a new 2010 credit facility of US$ 372 mio (LIBOR +300 bps) for the acquisition of the 7 Metrostar vessels. It also has US$ 300 mio 12% notes due 2017. Of the 2005 credit facility, US$ 50 mio falls due in 2011 and the remaining US$ 695 mio in 2012. The 2010 credit facility has a repayment schedule starting September 2010 estimated at US$ 33 mio per year. Cash deficits of US$ 67 mio/ US$ 787 mio are projected in 2011/ 2012.

The company needs substantial restructuring and new business plan. A merger with a larger, stronger group with a better commercial base is another option. The quality of the fleet could make this attractive.

Fiscal sanity: Time to end special treatment of government debt!

2011-03-28T17:32:00.001+03:00

Greek financial minister George Papaconstantinou's recent diatribe against rating agencies illustrates the pernicious mentality that got Greece into deep financial problems and national bankruptcy. He wants to avoid the discipline of the market place, getting special loan pricing with rates that do not reflect true credit risk. He cannot live with objective transparency in Greek public finance. Market priced sovereign credit is critical to fiscal sanity and proper allocation of resources.

Since governments make the laws and appoint the regulators, there is substantial political moral hazard to abuse credit allocation, create financial pyramids and bubbles rewarding political constituencies and buying votes to assure re-election at expense of the future. Greece is case in point.

The country was middle income and emerging market, but 'baptized' within the Eurozone as a 'developed country' with a mispriced credit rating. The trade imbalances worsened severely, people lived beyond their means - many in bloated state sector jobs with salaries far in excess of the private sector - and the public debt levels became out of control, rising to Ponzi levels. The political system encouraged the consumption priding itself on the rise in living standards that was largely financed by "cheap" debt with a shrinking productive base.

There was the EU stability agreement designed to impose fiscal discipline and avoid 'free-loading' the system, but politics got in the way of serious enforcement. Core countries like France and Germany were the first to set a bad example by flaunting the rules. The ongoing Greek statistics blame game is superfluous when Greek accession to the Euro was fudged from the beginning with the blessing of the European Commission because the currency union was seen a political unification project and they wanted the widest participation possible.

The Eurozone is now moving to fried ice cream where core countries like Germany are overheating but periphery laggards like Greece are insolvent and in deep recession. ECB's President Trichet even suggests some topping syrup in the form of higher interest rates that might help price stability in Germany but send Greece to outright default with losses on core country banks. Even the ECB balance sheet carries toxic Greek sovereign debt securities which the CDO market prices with deep discounts for longer maturities.

The IMF-ESM backstop facility to Greece adds to Greek debt along with the short-term debt market where the ECB buys Greek securities from the Greek banks. The Greek crisis is treated as a liquidity problem but in the immediate future, the public debt levels continue to increase to even more alarming levels whilst the tax base is imploding with the deep recession. The theory that Greece is a rich country with lots of tax evaders is largely a euphemistic illusion in self denial to support this kind of thinking. At the current rates of VAT including substantial increase on food and fuel taxes, everyone in Greece effectively pays already substantial taxes and these taxes are a huge drag on the private economy together with the government using the Greek banks for short term funding.

The Greek banks themselves are deteriorating financially with growing loan losses from the recession and the toxic Greek debt securities. Just recently the IMF has asked the Greek government to implement a Euro 30 billion guarantee to backstop the banks. So contingent liabilities are also on the rise. In short, the EU is creating an ever growing mountain of debt.

In the same spirit, many would like to increase this mountain of debt with the introduction of Eurobonds, a subterfuge for more mispriced credit to EU laggards based on cross guarantees from the core countries. Woe to any rating agency that might eventually downgrade Eurozone core countries for the rising contingent liabilities from such a system!!! The Eurocrats would be tempted to send them to the guillotine!!!

Whilst the fear of debt deflation is understandable, getting out this Ponzi debt pyramid situation depends on a miracle of unexpected growth that just does not seem realistic. In the case of Greece, the required economic growth rates to pare down its 125-130% GDP (still rising) debt levels would be sustained double digit levels that exceed China!!! The EZ is rapidly moving to a situation between a rock and a hard place.

It is time that that governments end their games of voter deception with mispriced credit and subsidies on sovereign debt. They should revise the Basel Accords to include loan reserves on sovereign debt, insist on stringent sovereign debt credit rating and avoid the temptation of Eurobonds that would add to the contagion risk and credit mispricing that already plagues the system.

The only road to fiscal sanity in the EU is market priced sovereign credit and a period of painful loan restructuring and credit writedowns, with possibly (suggested by Nouriel Roubini) some monetization through quantitative easing and lower exchange rate to temper the shock of the debt deflation.

NewLead turns to Scorpio for pool employment

2011-03-23T19:41:00.006+02:00

NewLead recently announced the the 37,000-dwt Hiotissa (built 2004) and Hiona (built 2003) will join Scorpio’s Handymax Tanker Pool during the second quarter. This justifies my observations at the time of the Aries reverse merger with then Grand Union. I felt that Grand Union - a traditional vessel provider model - lacked the commercial base of Scorpio . I also had concerns about recapitalization, which are still an issue. On the restructuring, I commend the efforts of the NewLead management.

Aries (NASDAQ: RAMS) was a listing that never should have happened. The group had many weaknesses and was not a deal for institutional investors. I expressed my personal concerns at the time to Stephanie Kasselakis, who was assisting John Sinders at Jefferies and is now at Poten Capital. It was only the skill and determination of John Sinders at Jefferies that got this problematic IPO placed. Sinders worked hard for his two main shareholders clients - Mons Bolin and Gabriel Petrides - to achieve an extraordinarily deal.

Unfortunately, these efforts went in vain and it was a downhill course thereafter for the company and its investors with a series of operational problems and operating losses that put the company on the verge of bankruptcy. It is to the credit of Jeff Parry, who came from Poten in the eleventh hour as CEO that the reverse merger with GrandUnion got done and the company did not go under.

GrandUnion did not put a lot of money initially in the new venture, which is understandable on their part. They capitalized their entry by transferring tonnage of their own to the troubled company and got some financing from the Industrial Bank of Greece. They realized their goal of a publicly-listed company, but they also took upon themselves a gigantic restructuring job with a company where almost nothing worked. They have done a commendable job so far, selling off unproductive assets, cleaning up the vessel technical management and dropping into the company new assets from the Grand Union. They moved the Aries vessel management to Nick Fistes' company NewLead and renamed Aries as NewLead, sensible management decisions in an effort to rebrand and change a tarnished corporate image.

The Scorpio Group, who was reported to be a contender for Aries, was not for this kind of job and the existing Aries tanker tonnage would have been very problematical for them. Scorpio made a very wise decision to pass on any involvement with Aries and do a clean IPO on their own to build up their asset base with good quality tonnage at moderate prices. They already had a significant tanker commercial base with three pools and a fine management team, so the listing had inherent value.

The Scorpio Group is in stronger position than NewLead (NASDAQ: NEWL) - the renamed company -and can hardly be called a rival. Scorpio Tankers, the listed downstream company, has a fleet of ten modern, high specification product tankers. The Scorpio Group controls commercially 57 vessels of which their Handymax Tanker Pool is now 33 units including the two from NewLead.

On the other hand, it is sensible move for NewLead to join the Scorpio Handymax Tanker Pool. They do not have comparable internal capabilities that were a substantial investment of the Scorpio management to develop over time and add value to their group. NewLead already has put three of their Suezmax tankers on period time-charter. They also have a larger drybulk fleet - a number of them built in the early 1990's, which is undoubtedly facing some challenges in current market conditions. NewLead's major challenge is to complete the restructuring, turn profitable, establish a dividend policy, increase capital and scale up.

The tanker markets are struggling and the Japan earthquake has increased the turmoil. Scorpio Tankers CEO Robert Bugbee was one of the first major tanker companies to warn investors last fall of the coming challenges in the tanker sector. Both companies face turbulent market conditions this year.

Drydocks World in massive debt restructuring talks

2011-03-17T20:38:00.001+02:00

Drydocks World is suffering from the effects of overexpansion and high leverage. They have been on a binge not only to expand their Emirates facilities but also have moved into southeast Asia, acquiring facilities in Singapore and Indonesia. Although essentially a repair yard, their ambition is to go into shipbuilding, conversion and offshore work. Business has not developed as they hoped and they have to restructure a whopping US$ 2,2 bn debt with their senior lenders.

At the same time that Dubai Drydocks World was aiming to become a major force in world shipbuilding, other ME countries flush with petrol money were investing in rival repair facilities in Qatar and Oman. These projects have been slow to come on stream, but Qatar Drydocks at Las Raffan opened in December last year. These new facilities are likely to create margin pressures with the increased competition and need for new business to fill the new facilities.

The Gulf region has no tradition in deep-sea merchant vessel construction. It is not an area of industrial production for the auxiliary equipment like Japan or Korea. They have done some off-shore platform work and supply vessels, but their main staple has been ship repairs.

Meanwhile Singapore shipbuilding activities have been in consolidation with mergers for fewer and stronger groups. The former Pan United shipyard that Dyrdocks World acquired in Singapore was one of the smallest and weakest yards. Singapore has some tradition in merchant shipbuilding, but mainly smaller vessels. They have a good reputation in ship repairs, conversions and off-shore platforms. Of course, Dubai Shipyards has to face competition from established Singapore players like Keppel and Sembwabang.

An even bigger problem for their strategy is competing with major shipyard players like China, where capacity increased by 57% last year and has become of the three major shipbuilding countries as well as the Koreans and Japanese. Japan and Korea have proven design history, auxiliary industries for engines and equipment, and sophisticated export finance facilities. China is a relative newcomer, but is it credible that Dubai Drydocks World can compete with their labor costs?

Drydocks World brought Khamis Jumaa Buamim into their business the middle of last year as part of a management reshuffle and to look at refinancing its huge loans. Buamin was with Conoco and ConocoPhillips for 25 years in various management positions including Vice President, Dubai Petroleum Company (2002-2007), a ConocoPhillips affiliate company in the United Arab Emirates.

In January Drydocks World lined up US$ 200 mio in intermediate financing from seven existing creditors to tide it over while it attempts a restructuring. Buamim reported at the time the money would be used to cover ongoing business costs such as equipment suppliers, subcontractor services and staff wages. He was hopeful that the business cycle was coming back.

