Is Peter G’s sudden foray into chemical tankers a clear signal to short the sector?

 Peter Georgiopoulos in his effort to make a comeback in the shipping space has decided to enter the chemical tanker sector with a speculative order for five firm 25,000-dwt vessels, plus five options at the state-owned Avic Dingheng yard. Well-placed sources say the ships are costing more than US$ 40 million each, with Avic slated to deliver the firm units in 2016 and 2017. Rumor is that Georgiopoulos had teamed up with unidentified private-equity investors to enter the chemical tanker segment. Given the recent history of his tanker company General Maritime in and out of Chapter 11, with massive losses to share and bond holders and his dry bulk company Genco teetering on the edge of Chapter 11 reorganization for some time now, should investors jump in to support this sort of asset play, especially in an entirely new sector where he has no prior operating or commercial experience? 

This latest movement of Peter G could well serve to vindicate the viewpoint of Niels Stolt Nielsen that “the amount of [private equity and institutional] money now entering into shipping is extremely worrisome……”  The Stolt CEO goes on to say: “The orders for new ships are being driven not by increased demand for logistical services, but by the overflow of capital available in the market.”   Finally, he expresses his concern about the acceptance of fee structures where the managers of these new “shipping companies” get fees up front when ordering ships, or for managing the ships they order, without having any equity stake in what is being ordered. 

Peter G’s new venture opens all Stolt Nielson’s concerns. If we take as a benchmark the Georgiopoulos dry cargo venture; Baltic Trading has had fairly steady losses from inception until very recently, but provides valuable source of collateral revenue, shoring up his main dry cargo operation Genco, with a hefty management fee structure to husband Baltic. It is speculative, asset arbitrage driven venture. Not surprisingly, Baltic stock trades very much like a freight market derivative instrument.

The challenge for any investment in the chemical tanker sector is that historical returns on asset have been exceptionally low (less than 10%). The number of players is limited, making for an illiquid sale and purchase market. In the case of the Eitzen Chemical distressed debt, senior lenders preferred to become shareholders and even waive loan spread, staving off any distressed asset sales under these limitations. Finally, this is has been a high cost, low margin business based on contracts of affreightment for base cargoes and the spot market to fill up the remaining empty space. The cargo contract commitments on the vessels further limit flexibility for asset plays in this sector because they create restrictions on timing for sales.. 

The mature groups in the chemical tanker sector have all transformed their business models from vessel  to logistics services provider and diversified into parallel sectors like chemical storage and gas shipping to improve their financial returns and risk profile. They have also kept their finance costs as low as possible and maintain strong balance sheets. None of the major players like Stolt see a quick market turnaround. They are companies with long term commitments to their customer base. 

None of this fits with Peter Georgiopoulos and his business approach. Peter G is above all an asset player. He keeps to the traditional Greek business model of vessel provider. His focus is mainly on acquiring shipping assets in large block deals. Further it is unlikely that he is putting a large amount of his own increasingly limited capital into this new venture and more likely that he is acting as an asset manager in this venture.  Here, however, in contrast to Baltic Trading, he does not have an operating company like Genco to back this new venture, which is fundamentally a start-up play. 

Another interesting twist is that the Avic Dingheng yard is also a newcomer to chemical tanker construction. The large, established players like Stolt and Jo Tankers have contracted larger size units (Dwt 38.000 and 30.000) at Hudong and Minde respectively. They appear to be aiming for lower unit costs, using larger deadweight units for emerging US chemical exports over the smaller competitor vessels. Both these yards have a proven track record in building chemical vessels. 

The Navig8 venture with Oaktree Capital has placed their orders (Dwt 25.000) at Kitanihon Shipbuilding and Fukuoka Shipbuilding, which are well established, first class Japanese yards with a long history of building stainless chemical tankers. By contrast, Avic has only built small coastal chemical tankers.

It will be very interesting to see how this new venture fares, but it likely be challenging for the investors unless there evolved an exceedingly bullish market given the stronger position of competitor peer companies.

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

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

Why not a derivatives market in vessel asset values?

Shipping investment projects have always been mostly asset plays rather than new business models to serve customers more efficiently in the transport of cargo. The Greek shipping industry craves for investment in physical assets as opposed to the Norwegian asset-light cargo operator model with chartered-in tonnage often on purchase options. Profits are generated from moving in and out of assets in the shipping cycle. Cargo transport operations remains secondary in the process mainly to keep holding costs down. Lately investment firms have also gotten into the game, teaming up with operating companies to acquire shipping assets.

Would not it be easier and more efficient to develop a derivatives market for this process rather than taking on all the headaches of physical asset ownership?

The latest version of this asset play concept is the Oceanbulk Carriers partnership between Petros Pappas and Oaktree Capital with the purpose of picking up distressed dry cargo shipping assets and eventually making profits on market recovery. Petros Pappas has an excellent record as one of the most successful asset players in the Greek shipping community, having sold off most of his dry cargo fleet in the heady boom years of the late 2000’s to the point of even moving out of basic ship management and operations.

There is no doubt that the dry cargo business is currently under severe stress. The sector has been plagued for years with a historically high vessel order book on expectations of infinite Chinese growth with their insatiable appetite for commodities imports and incessant speculation in commodities resources. The Chinese themselves have become major shipbuilders with huge expansion of yard capacity, mainly for dry cargo vessels. It did not take much of a drop in Chinese growth rates in 2012 and some inventory destocking to send dry cargo freight rates tumbling.

As this point, several high profile listed dry cargo companies like Genco (GNK) and Excel Maritime (EXM) are on the verge of bankruptcy, plagued by asset prices falling below loan outstandings and cash flow problems to service the debt payments. Unlike Asian competitors like Pacific Basin with large cargo books, these companies themselves started as asset speculations. They leveraged up with debt to expand their fleets in large block purchase deals, playing the market cycle.

Excel Maritime went to the extreme of merging very unwisely with another asset play, Quintana (QMAR) shortly before the 2008 global financial crisis and reportedly taking on US$ 1 billion additional debt to finance this transaction. The motive to merge for the Quintana stakeholders backed in part by First Reserve private equity was to realize