The question is whether there will not have to be further restructuring, sale of assets and reduction of capacity under the weight of the enormous debt load, if recovery takes longer than expected.

Japan disaster brings more pain to already beleaguered tanker markets

2011-03-17T19:50:00.002+02:00

Last spring a year ago, the window opened for the Crude Carriers (NYSE: CRU) and Scorpio (NASDAQ: STNG) IPO's as well as the General Maritime (NYSE: GMR) capital raise for the fateful Metrostar block deal. This proved for investors (and especially for Genmar) disastrous timing. Now the Japanese tragedy is like to take an already ailing market a further notch down, creating potential distress conditions for overstretched tanker operators like Genmar, whose shares recently plunged 20%.

Six Japanese refineries are closed as a result of Friday’s devastating earthquake and the power shutdown of nuclear facilities threatened by meltdown. Of the crude on the water and destined for Japan at present, much of this may get resold, which may have a further effect on the crude price.

There could be woe for the long-range LR1 and LR2 products tanker markets with Japan unable to keep up its large naphtha imports with the Japanese productive capacity immobilized from lack of energy resources and the physical destruction from the earthquake.

Of the six refineries – two JX Nippon plants in Sendai and Negishi, Kashima Oil in Kashima, Cosmo Oil and Kyokuto Petroleum in Chiba and TonenGeneral Sekiyu in Kawasakim - all but the last are yet to have a restart date.

If the refineries are shut for for a prolonged period, all diesel exports to Southeast Asia, Europe and the western coast of South America will stop altogether and there will be a trade rebalancing with diesel sourced from India and the Middle East. Japan will become a net importer of gasoline with South Korean and Indian refineries benefitting.

The trade rebalancing will also affect other shipping sectors like containers and dry cargo.

It will be interesting to see what happens with time chartered vessels and whether contracts will be subject to renegotiation as Charterers face the stress of declined cargo volume and trade rebalancing.

Maersk gambles on cargo volumes

2011-03-08T20:23:00.000+02:00

From suffering US$ 2.09 bn losses for 2009 in its container shipping and back to US$ 4.9 bn profits in 2010 primed initially by slow-steaming, Maersk is now making a record-breaking order for 18,000-teu ships that is raising again the specter of overcapacity on major liner trades. Their sheer size means they can only be fully utilized on the Far East-to-Europe trades. Dependence on a single route has led some to remember the ill-fated ultra large crude carriers (ULCCs) of the 1970s.

Maersk recently signed ten firm orders with Daewoo Shipbuilding & Marine Engineering for delivery in 2013 and 2014 at a cost of US$ 190 mio apiece. Options for another 20 vessels means the deal could end up being worth US$ 5.7 bn.

Maersk is clearly taking a forward position on the freight market after 2013 where The company appears to expect that container volumes will pick up by the time the first of the leviathans is delivered in two years’ time.

2010 marked a significant recovery in the container sector. Freight rates per teu in 2010 rose by about 30 percent from the previous year calculated on a yearly average basis. Freight rates fell in the last quarter, however, after gaining steadily during the first three quarters. The main factors behind the weaker market were a seasonal drop in cargo volumes, higher deliveries and reactivation of idle tonnage.

Freight rates from Asia to Europe experienced the most pronounced upturn in the early part of the year, but also saw the sharpest drop towards the end of the year. On an annual basis, box rates on this trade route rose by 80% compared with 2009. Other trade routes typically saw rates increase by 20% to 30%. Charter rates followed a similar trend with a steady increase over the first three quarters, although they declined only moderately in the final quarter. On a yearly average basis, charter rates rose between 40 - 80% with the strongest gains for ships above 3000 teu.

China’s imports of container cargo grew at a brisker pace than exports. A large portion of the containers imported to China consisted of parts to assembly plants, which to a significant extent were also reexported to other countries. Intra-Asian container traffic increased significantly by around 20%. outpacing the headhaul Chinese export routes to Europe and the US (approx 15-6% increase). Also a notable trend in the global container shipping market in 2010 was a sharp increase in volumes from East Asia to the Middle East, Africa and South America.

Maersk may be looking around for new markets, with chief executive Eiving Kolding alluding to “interesting markets” in the Europe region, namely Russia, Turkey and North Africa, but the development of these kinds of routes does not call for such leviathan vessels.

In 2010, container traffic rose by 2.7 times world GDP growth. Historically, global container traffic has increased by between 2.2 and 2.7 times the world GDP growth. This phenomena, which was the need to rebuild inventories after the economic recession in 2009, is not sustainable.

Based on prevailing forecasts for world GDP in 2011, Platou Markets are forecasting that the global container trade could climb by around 10%. They are expecting biggest gains in container volumes in Intra-Asian trade and on routes from Asia to the Middle East, South America and Africa. Conversely, they expect container imports to Europe and United States to show a more moderate increase this year.

The net fleet expansion is forecast to around 9% on a yearly average basis. Platou Markest are expecting the global container trade in 2011 to rise another 9-10%, representing a balanced picture with likelihood of slacker rates the first half of the year and then a pickup in activity in the 2nd semester.

The container orderbook remains large. Scheduled deliveries in 2011 amounts to a capacity of 1.4 million teu (1.3 mio teu in 2010). Major players like Seaspan have aggressively held on to their pre-2008 fleet expansion orderbook; Maersk is now setting a new trend in increasing the containership orderbook.

Domino effect in Dry Cargo Market?

2011-03-03T17:18:00.008+02:00

The dry cargo sector started the year badly in 2011 with the KLC bankruptcy and reorganization. The US bankruptcy fillings in NY Federal court name three major previous shipping failures: Britannia Bulk, Armada and Transfield as counterparties, all of which went bust in the wake of the financial crisis. Its collapse created shockwaves in the dry-cargo market with Eagle Bulk, Golden Ocean, Paragon and Goldenport Holdings among those with vessels on hire to the cash-strapped company.

KLC is a major Korean shipping company controlling a large fleet of both tankers and dry cargo vessels. Its dry cargo operation is divided into five groups: Cape team, Panamax team and three tramper teams. They are major charterers for numerous listed dry cargo companies like Eagle, for example, who depended on them for the employment of many of their vessels.

KLC’s needed US $186.94 mio in February to repay debts and meet operating expenses. At the same time its liquid assets totalled only US$ 60.66 mio. Operating income was insufficient to cover these amounts. Its red figure for the whole of 2010 was KRW 328.6 bn (US $291.55 mio), which added to a loss of KRW 584.1 bn in the previous 12 months.

They had tried unofficially to renegotiate some of their charters. KLC earlier sent out 60 to 70 letters to shipowners seeking to revise charter contracts in a bid to stay afloat, but of course, owners resisted. Hard pressed companies like Eagle had little room to give. KLC is already facing six separate legal battles in the US and others are expected to make similar claims. It also has 47 ongoing arbitration disputes. KLC began receivership proceedings in Seoul in mid February a couple of weeks after filing for court protection.

Erik Nikolai Stavseth, an analyst at Arctic Securities, said in his morning note: "In light of the weak market fundamentals and cautious outlook on the dry bulk sector, we maintain our view that more situations like Korea Line are likely to emerge." Platou Markets forecasts utilization and earnings in the dry cargo sector to decline. They estimate a 10-20% decline in asset values depending on vessel type, but note that dry bulk stocks reflect a softer market ahead to a greater extent than tanker stocks. On the other hand, dry cargo owners like Michael Bodouroglou of Paragon maintain up upbeat view that the market will strengthen in the 2nd half of the year and pressure on vessel values will be minimal.

Prevailing forecasts for the world economy in 2011 suggest somewhat lower growth than in 2010. It is therefore likely that seaborne dry bulk trade will also increase more moderately than in 2010. Last year China’s imports grew less than expected, while imports to the rest of the world were significantly stronger. World market prices for iron ore will be of vital importance for how much China will source from the international market. Sailing distances for iron ore, soybeans and forestry products are also expected to increase somewhat due to higher South American exports to Asia. The imbalance in trade between the Atlantic and Pacific Basins will continue to widen. It is also possible to expect slower speed due to high fuel prices and excess ship capacity. All this provides a scenario of stronger growth in tonnage demand compared with cargo volumes in 2011.

What continues to plague the dry cargo market is the huge orderbook overhang and flood of new deliveries into the market, creating a chronic oversupply that depresses freight rates. In 2010, about 77 mio dwt of new ships were delivered from yards and 4 mill dwt of converted tankers entered dry bulk operation. Only 6 mio dwt were scrapped. On a yearly average basis, the active dry bulk fleet grew 12.5% from 2009 to 2010. By segment, the fleet above 100,000 dwt expanded by 23%, while vessels ranging from 60,000 dwt to 99,999 dwt grew by 9%. The 40,000 dwt to 59,999 dwt segment rose by 13%, while the fleet below 40,000 dwt increased by only 4%.

Around 140 mio dwt of new ships are scheduled for delivery in 2011. From previous years, we can assume a 60% slippage, some 85 mio to 90 mio dwt of new ships will start operation. Scrapping is a function of the ships’ earnings, but assuming 15 mio to 20 mill dwt will be sent to breaking, a fleet growth rate in the region of 14-15 percent seems plausible. This far outpaces demand projections of seaborne dry bulk trade increasing by 6% to 7% from 2010 to 2011.

Blue chip tanker operator OSG posts big losses

2011-03-03T16:02:00.003+02:00

US-listed tanker owner Overseas Shipholding Group (OSG) suffered sizeable losses in the final half of 2010 . The net deficit to 31 December was US $134.2 mio, against a profit of US$ 70.2 mio in 2009. The FFA market currently expects VLCC rates in the low 20’s the next two years, yet equity analyst consensus expectations indicate a recovery of the tanker market. It appears that the analyst consensus underestimated the supply side.

OSG is diversified with both crude and product tanker exposure in addition to its specialized US Flag business. 110 ships are operated of which 43% are chartered-in.

The OSG time charter equivalent (TCE) earnings dropped 10% to US$ 853.3 mio over the full year, due to increased spot exposure combined with lower average spot rates. VLCCs and MRs were most badly hit. Average VLCC spot rates were only $17,000 per day in the final quarter, down from $23,900 in the same three months of 2009. Fleet revenue days decreased 2% or 861 days.

CEO Morten Arntzen said: that 2010 was clearly a disappointing year financially but he pointed to debt reduction, a focus on keeping ship operating costs in check and long term charters for two FSOs operated in joint venture with Euronav as reasons to be more optimistic for 2011. He also said the US-flag business has secured new contracts combined with a lower cost base, which should return it to profit.

OSG has high spot exposure and large fixed costs as almost half of the fleet is leased. OSG will struggle with weak cash flows in a low market scenario the next two years. Like most mature companies, OSG suffers from comparatively low returns ratios.

On the other hand, with its strong financial strength, the company could take advantage of new growth opportunities, something that it very much needs to maintain investor interest by improved profitability. OSG had by the end of Q3’10 cash equivalents of US$ 351 mio and a remaining capex of US$ 375 mio which is fully funded. Total liquidity, including undrawn bank facilities was US$ 1.5 bn. In a weaker tanker market, the company could use the opportunity to expand its owned fleet.

Earnings forecasts in the tanker sector are likely to come down as weak market conditions continue to prevail.

Revisiting the impact of the 2008 financial crisis on the shipping industry

2011-02-01T19:20:00.002+02:00

The rebound from the 2008 financial meltdown has been the best bounce back on average in the post-war period for large corporations, but most shipping stocks have stabilized at low levels with only a few companies making full recovery. Because their smaller would-be competitors are still having more trouble accessing credit, big companies have done disproportionately well. This is particularly true of the shipping sector and the Greek market.

Back in the fall 2008, tankers were faring comparatively better than dry cargo and containers. Dry cargo staged a remarkable recovery on the back of the Chinese stimulus program in 2009. Tankers, initially supported by storage demands and phase-out were hit hard from the 2nd semester 2010. Dry bulk started to feel some pain in summer 2010. 2011 started very badly for this sector with the orderbook overhang and the Korean Lines bankrupty. Conversely, containers - after massive losses and a dismal year in 2009 - staged a remarkable recovery in 2010 first primed by slow-steaming and then a pickup in headhaul Far East export routes, especially the Asia to the US transpacific route.

Structural changes are evident. The publicly listed company model - strongly resisted by some family shipping die-hards in Greece - proved resilient. Not only did the model offer salvation to laggards by recapitalization through ATM follow-on share offerings to cure bank covenant violations from investing in over-priced vessels and taking on high debt levels, but it also allowed the leaders to raise funds more flexibly and effectively to expand their fleets in a damaged financial system at lower asset prices and financial cost than their competitors.

Major international shipping banks have tightened on their age criteria for vessels to be financed making CAPEX a higher ticket item for fleet renewal. Smaller companies, especially local Greek operators with older tonnage are dependent on domestic Greek banks and face difficulties in rolling over their fleets and moving to newer vessels as credit has dried up with more bank resources going to assist the ailing Greek public sector rather than productive private investment.

The shipping sector may not be out of the woods yet. All shipping investments are highly dependent on future growth in Far East emerging economies - particularly China - to bring rates to better levels for acceptable investment returns. Any slow down in the Far East would lead to a situation of attrition for overly stretched financial laggards anxiously waiting for market recovery before the next round of covenant extensions with their lenders.

The orderbook overhang situation will continue to depress rates. Added to this problem, higher bunker costs from the rise in oil prices are again eroding earnings margins. Financially stronger, larger companies will be looking to assert their strength and push for more industry consolidation.

Each company and shipping sector must be carefully examined on its merits.

Seaspan eyes Tiger scheme: structural change in Chinese container market

2011-01-23T22:10:00.032+02:00

Seapan's move to raise capital by a US$ 250 mio preferred shares together with a proposed US$ 75-100 mio minority stake in a containership venture with Tiger Group are raising eyebrows. Aside from possible Clayton Act violations stemming from Seaspan CEO Gerry Wang also running the new fund which may invest in competitive container companies, the nature of the fund illustrates Chinese policy to maximize its future container transport needs though Chinese-built vessels and Chinese liner companies.

Seaspan announced recently (January 21), a public offering of 9.5% Series C Cumulative Redeemable Perpetual Preferred Shares. The company had been examining for some time alternatives to raise capital to cover their ambitious CAPEX program. The use of preferred shares appears to be a means of raising capital with minimum dilution to shareholders.

The Tiger investment fund vehicle would invest in container shipping assets, primarily newbuilding vessels strategic to China. Seaspan is placing its future in Chinese liner trades, which now represent more than 70% of their fleet employment.

Seaspan told investors:

“We also anticipate that we would have a right of first refusal for some negotiated duration with respect to any containership asset opportunities that are developed by the vehicle. We believe that any investment by us in the vehicle could enhance our ability to pursue current growth opportunities in the container shipping market by leveraging the vehicle’s access to capital and customer relationships. We also believe that an investment in the vehicle would allow us to continue to increase the scale of our business and realize volume discounts for newbuilding orders that we would not otherwise be able to achieve.”

The role of Gerry Wang, the Seaspan CEO who is going to also run the new fund which may invest in competitive container companies is confusing. Whilst Seaspan is based in Hong Kong, it is a US-listed company subject to the Clayton Act.

The Clayton Act states: "No person shall, at the same time, serve as director or officer in any two corporations that are, by virtue of their business and location of operation, competitors..."

The other aspect of these moves is that Chinese policy seems to be moving more to a Japanese "Keiretsu" model of interlocking business relationships and shareholdings and Seaspan is following along with this trend. We have already began to see a similar direction in the Capesize trades, where a growing share of the iron-ore business is going under long-term contracts including transport and less emphasis on spot markets. Key suppliers like Vale are building their own fleets. Further the Chinese are very keen on supporting their domestic shipbuilding industries, who have increased dramatically their capacity over the last few years to become major players.

Finally, this system depend on perpetually high growth rates in the Chinese export model, where money is constantly being channeled into new capacity. Already there are signs of overheating. Seaspan has a franchise on special relations with China, but should there be a downturn where expectations are disappointed, Seaspan will be affected with such concentration in this market.

For the time being the 'smart money' continues to give strong support to this group. Wells Fargo Securities" Michael Webber upgraded Seaspan to “outperform”, calling the company “best of breed” within the containership sector(among vessel providers to liner companies, as Seaspan has no cargo system of its own and depends on liner companies to employ its vessels):

“Seaspan currently has 11 vessels scheduled for delivery in 2011 and three in 2012, which are fully financed and will increase its capacity by 53% to over 400,000-teu,” he told clients, adding: “We believe Seaspan will have capacity to materially increase its dividend and potentially fund additional growth and pay down debt, as we expect Seaspan to generate roughly US $412 mio and US$ 528 mio in Ebitda in 2011 and 2012, up 43% and 28% [year to year], respectively.”

This mirrors the China growth story with aggressive growth and high returns on growth of multiples. The underlying investment returns on DCF with residual asset value are much lower. Seaspan's asset-heavy vessel provider business model with long-term time charters is by nature a low margin business, where higher returns can only be generated by high capital gearing and rapid growth. What makes this especially appealing is that Chinese business is considered virtually "risk free" counter party risk.

DryShips again in the limelight on possible conflict of interest issues

2011-01-19T11:57:00.005+02:00

George Economou’s DryShips caused some surprise announcing a US $770 mio order for six suezmax and six aframax tankers. That was nothing compared to the reaction to market speculation when Morgan Stanley analysts Ole Slorer and Fotis Giannakoulis downgraded the stock raising concerns about increasing potential conflicts of interest between the public and private companies of DryShip's chairman George Economou. Economou had previously announced a firewall between Cardiff and DryShips.

Morgan Stanley Research suggests that DryShips may have overpaid by about US$ 50 mio for the six suezmax and six aframax tankers and warns that it expects tanker prices to further decline. This was a very sensitive remark because of previous concerns back in the fall of 2008 concerning the transfer of some Capesize dry bulk orders from Cardiff to the public company in view of subsequent cancelations and accompanying write-offs.

DryShips’s finance chief Ziad Nakhleh vehemently denied these allegations, asserting that not only were the orders done directly between the yard and DryShips but that Cardiff did not have any tankers on order from the yard in question. According to a well-known shipping publication," the denial sparked thinly disguised incredulity on the part of some, since during 2010 Cardiff was widely reported to have built up an orderbook of at least six aframaxes and five capesizes at South Korea’s Samsung Heavy Industries."

Prior the Morgan Stanley hiccup, DrysShip's shares had been rising on increased optimism about their CAPEX offshore funding and announcements of rig employment contracts. There has been speculation for some time about DryShip's spinning off their offshore activities at a premium for its shareholders.

Since then, DryShip's shares have stabilized at US$ 5.25 - not a very exciting level but still considerably better than the July 2010 low of US$ 3.28. DryShips was a star in the bull markets prior the 2008 meltdown with peak share levels close to US$ 130. In 2009, the company entered into a series of ATM offerings that led to massive dilution to deal with bank covenant issues.

Genmar muddles through

2011-01-19T11:20:00.000+02:00

Genmar recently found reprieve in Northern Shipping funds, selling three product carriers and leasing them back for seven years at US$ 6.500 per day that will rise to US$ 10.000 per day after two years. The group has been fighting a shortfall on the US$ 620 mio Metrostar deal for some time and needed the cash to repay a short-term loan. Northern participation reflects increased interest in this financial sector to book shipping transactions.

Northern - composed of mainly ex-NFC (DvB Bank leasing venture, who lost a lot of people in the 2008 meltdown) executives like Sean Durkin and Nikos Stratis - has been looking for leasing business and Peter G/ Genmar is a too big to fail company and ideal client.

Peter G did the Metrostar deal in the spring of 2010 on the euphoria of tanker market revival, taking advantage of the funding window opened in capital markets. He was constrained to do a large block deal for a follow-on offering with investors. Metrostar got a premium price on their units because of the time needed as well as the uncertainly to complete the deal with share underwriting and bank lending. In the end, the Genmar follow on offering was very successful with only marginal discount and their banks happy granted them a large loan facility to support the acquisition.

Since then the tanker markets have deteriorated and values are under pressure. This year the crude market has started badly with a nasty tonnage overhang and slack cargo demand, mainly driven by the Far East and Western economies much weaker. The products market is faring better with firmer rates, but still historically low levels.

The pricing of this deal with US$ 6.500 leasing rates in the first two years reflects current market conditions, leaving Genmar barely above water with two of their units chartered at US$ 15.000 per day and the third unit at US$ 16.000 per day. This is comparatively better than other leasing deals with hard pressed owners where sometimes there is even a burn rate that has to be funded in such transactions whereas Genmar has a surplus. The lease rate structure, however, is probably insufficient to provide acceptable investor return; thus, the US$ 10.000 rate increase in later years. We do not know, of course, how residual value is shared. NFC was normally quite aggressive on this with owners as it is key factor in lease profitability.

Northern is counting on a revival of the product tanker sector in later years, which is probably a reasonable bet. With Western governments pushing the 'green' energy revolution and adopting policies hostile to offshore drilling and domestic refineries, the main growth in the crude sector is coming from China and the Far East, but the products markets may get a substantial boost from the numerous Middle East refinery projects, where Gulf Oil producers are looking for more valued-added content in their economies.

Producing oil products at source will give them a big competitive advantage. The shift to longer trading routes will hopefully result on more tonnage soaked up to resolve the supply overhang. The product tanker orderbook situation is only slightly more favorable than the crude sector, but there is a lot more growth potential in the product sector.

The product tankers in this package are handy-sized where there has been the most ordering recently, but also more potential for scrapping due the age of the existing fleet (older, smaller units) and the larger cargo lots. Genmar had previously been trying to market a sale-lease back deal with Pareto for several VLCC's, but this did not work out well with the collapse in the spot market for this tonnage class.

Note that Genmar investors have been lately taking it in the chin with a 53% decline in market value in 2010 (not including follow-on offerings during the year) according to a recent Dahlman Rose study. TeeKay was one of the best performers among listed tanker operators with a 44% increase in market value. Teekay's business model incorporates more added value and is less dependent on asset speculation for profits. Genmar has higher financial and operating leverage making them an attractive turn-around investment should there be an unexpected and early revival in the tanker market.

Genmar capitalization, however, is closer to US$ 310 mio rather than the US$ 188 mio figure in Dahlman's study because of their follow on offering. Genmar's shares are presently trading around US$ 3,25 whereas investors purchased at double these levels in the follow-on offering so they have been badly burned in the transaction.

Genmar's scaling up proves poor timing decision

2010-12-11T23:37:00.001+02:00

Peter G was the star of Posidonia earlier this year with his US$ 620 mio block tanker deal for the Metrostar fleet (five VLCCs and two suezmax newbuildings). He succeeded to raise US$ 195.6 mio in net proceeds from the sale of 30.6 million new shares plus allotments with a minimal 4.75% discount in a highly touted deal. One cynical hedge fund manager said at the time that the deal was a means to raise equity with minimal dilution for an already belabored operation suffering from high leverage.

The leverage reduction was only 5% with a drop from 75% to 70% by this equity raise on hyped expectations of a tanker market recovery. A number of major brokerage firms were bullish on tankers at the time. Several analysts upgraded Genmar, which facilitated the issue.

These shares represented 50% of the companies market valuation. There was both market and dilution risk in this operation, yet well-regarded analysts like Cantor's Natasha Boyden ignored the risks arguing that the acquition was accreditive and encouraged investors to buy. Unfortunately, the tanker market disappointed and Genmar's share price has been heading southwards since. Investors got badly burned.

In the fall, Genmar announced a US$ 165 mio sale and leaseback deal with Pareto for two VLCC's (Genmar Victory and Vision Dwt 312,000 both built 2001). This transaction looked like signs of financial trouble with leverage and liquidity. Genmar was facing a 15 December deadline to carry out asset sales. Pareto struggled to rally investors to put in US$ 43 to US$ 63 mio equity to close the deal.

Generally sale and lease back deals raise cash at the expense of future cashflow. In the case of poor markets, this can create further problems. On the other hand, they enhance operational leverage should there be an upturn.

Under these circumstances, it is not surprising that Standard and Poor's (S&P) has just slashed General Maritime Corp’s (Genmar’s) long-term corporate credit rating from B to CCC+. S&P cited lack of current borrowing ability, low levels of cash and significant intermediate-term debt obligations as the rationale.

Wells Fargo Securities analyst Michael Webber said: "given that Genmar's best options to avoid a covenant breach include: additional waivers, which would indicate continued dependency on its lenders and a potentially higher interest burden; asset sales, which could imply material [net asset value] NAV downside if forced on to the market; and an equity raise (which would be significantly dilutive); we believe shares could continue to face downward pressure over the near-to-intermediate term.”

Many feel that tanker markets will improve in 2011. The question is the degree of recovery since the fall in rates has been substantial and the winter season so far has had lackluster results.

QE2: Dampening shipping sector expectations from the Chinese Eldorado?

2010-11-12T13:59:00.000+02:00

Nearly all the shipping investments made this year have been predicated on continuation of double digit Chinese growth ahead to maintain demand and soak up new tonnage coming into the market from the large orderbook overhang. Should Chinese growth rates slow to lower levels, this risks retarding market recovery and the effects of tonnage overcapacity may continue to impact the shipping markets longer than the smart money was counting on.

China reported an October trade surplus of US$ 27 billion Wednesday. This is a very big number. It will be very hard for China to credibly argue that it is trying to contribute to global growth while pulling in more and more foreign demand.

In his latest piece on the impact of QE2 on China, Michael Pettis is projecting growth rates over the next few years in the order of 5-7% if all goes well. He believes that major growth driver in the Chinese development model is low interest rates. He feels that the influx of dollar capital inflows from QE will really test the Chinese capacity to continue to keep their US Dollar peg and keep down domestic interest rates.

The Chinese appear to have thrown the gauntlet to Tim Geithner’s proposal on restricting current account imbalances directly by caps on exports as percentage of GDP, setting the stage for a potential G20 showdown. China is very dependent for its growth on widening trade surplus, and if the surplus was cut by a third in the next year or two, which is what it would take to bring it to under 4% of GDP, it would cause a several percentage point slowdown in Chinese growth, which could only be reversed by another surge in bank-driven investment.

Low interest rates (along with their cousin, socialized credit risk) are the main causes of capital misallocation and excess capacity in China, and are probably also the main forces pushing down household income and household consumption as a share of GDP.

China is very worried about the double impact of a contraction in the trade surplus and the impact of the Fed’s quantitative easing. If the former occurs, it will be almost impossible for Beijing to reduce the impact of the latter without causing a sharp slowdown in growth.

QE2 is fairly explicitly the US countermove in the great global game of beggar-thy-neighbor. It risks creating excessive monetary expansion in China because the PBoC will insist on purchasing all dollar inflows at the exchange rate set by the PBoC and monetizing them. China and other countries are right to claim that QE2 is likely to lead to asset bubbles outside the US, but only, as the US points out, in countries that intervene to prevent dollar depreciation, something the US authorities want to punish and end.

China already is experiencing a liquidity-driven investment boom, and would have already raised interest rates if it weren’t so difficult to do so (many borrowers can barely service debt even at such low interest rates). If the US continues to pursue quantitative easing, it could spell the last stage of China’s great growth spurt followed by the beginning of the big adjustment.

Shipping market expectations started with somewhat of a bang in the first half of the year with the new IPO's and renewal of large block deals. Even the container markets started to turn around with the slow steaming and renewed export volume from head haul routes. Dry bulk took the first hit in the summer with an abrupt fall in rates, for which there has been a fall recovery. Tankers have been dismal and underperformed since last winter with so far a disappointing 4th quarter.

Nearly all shipping investments at present asset price levels have very mediocre investment returns and depend on future reversion to median freight rate levels for satisfactory returns to woo investor money. Everyone in shipping is counting on a gradual recovery in 2011 and they are all citing the China growth story in their investment thesis as a prime demand driver.

Profit and Growth Opportunities in Container Port Logistics Software

2010-11-09T10:38:00.004+02:00

Goldman Sachs Infrastructure Partner's investment in Carrix, Inc signals investor interest in high-quality, core infrastructure software systems. Whilst container shipping has been suffering from overcapacity of vessels, the competitive landscape for container terminal software suppliers is limited to a select number of vendors - TideWorks, Navis, Maher, Advent Inc, Cosmos - in a growing market in the global port operations industry. Goldman saw a substantial growth opportunity in Carrix.

Container liner companies like Maersk have evolved into a highly integrated logistics services with worldwide presence. The container logistics business is moving to a manufacturing business model with forecasting and advanced planning. Often they own their own terminals and are actively investing in new terminals in key locations. The trend is to merge air freight, trucks and container services. The European Union will shortly change customs regulations such that cargo must be declared on departure to the arrival port customs authorities. This will add new demands on container port terminal operating systems (TOS's). These systems pay for themselves quickly.

Container registration is a core task. It is simply not possible for terminal to keep track of their container cargo without appropriate software systems. Today container logistic systems are fully on line so that containers can be tracked from door to door. Once a container terminal chooses a software system, it is difficult to change and move to another software vendor. Service and backup are essential. Software suppliers compete by leveraging proprietary algorithms. As time goes on, the technology advances in computing power.

The right container terminal operating system (TOS) ensures the long-term success of a terminal by being efficient, adaptable, cost-effective and scalable. Terminal operators need an automation system that enhances container terminal operational efficiency and supports future growth while reducing operational overhead and maintaining customer-focused services. For independent terminal operators, it is essential to have reliable, accepted TOS systems to maintain competitive advantage over alternative port terminals with liner company customers.

The leader in container port software is Navis, which is owned by Zebra Enterprise Solutions, which services over 400 ports worldwide. Cosmos was started by an Antwerp services company. Carrix is the parent company of SSA Marine and Tideworks Technology. SSA Marine is the largest U.S. owned, and privately held, marine terminal operator in the world, with over 120 marine and rail operations worldwide, including 11 container terminals in LA/Long Beach, Oakland, Seattle, Panama, Mexico and Chile. Tideworks has focused more traditionally on truck warehousing and is less interesting to terminal operators than competitors like Navis.

Both Piraeus Port Authority and APM Terminals in Rotterdam use Navis software systems. Latest Navis SPARCS N4 software has integrated two previously separate systems. It is a terminal operating system that is very maintainable and adaptable over the entire life-cycle of the product while allowing customers the flexibility and scalability they need to run their operations - from a single terminal to multiple terminals across multiple geographic locations, all within a single instance. It is priced at the lowest possible total cost of ownership (TCO). As market leader, Navis systems are sold at a premium to competitor software vendors.

The large terminal companies make annual reviews of their software systems and future needs. APM Terminals, which is one of the largest container port terminal operators in the world, has prepared a comparative report on software vendors for external use with a look into the future with a five-year horizon.

Irish Sea ferryboat business rebounding but limited financial returns

2010-10-21T20:12:00.016+03:00

The Irish Sea is of significant economic importance to regional trade, shipping and transport. Unlike Great Britain, Ireland has no tunnel to mainland Europe. Thus the vast majority of heavy goods trade is done by sea. Annual traffic between the two islands amounts to over 12 million passengers and 17 million tonnes of traded goods. There are five major companies who service these needs: 1) Seatruck Ferries 2) Norfolkline (now DFDS in Denmark) 3) P&O 4) Stena Line and 5) Irish Ferries.

Seatruck is a dedicated freight ferry service. They have two short sea routes and the longer Dublin-Liverpool service where they cater for trailers and unaccompanied freight. They are part of the Clipper Group. Seatruck has been growing capacity, although it has not been all smooth sailing. Its 6,000-gt ro-ro Riverdance (built 1977) was declared a constructive total loss (CTL) after grounding on Blackpool Beach in early 2008, while Spanish builder Astilleros de Huelva was very late delivering four 142-metre Heysham-max ro-ro containerships, which proved very expensive for them causing them to miss the strong markets when the Irish economy was booming prior 2008.

Norfolkline was established in 1961 but it has recently passed ownership from A.P. Moller-Maersk Group who then sold out to DFDS in which Clipper has been increasing its share lately. It operates long haul services between Belfast/ Dublin and Liverpool that are freight-oriented like Seatruck.

The other contenders, Stena, P&O and Irish Ferries focus mainly on ropax business. They also cooperate in joint services on certain routes. Stena has four short sea routes: Belfast-Stranraer, Larne-Fleetwood, Dublin-Hollyhead and Rosslane-Fishguard. P&O (now owned by the Emirates-based DP World) operates three routes: Larne-Cairnyan/Troon and Dublin-Liverpool (competing in this longer haul route with Seatruck and Norfolkline on freight and unaccompanied cargo). They sold their Larne-Fleetwood service to Stena in 2004. Irish Ferries operates two services: Dublin-Hollyhead and Rosslane-Pembroke. They focus on short sea routes and other activities as discussed below.

These are all diversified companies. Irish Ferries - owned by the Irish-Continental Group - operate ferry services directly to Continental Europe, they have invested in terminals and are also active in the container sector. Stena and DFDS are active in the Baltic ferryboat business. Aside from being one of the world's largest ferryboat operators, Stena is also a major tanker player in bulk oil shipping.

This business has been suffering from the Irish financial crisis with reduced traffic and earnings results with some pick up this year. The crisis hit hard the more lucrative freight and car market. Traditionally the financial returns in this business have been limited. CAGR for Irish Ferries in this sector is frequently negative.

Greener pastures in liquid storage over tanker shipping

2010-10-21T20:12:00.015+03:00

The storage industry has experienced solid growth since 2004. The financial meltdown of 2008 brought it very minimal pain. Vopak is the major independent storage operator. Stolt and Odfjell have storage subsidiaries to offer full service to their clients and strengthen their balance sheet. Others like Oiltanking are part of a trading company group (here Mabanaft). Storage is a growing market that is part of global supply chain logistics.

The storage market benefits from four major global trends:

Geographical imbalances between product and consumption.
Countries setting individual specifications for products.
Liberalization of previously closed economies.
Growing demand for biofuels fuels.

Large multinational groups like Vopak operate terminals globally in a variety of countries. Vopak is in both the oil and chemical storage business. The oil storage business is driven by distribution needs. For example, Russian oil products are transported in smaller ships to a hub location (Rotterdam) where they are sent to the Far East in larger vessels. Vitol, a major oil trader, is building a storage facility in Cyprus as a hub for Russian Black sea production to be exported to other locations. Likewise Middle East oil products to be distributed in the Med.

The rising trend in country regulations setting individual specifications for products has been an Eldorado for this business since this creates rising demand for local blending before products can be distributed in the market place. Environmental regulations calling for greater use of biofuels have also been a boon to the storage industry with the rise of ethanol blending in motor gasoline.

One of the biggest future drivers for this business should be the Middle East refinery facilities and the shift to product of oil products and chemical feedstock at source. Production at source allows very competitive product prices for export. Whilst these facilities have been targeted for export to Far East emerging markets, there are also export opportunities to Europe and the US. Equate, a Dow-Kuwait joint venture, has been exporting ethylene glycol to the Mediterranean for some time now. The product and chemical sectors may be in the doldrums from tonnage overcapacity, but the products still need to be discharged in storage tanks.

Chemical storage is more oriented toward industrial production needs. Vopak experienced in 2009 a sharp reduction of chemical storage volume in their European chemical division, but this was made up globally by rising demand in Far East emerging markets.

The largest share of storage is booked on a fixed rental basis, providing stable income flow not subject to volume fluctuations. A large share of contracts (40% for Vopak) are long term (over four years). This trend is especially strong in Far East emerging markets. This provides stable cash flow to amortize the large capital investment in new storage facilities. Returns on capital in this business often exceed 20%.

Whilst volatility and timing can create great opportunities in the tanker market, this creates much higher risks in a capital and labor intensive business. The storage business has provided better returns over time with less risk. For major chemical parcel tanker operators like Stolt and Odfjell, their storage divisions have assisted them in providing for more stable financial results.

TeeKay in share buy-back

2010-10-20T18:09:00.002+03:00

TeeKay's shares recently soared on announcement of a share buyback plan. TeeKay is one of the shipping sector's major success stories. Despite being mainly a tanker operator its share price is at record pre-2008 levels. Since early 2009, it has been making a steady recovery. The company operates a diversified fleet of Aframax, Suezmax, VLCC's and product tankers. It also has a presence in LNG and LPG vessels as well as the FSO/ FSPO market. It is a major operator of shuttle tankers.

Teekay plans to resume buying back its shares under an existing $200m share repurchase authorization. They feel that their shares are currently trading at a 40% discount. They moving into a period of excess cash flow and they see this as a compelling investment opportunity.

Teekay has a number of spin off companies in tanker and gas vessels. Its down stream company, TeeKay Gas Partners, has outperformed peer shipping shares, recovering all its pre-2008 value. It was a tremendous value play in 2009. Just recently Teekay LNG Partners announced plans to acquire a 50% interest in two Exmar LNG carriers for an equity purchase price of about US$ 70 mio. Exmar will retain a 50% ownership stake and continue to operate the two ships.

The ships are the 138,000-cbm Excalibur (built 2002) and the Excelsior (built 2005), a specialized gas carrier which can both transport and regasify LNG onboard. The two ships are expected to generate distributable cash flow of about $10m per year for Teekay LNG Partners over the firm period of the charter contracts.

TeeKay made news earlier this year with its loan to Nobu Su's TMT for two VLCC's for which they used a pre-2008 credit facility taking advantage of the sizeable loan spreads.

Gremlins returning to haunt container market

2010-10-20T17:38:00.003+03:00

This year market a remarkable turnaround in container shipping. In 2009, major container operators took massive losses, 10% of the global tanker fleet was laid up. Projections were for two more years of losses before recovery. Ultra slow steaming soaked up surplus tonnage capacity together with robust economic recovery in Asia. Resumption of exports to EU and US head haul trades have led to a resurgence of profits. Basic over supply of tonnage remains. Head haul routes are weakening again.

Maersk is cutting its Asia-Europe capacity by 10% for the winter period in line with changing market demand. Volumes are expected to remain weak throughout the coming four months, as the seasonally weak winter period approaches.

Conversely, Singapore's NOL Group has posted net profit of US$ 282 mio for the third quarter, turning around a US $138 mio loss last year. Revenue to 30 September grew 55% to US$ 2.4 bn. Its cumulative nine-month profit is now US$ 283 mio. It lost US$ 530 mio during the same period last year. Revenue for liner shipping improved 60% to $2.2 bn in the third quarter. Containership unit APL’s core pre-tax and interest earnings were $301 mio, compared to a loss of $130 mio in 2009. Average revenue per feu was $2,799, up 21%, while volumes grew 29% to 2 mio feu.

Container port operators in mature economies face strong cost competition from emerging markets due to excess capacity and slowing growth rates as this year's sharp rebound in container shipping cools off. Port congestion was returning in the fast growing emerging markets, but sluggish growth in the mature markets meant continued excess capacity in many ports, including New York/New Jersey and Antwerp. Customers seeking the over-capacity are starting again to squeeze the liner operators and there is increasing cost competition.

This has not discouraged more asset-oriented shipping players to move into the containership sector. A number of Greek operators like Paragon and Diana have bought container vessels at current price levels and put them on charter, looking to build up a presence in the sector. More established operators like Seaspan have continued their aggressive CAPEX plans, absorbing all newbuildings due this year, putting them on charter with increasing reliance on major Chinese liner operators.

There remains a lot of optimism in financial circles that pre-2008 growth levels will return rather than a prolonged 'new normal' scenario or at least this appears to be their story to investors in these companies to back their large deals and aggressive asset expansion financied by bank debt and plans for follow-on share offerings. They argue continued robust Asian growth regardless of Western economies. Also, attractive is the long-term employment by liner companies with strong balance sheets or sovereign risk that are considered too big to fail and unlikely to renegotiate rates downwards in poor market conditions. Tanker and drybulk sectors charters are generally for shorter period of time and more prone to renegotiation.

Seaspan's share price has outperformed this year from US$ 8 levels to the present US$ 13.20 despite the weakening conditions in the underlying container freight markets. Seaspan remains highly leveraged but it has long-term employment not subject to these market fluctuations. Still its share price remains very far from the lofty US$ 30 pre-2008 levels, but this is the same pattern for nearly all shipping stocks since the meltdown.

The basic problem is that there is still a large order book overhang of tonnage and even some new ordering. The slow steaming has been masking the existing over capacity and some are even calling for these measures to become permanent. The sector would be exposed to the effects of trade rebalancing when and if this every takes place.

Tough times for the tanker sector

2010-10-19T23:48:00.003+03:00

Despite some rate improvement earlier this year and some speculative new IPO's like Crude and Scorpio as well as a large Genmar block acquisition deal; the markets have not met expectations, suffering from low rates and over capacity. Futures and inventories do not support any storage to soak up excess tonnage supply. Scrapping of single hull tonnage has been high. Even bullish analysts like Platou have revised downward forecasts. The future depends on renewed FE emerging market demand.

Recently Oppenheimer's Scott Burk and Cantor's Natasha Boyden have been downgrading major listed companies and slicing rate forecasts into 2011. Boyden reduced next year's VLCC rates to US$ 40,000 daily, some US$ 5,000 a day lower than she had previously expected. She chopped her fourth quarter Suezmax forecast from US$ 37,500 daily to US$ 22,000 daily, with projections for 2011 down from US$ 35,000 to US$ 30,000. For 2011, Burk dropped his rate assumptions to US$ 36,000 daily for VLCCs and just US$ 27,500 per day for Suezmaxes.

Whilst demand from the East has remained strong, it has not compensated for drop in demand from the major oil consumers in the west, which remains weak. The onslaught of tonnage supply has further pressured rates, with the pace of newbuilding deliveries accelerating and floating storage counts coming down. This year there has even been some resumption of ordering. The prospects of a significant rebound in 4Q look bleaker by the day.

Natasha Boyden recently bumped down Overseas Shipholding Group, General Maritime and Tsakos Energy Navigation from 'buy' to 'hold'. Share prices have taken a beating. Peter G's General Maritime, which was a star in the spring with its massive Metrostar deal raising over US$ 200 mio from the market with little or no discount to complete the deal, is currently trading at US$ 4.03 today down from a peak of US$ 8.80 at the time of the deal frenzy. Such is the fate of investors in current markets who trust their underwriters, albeit perhaps the longer-term will eventually bring expected appreciation.

Genmar recently sold two of its VLCC to Pareto. Although claiming other reasons, this may have been a financial move to get the units off their balance sheet. Their US$ 620 mio block deal was financed with a US$ 372 mio loan facility from DnB NOR bank. At the time of the share offering, the company leverage was approximately 70%; so if market conditions continue soft in 2011 with declining vessel values, they could have loan coverage covenant problems.

Crude and Scorpio have held their share value more successfully than Genmar despite the weak spot freight rate environment. Their business model is based on less debt but Crude has substantial spot market exposure and limited operating history. Scorpio has a very strong chartering and management team providing more more inherent value than Crude, but the clean sector in which they focus has been a market laggard for some time.

Clean products have much better forward growth demand projections than the crude sector. The long term OECD trends are negative for crude oil and the only growth comes from Far East emerging markets, whereas new refinery projects in the ME will lead to structural market changes with more production at source and less export of crude oil. Unfortunately, however, the clean tanker sector order book has overshot realized demand growth and created currently a nasty over supply situation.

Scorpio's CEO Robert Bugbee, ex-OMI CFO, was one of the first major tanker executives to warn investors of coming market turbulence.

Signs of Life in Dryships Shares

2010-10-01T19:40:00.001+03:00

Dryships recently sealed a breakthrough drilling contract that caused an 6% bounce in its share price early this week. Its share price was taking a beating this year largely due the employment uncertainty for the deep water drilling rigs on construction, CAPEX gap and the liabilities that dominate its balance sheet.

Dryship's acquisition of OceanRig, a two-rig drilling company in Norway, back in late 2007 was a major gambit in its future. The company made a major shift into the off-shore drilling sector. As founded, Dryships was one of the most speculative plays in dry bulk. This transformed Dryships into more of a drilling play than shipping company, to which it added an additional two newbuilding deep water drilling rigs negotiated through Cardiff, George Economou's private shipping company.

Unlike other its other Greek listed peers, Economou started with a much larger controlling share (45.5%) in the business, where he focused on somewhat older, mainly Panamax tonnage initially. His strategy was to build up the fleet in the then rising market by selling off this tonnage at profits and then using the free cash flow from operations and sale profits to buy newer tonnage. Most vessels were traded on the spot market. This strategy quickly made Dryships a market darling where its share price hit the roof with its share price rising from US$ 17.50 as an IPO to over US$ 120 by late 2008 with less than two years of trading.

The OceanRig transaction was done at the top of the market. This loaded the balance sheet with debt and the company put most of its fleet on period time charter for financial posturing. The 2008 financial meltdown hit the company very hard. It found itself very quickly with major loan asset covenant violations and was constrained to enter into a series of at the market supplementary share offering with considerable share dilution in 2009. George Economou's stake in the company plummeted. (Currently it is back to 14.5% after some incentive plan awards in his executive compensation plan.) Economou held all the key corporate positions. There was rising criticism about transactions between his private company Cardiff and Dryships.

The loan covenant asset-debt coverage violations have taken months of negotiations to resolve. Just recently the company penned a pair of supplemental agreements with HSH on loan covenants laying the groundwork for amendments to its senior and junior loan facilities that carry an outstanding balance of US$ 520.9 mio. Last June, Economou announced that the company would do no further deals with his private company Cardiff.

The company has recently added some depth in its management team with the appointments of Ziad Nakhleh as Chief Financial Officer and Pankaj Khanna as Chief Operating Officer. Nakhleh was formerly CFO at Aegean Marine Petroleum Network Inc and started his career as an auditor at Ernst & Young and Arthur Andersen in Athens. Khanna was the Chief Strategy Officer for Excel Maritime Carriers Ltd. Mr. Khanna also previously served as Chief Operating Officer of Alba Maritime Services S.A. Prior to joining Alba Maritime Services S.A., Mr. Khanna was Vice President of Strategic Development at Teekay Corporation.

The four well contract off West Africa will generate US$ 135 miio in revenue. Dryships still needs financing to cover its CAPEX for two of the four newbuild drillships. It has a US $350 mio ATM offer pending. It still needs contracts on the other three drillships to finish financing remaining payments of US$ 1.1 bn. Originally Dryships had plans to spin off their drilling company but this has been constantly delayed. It is said that they want to realize at least US$ 400 mio from this transaction. This may require more progress on the CAPEX financing gap and better contract cover.

Significant Changes in Chinese and Greek Ship Finance

2010-10-01T19:20:00.002+03:00

As the Chinese local banks were used to distribute the stimulus package in 2009, local financial markets were flush with liquidity last year. Unlike Western markets, there was plenty of finance available for shipping companies. Today there is growing a shortage of US dollars in the market because China’s Central Bank is soaking up the foreign inflows from Chinese exports. Presently growing need in China for international finance sources is leveling the playing field on the finance front. Hopes now seem frustrated that China might be a new source of senior debt finance for the hard-pressed Greek local market.

There was a big hope in the cash-starved market in Greece that China might be a new source of finance for Greek owners. The Greek public debt crisis has effectively locked up small, medium market Greek owners from senior debt financing from local Greek banks.

Chinese banks had expressed an interest in targeting more international ship finance business, even if there is not a domestic element. In practice, very little actual business has been done.

The majority of these smaller Greek shipping companies are very healthy economically with good reserves from the boom years and most of their fleet paid off, but domestic banking crisis has deprived them of bank finance for fleet renewal.

There is considerable potential in the Greek market for foreign lenders interested in medium term asset lending with attractive pricing. Also this situation makes lease financing a viable alternative. The high loan pricing makes leasing more competitive than credit conditions prior the 2008 meltdown.

Earlier this year DnB secured a Renminbi currency licence to extend their loan business to the local Chinese market. The Chinese domestic fleet is almost equal in size to the international fleet and is basically Renminbi currency dominated. DnB NOR Bank's Espen Lund recently said "With this shortage [sic in China], we now have the big shipping companies coming back to us and our business is now back on track."

If the moribund situation in Greece prevails over time, it will result potentially in more rapid consolidation of the Greek fleet in fewer and larger companies with access to public markets and international banks. It may also lead to a longer term shift, where the Chinese-controlled fleet grows in proportion to service more of its cargo transport needs.

Two Chinas for growth in steel demand?

2010-09-30T18:12:00.001+03:00

Many dry bulk owners invested in Panamax and Capesize tonnage seem to expect that China will follow a path similar to Japan or Korea in terms of steel consumption per capita. The critical question to ask is whether it makes sense to look at China as an undifferentiated entity in this matter. The per capital steel consumption in the coastal regions on a standalone basis already surpasses Germany! It may be less growth potential than most observers are forecasting.

Danish Ship Funds, Christopher Rex, divides China into an urban and a rural economic zone. He notes that approximately 650 million people, of the Chinese population of 1.3 billion people, live in the urban region. The remainder lives in rural China, where food expenditures account for a relativity large share of the disposable income. In rural China approximately 150-200 million people living are living in poverty (using the internationally accepted 1 US$ per day guideline), There is still a long way to go before these individuals increase their steel intensity to a level close to that of the urban regions.

Rex deems it unlikely that the rural regions will develop their steel intensity extensively as long as food expenditure represents a considerable share of their income. The current food inflation exacerbates the situation and suggests that it will be a long time before the rural provinces increase their steel intensity per capita.

The future potential for Chinese iron ore demand is highly sensitive to this issue. Assuming that the Chinese population, in terms of steel consumers, does not consist of 1.3 billion people but rather the 650 million people living in the urban region, this change would obviously double the Chinese steel consumption per capita from its current level of 320 kg per capita (the same as the US) to 650 kg per capita (larger than Germany).

If Chinese steel consumption per capita is 650 kg, few will expect a massive surge in Chinese iron ore imports.

The only saving grace to this situation has been the financial crisis that has limited capital and increased the cost of bank finance for owners to complete their CAPEX needs. Last year roughly 60% of the drybulk new building orderbook was deferred and there may be similar results this year.

A Chinese rebalancing agreement with its trading partners that results in a 20% currency depreciation over a several years would bring market conditions similar to the early 2000's (when China did something similar with its currency) with considerably dampened freight rates. Despite the sharp drop earlier this year in spot Capesize rates, present rate levels remain profitable for dry bulk operators and they remain in a more comfortable position than their tanker owner peers.

China bubble ahead or beginning of a new economic boom cycle?

2010-09-30T17:56:00.002+03:00

Optimism on China and other emerging markets is a major driver in shipping markets this year in all classes of tonnage as well as resumption of new building orders. WTO's Pascal Lamy revealed global trade is now expected to grow 13.5% this year. The future depends on successful trade rebalancing, a highly complex and political issue. China watchers like Michael Pettis and Andy Xie do not believe in the sustainability of the growth model.

Pettis and Xie feel that this system is resulting in increasing asset misallocation. The growth model is based on easy money from domestic financial repression that the government invests in infrastructure projects, SOE's and real estate. China keeps its currency pegged with the US Dollar at advantageous rates to promote exports by massive purchasing of US dollar assets rather than importing their trade surpluses domestically. Internal saving rates are held at very low levels.

Xie has argued that there is no rational pricing mechanism for real estate swapped by local government entities. Pettis is worried about future non-performing loans. He cannot see how the Chinese authorities can boost consumer growth from loss-making infrastructure projects:

"But governments do not cover losses. They channel money from households to cover losses. In other words if the Chinese railroad system turns out to be economically non-viable (i.e. the true economic cost of building it exceeds the economic benefits), households will be forced pay for the net reduction in national wealth. This of course reduces future household income and consumption – the surging of which is supposed to make all these infrastructure projects viable."

Xi Li, a Consultant at State Street Global Advisors, focused in a recent article on the real exchange rate (RER), which is nominal exchange rate (NER) adjusted for inflation rate and is more important in determining a country’s current account balance with another country. China's NER, largely fixed with the U.S. in the last few years, is provoking very high internal inflation. Bubbly housing prices are due to a combination of negative real interest rates, few investment options, and extremely low carry costs in terms of maintenance fees and zero property taxes.

This viewpoint dovetails with Andy Xie's observation that the global economy is like fried ice cream, where China and other emerging markets are swallowing the US stimulus. Fed easy money policies are putting them on fire with inflation. Li feels that these dynamics will eventually put China in a very precarious position. China will become even more dependent on investments and a current account surplus to grow its economy. It is increasingly cornering itself by reducing the RER of Yuan.

Given the fixation of the current debate on adjusting the NER between Yuan and USD, one day, the continuously exploding trade deficit, coupled with the likely persistent high unemployment rate in the U.S., means that the only outcome will be the threat of trade war, or trade war itself. The U.S., controlling final demand, may finally realize that this control gives it much stronger bargaining power, may end up as the relative winner. If China has trouble, the most commodity driven economies. None of this would be good for commodity shipping.

Pettis recently wrote a lengthy piece on the politics of Chinese adjustment. He notes four ways of boosting the household income share of national income and made a list of winners and losers as follows:

Winners and losers

1.) Raise the renminbi:

Winners:

Households as consumers, especially middle and lower middle classes

Service industries

Exporters

PBoC

Losers:

Exporters

PBoC

2.) Raise interest rates

Winners:

Households as savers, especially the middle and upper-middle classes

Service industries

Labor-intensive industries

Small and medium enterprises

Capital intensive industries

Real estate developers

Banks

Local governments

Speculators

PBoC

Losers:

Capital intensive industries

Real estate developers

Banks

Local governments

Speculators

PBoC

3.) Raise wages:

Winners:

Households as workers, especially lower middle classes and urban workers

Consumer and retail businesses

Capital intensive industries with domestic customers

Employers, especially low-income labor intensive companies

Losers:

Employers, especially low-income labor intensive companies

3.)Transfer state assets:

Winners:

Households, with the distribution depending on the form of privatization

Government, especially local officials

Losers:

Government, especially local officials

He notes that the trick for any of the first three adjustment measures (which are the necessary ones for a sustainable adjustment) is to adjust just fast enough so that the employment created by the rise in household consumption offsets the unemployment created by financial distress among the relevant losers. He stresses that Chinese adjustment must be slow because in the short term the negative consequences for employment can overwhelm the positive consequences.

Pettis feels that the pace of China’s adjustment will in large part depend on the pace of the external adjustment. Its trade surplus depends on the ability and willingness mainly of the US and trade-deficit Europe to absorb them. He does not think that the rest of the world is able (especially in the case of trade-deficit Europe) or willing to wait long enough to allow China a relatively easy adjustment.

Accordingly, Pettis interprets the China optimism of commentators like the Sydney Morning Herald's Michael Pascoe and the Financial Times's David Stevenson as the final stages of a bubble. Both Pascoe and Stevenson see a huge rising consumer market in China in the coming years as a major driver in world growth.

The shipping community seems to believe strongly in the robust growth school with Peter G's block vessel acquisition deals earlier this year, Navios's foray into tankers and Evergreen's new order of post-Panamax tonnage. From 10% of the world container vessel fleet in layup in 2009, pundits are now concerned about a future shortage of boxships in view of this massive new growth ahead. All this is all based on continued robust demand growth in China and other emerging markets.

The Eurozone pact with the Devil and its risks

2010-09-09T20:14:00.015+03:00

Peripheral Eurozone countries effectively made a Faustian pact with the Devil foregoing their economic freedom in exchange rates and monetary policy tempted by easy credit and EU transfer money that resulted in consumption and real estate bubbles. The Euro was always a political tool to force European integration rather than sound economics. The EZ created structural distortions increasing divergences. Without an exit mechanism, "Abandon every hope, ye who enter here" as Dante would put it....

The Trilemma in international economics suggests that it is impossible to have all three of the following at the same time:

A fixed exchange rate.
Free capital movement (absence of capital controls).
An independent monetary policy.

A flexible exchange rate and independent monetary policy are means to manage trade balances and promote growth, which is critical in an open market environment and free capital flows - something that EU periphery politicians sadly overlooked.

These hapless countries were reduced to the status of US state governments but without any equivalent of the US Federal redistribution system. EU members in the north like the UK, Denmark and Sweden prudently passed on these risks, preferring their independence. They were unjustly and ruthless maligned by the Brussels elite, but today time has proven the wisdom of their judgement.

Unlike sovereign governments, who can create monetary reserves through their central banks, the peripheral Eurozone members unwittingly exposed themselves to the risk of insolvency and bankruptcy with the illusion of a sovereign guarantee from Brussels that allowed them to rake up public debt in amounts and at rates that they would not normally be entitled. Once the bond vigilantes moved in and popped this illusion, credit spreads started to widen with restoration of proper risk pricing and crisis broke out.

The Brussels elite initially compounded the crisis with their very poor management, blaming the markets for their own shortcomings and policy failures. They were only bailed out with the tacit cooperation of the US, who winked at the unprecedented expansion of the IMF charter by facilitating them with a financial backstop because the Americans feared the systemic risk. The ostensible mission of the IMF is to support individual countries in trouble, not a badly constructed and questionable currency union. This should have been the sole responsibility of the European Union, not other IMF members collectively.

The unsustainable trade imbalances that this currency union has created have in no way been addressed to date. It is virtually taboo in the EU even to raise the subject. The reason for the lack of demand-side adjustment is that much touted Europe’s internal market is not fully functioning, certainly not at the consumer level. As FT's Wolfgang Munchau points out, Germany entered the Eurozone at an uncompetitive exchange rate and embarked on a long period of wage moderation where it benefited from a real devaluation against other members. Meanwhile southern European industry lost competitiveness and withered. Consumption soared and real estate bubbles were fueled by the cheap credit until the bond vigilantes spoiled the party. A large part of the German trade surpluses are reflected in peripheral member deficits.

Over time, these intra-Eurozone imbalances will not only persist, but probably increase. This will make the economic adjustment for Spain, Portugal or Greece even more difficult than it already is. Those persistent imbalances, as well as the alarming build-up of debt, raise cause of concern about the long-term health of the Eurozone. Solvency is defined as the ability to finance debt in a sustainable way, and is affected both by the amount of debt, and future income through which the debt is repaid. Already several EZ members like Greece, Ireland and Portugal are bordering on insolvency.

For the Greek austerity plan, it hard to imagine a realistic estimate of a trajectory that foresees a stabilisation of the Greek debt-to-GDP ratio at tolerable levels. Optimists like Olli Rehn in his recent article 'Greek Renaissance' tend to pull the joker of some massive above-average growth forecasts for the future without explicitly stating where this growth is coming from. Normally in these IMF work-outs the growth comes from exports spurred by devaluation and structural changes. Even Swedish restructuring in the late 1990's resulted in currency devaluation. In Euro Hell, Brussels will not give Greece this option in defense of their sacred cow, the Euro.

The other side of the German exports to weak peripheral members and the resulting trade deficits is the mounting debt crisis. The austerity measures of 'infernal' devaluation is largely a Brussels concoction of untested crank economics that in practice downsizes GDP and deprives the failing country of tax base and income needed to repay and reduce its debt. Coupled with the 'pretend and extend' debt pyramiding of the IMF/ EU 'bailout' facility for insolvent borrowers, this risks bringing the whole Euro currency union down like the Tower of Babel. In the case of defaults, other weak EZ members will be liable for the backstop facility, pulling them under as well.

To guarantee the solvency of the Eurozone’s periphery would require not a few quarters of solid growth, but an entire decade. Where is this joker of massive above-average growth going to come from? Who is going to accept the trade deficit rebalancing?

Presently the Brussels elite seem very much in self denial. They remain unwilling to accept that one day a Eurozone state might either default, or, more likely, be forced to restructure its debt. Not only do they adamantly refuse to accept the principle, but also stubbornly insist on avoiding any institutional preparations for an orderly default of a Eurozone member or departure from the currency zone.

It is as if the Devil has possessed their minds in the hell (with no exit) that they have created with their currency union.... Is it a coincidence that the Faustian legend came from Germany? Can purgatory bring salvation?

Chemical war of attrition

2010-09-08T20:56:00.009+03:00

The chemical sector experienced some revival earlier this year, but rates softened again during the summer and there remains a great deal of uncertainty yet about the time of a market upturn. Financially weaker operators like Eitzen and BLT continue their optimism, the more established major operators like Stolt and Odfjell remain cautious and see a longer market recovery period.

The chemical tanker sector was badly hit by the 2008 GFC. Cargo volume dropped dramatically in nearly all trades. Markets during 2009 were sustained mainly by US chemical feedstock exports to China, with tonnage swelling in the FE struggling for return cargo. This year after a stronger first quarter, the chemical tanker market saw a pullback. The transatlantic trades slowed, not helped by continued weak petroleum product markets. Reduced requirements for aromatics from China, which sustained the market in 2009, led to less demand for larger commodity parcels (above 5,000 tons) and with plenty of available vessel space as a result. The biofuel market withered with the US putting a 54 cent/gallon import tariff on most foreign ethanol supply and Brazilian ethanol production has been hurt from high sugar prices and heavy rains in 2009.

Stolt has been outperforming its peers with its solid contract base, diversified income from storage and other activities, and its sound financial position with moderate leverage. Stolt was very fortunate in its CAPEX obligations because delays at the SLS Shipyard allowed them to renegotiate price and delivery of their Dwt 44.000 coated newbuildings placed in 2005 for ME commodity chemical trading and they eventually secured full refunds for their Dwt 43.000 stainless orders. STJS cargo volume transported was up 7.6% from 1Q10 albeit freight rates remaining flat. Stolt finished its 2Q2010 with US$ 27.5 mio net profit. 　

Stolt's main competitor Odfjell finished its 2Q2010 with a net loss of US$ 64 mio, but much of this was due to their decision to enter the new Norwegian tonnage tax system at a total cost of USD 42 million. Time-charter results per day increased by 2% compared to first quarter. Odfjell is not running any cash losses, but its balance sheet is somewhat weaker than Stolt with higher bank leverage.

Stolt expects a continued weak market for the rest of 2010 and 2011. Odfjell reports falling cargo volume in 3Q2010 accompanied by weakness in outbound voyages from US and Europe. They see increased competition for cargoes.

Ailing Eitzen Chemical with the recent exit of its CEO Annette Malm Justad and failure of its much touted merger with BLT gained reprieve by selling off its 74.3% stake in Eitzen Bulk, which brought a total profit of US$ 60.7 mio for the 2Q2010. Total freight income in the quarter dropped from US$ 31.03 mio to US$ 29.03 mio as the ethylene market remained weak and there were a number of drydockings. Eitzen has had extensive loan restructuring with its senior lenders and has extended its covenant waivers for several years, but it is far more dependent on a quick market recovery than financially stronger competitors. All the more so because it has a weak contract base, more dependence on the spot market and clean petroleum products.

The most optimistic and aggressive chemical operator, Berlian Laju (BLT), was recently down graded by Fitch, who cut its rating on the tanker owner from “B” to “–B” with a negative outlook. It also dropped its tag on BLT’s $400m unsecured notes from “CC” to “CCC”. Its Indonesian management believes fervently in rapid return to bull market conditions and it maintains a very aggressive new building program. This is an unlimited growth mentality similar to that of Seaspan's Gerry Wang, but without the support of long term SOE charterers to underwrite the business. BLT derives less than 10% of its revenues from Indonesian business, although lately it has shown interest to diversify into Indonesian FPSO and more domestic tanker cabotage business.

The weight of the shipowner’s significant capital expenditure requirements led Fitch to concerns that it may breach certain covenants if current market conditions persist. BLT leveraged up its balance sheet in 2007 when it purchased Chembulk from AMA at the peak of the market boom with a sizeable markup from the price that AMA had acquired this Connecticut-based chemical tanker operator from its founder Doug MacShane just a few months earlier in the beginning of the year. Having paid a premium price, the company strained considerably to raise the cash to complete the deal with AMA, selling and leasing back existing vessels in its fleet as well taking on heavy bank debt.

Eitzen and BLT have smaller vessels than Stolt and Odfjell. Particularly, the Eitzen fleet is concentrated in Dwt 12.000 stainless units and also has a fleet of coated chemical tonnage. BLT has some larger stainless tonnage in the Dwt 20.000 range, but this has come from their acquisiton of Chembulk, left largely with the US management. Their Asian fleet are smaller units. Both companies have smaller contract books than Stolt and Odfjell.

The future depends on how the markets play out. A V-recovery and bull market would greatly benefit BLT due its very high operating and financial leverage. A prolonged slack market will benefit Stolt with its resources to pick up distressed opportunities. Clearly Stolt and Odfjell with their stronger balance sheets and customer bases have more staying power than Eitzen and BLT. Eitzen needs very much a quick market recovery before its lenders become restless again and BLT could face loan restructuring with its senior creditors or even worse, be forced to sell off its Chembulk acquisition to raise cash.

Seaspan's China gambit

2010-09-07T12:29:00.006+03:00

Seaspan is a non-operating containership owner with a very ambitious fleet expansion plan. They have been struggling since the 2008 GFC to finance their aggressive CAPEX program. Their business plan is highly dependent on continued Chinese export growth. The two top customers are Coscon and CSCL (70% total revenue) both Chinese state owned enterprises. 90% of their contracted revenue is from China and Japan. The company is highly leveraged and has recently filed a shelf registration for a new share issue.

Seaspan is a vessel provider business model. It owns and operates container vessels with long term charters to major liner companies. It has no container logistical system of its own as do the major liner companies like Maersk, CSCL, MSC, CMA-CGM, Neptune Orient and Orient Overseas. It is largely an asset play backed by long term charter parties with substantial rate discounts and subject to earnings margin pressures over time from inflation, currency fluctuations and increased repair costs as the fleet ages.

It has a very impressive Board of Directors, including Graham Porter (Chairman of the Tiger Group), John Hsu (partner of Ajia Partners, one of Asia's largest privately-owned alternative investment firms), Peter Lorange (former President of IMD) and Peter Shaerf (managing director at AMA Capital Partners). Seaspan's CEO Gerry Wang appears to have very good personal contacts with the Chinese SOE's in shipping. He is always been extremely bullish on Chinese growth prospects.

The container sector was one of the most sharply hit by the sudden and deep economic slowdown in 2008 GFC. The major liner companies suffered heavy losses in 2009, with aggregate industry losses running into tens of billions of dollars. As an effect of industry wide losses, the liner companies heavily cut capacity, idling their own capacity and returned the chartered tonnage to non-operating owners. Normally, most liner companies own approximately 50% of their tonnage and charter in the remainder to cover their cargo volume projections.

These major operators made substantial adjustments in terms of order cancellations and deferrals of newbuilding deliveries well into 2011-2013. There was probably more speculative vessel ordering in the container sector than any other sector of the shipping market. A very large part of the orderbook are the large post Panamax size vessels for long haul routes.

The great attraction for non operating owners' investment has been the term charter cover from the liner companies. The current order book stands at 30% of the current fleet, down from about 55% at its peak in mid 2008. It is important to understand the current order book mix in terms of the owners. The German KG market and asset providers in non-operating owners like Danaos Shipping and Seaspan constitute greater than 50% of the current order book, remaining is covered by the liner operators like Maersk, APL, and CMA CGM etc, who actually control the underlying commercial business with end-users in the sector.

Seaspan fared well in 2009 closing the year with record profits of US$ 145 mio as opposed to the losses of the two prior years: 2008 (US$ 199) mio and 2007 (US$ 10) mio. They reported no charterer default or renegotiation problems. This year for the 1 H, Seaspan is again in loss position, but due to sizeable changes in fair value of financial instruments resulting in a loss of $223.2 million for the six months ended June 30, 2010 compared to a gain of $92.5 million in 2009. The change in fair value loss for was due to decreases in the forward LIBOR curve and overall market changes in credit risk.

As of their annual report filed last March, Seaspan had contractual CAPEX obligations on an additional 26 containerships over the next 30 months over an in addition to the existing fleet of 42 vessel in operation. Whilst there have been rumors of possible new order cancellations, Seaspan so far has maintained its orderbook. It appears that they are highly dependent on COSCO in chartering this new tonnage. The employment contracts with their two Chinese SOE charterers are subject Chinese law and dependent ultimately on the Chinese legal system for enforcement. Indeed, this year, they turned aggressive and also added one additional new acquisition chartered to United Arab Shipping Company for two years and Gerry Wang has made statements about opportunities to pick up units in the troubled German KG markets.

Considering the industry environment with the major liner companies cancelling orders and lately reletting larger post-Panamax tonnage, this represents a remarkable contrarian business strategy with backing from a BoD of major industry figures, who apparently believe strongly in a robust world economic recovery with shipping markets bouncing back to former levels in the near future, ostensibly driven by renewed Chinese export growth and internal infrastructure development as a return the pre-2008 GCF situation.

Financing this program has not been easy. The total purchase price of the 21 vessels was estimated to be approximately US$ 2.6 billion. The remaining five units were covered by leasing arrangements with Peony Leasing Limited, or Peony, an affiliate of Bank of Scotland plc and Lloyds Banking Group. As these units were contracted during the market boom, Seaspan faces a valuation problem with the decline in prices for new orders today. They have "gearing” covenants in their senior debt that prohibit them from incurring total borrowings in an amount greater than 65% of our total assets. Further they were blocked from drawing the remaining approximately US$ 267 million available under their US$ 1.3 billion Credit Agreement on which they were relying heavily to support their CAPEX program.

In May 2010, Seaspan issued 260,000 Series B Preferred Shares for US$ 26 million to Jaccar Holdings Limited, an investor related to Zhejiang Shipbuilding Co., Ltd. of China ("Zhejiang"). These preferred shares are perpetual and not convertible into common shares. They carry an annual dividend rate of 5% until June 30, 2012, 8% from July 1, 2012 to June 30, 2013 and 10% from July 1, 2013 thereafter and are redeemable by the Company at any time for US $26 million plus accrued and unpaid dividends. This appears to be a shipyard-extended credit facility for their reported two orders in this yard.

Compare this to established liner-owner operators like Neptune Orient Lines (NOL) and Orient Overseas (OOIL), integrated logistics players with proven container shipping capabilities available at attractive valuations. For example, OOIL's three principal business activities are segmented under International container transport and logistics services (OOCL, OOCL Logistics, and China Domestic), Ports and Terminals (Kaohsiung and Long Beach) and Property Investments (Wall Street Plaza in New York and Beijing Oriental Plaza in Beijing). OOIL’s container shipping operations is amongst the most cost effective in the container shipping industry with the Company consistently outperforming its peers with the highest profit margin among major container line operators.

OOIL has always had one of the most conservative and strongest balance sheets in the container shipping industry and has consistently kept the net gearing to the lowest. The company has no major issues in meeting its capital commitments and capital expenditure. At the end of FY 2009, OOIL had vessel capital commitments of US$ 712 mio and US$ 1.27 billion in free cash. It's capital gearing is 58%.

Seaspan's second quarter earnings conference presented a very rosy picture of a company with a low debt ratio, impressive built-in future growth revenue of US$ 7 billion and fantastic compound annual growth rate (CAGR) of 40%. Suffice this to be based entirely on their assumptions of a V-shaped world economic recovery and deeming their situation a few years ahead. . Their present leverage is very high and they would be not going through the trouble and expense of a shelf registration if they were not concerned about the need to raise equity to maintain their covenant obligations and cover their CAPEX needs. Indeed, one can presume it likely that this is an exercise to woo potential interest for a possible IPO offering.

The issue is whether peer companies like NOL and OOIL offer more value to investors because of their integrated logistics business models, their diversity of revenues sources, and their stronger balance sheets. All this is in the context of an uncertain environment in terms of economic recovery and rebalancing of trade flows. All these companies are dependent on continued emerging market growth in the Far East.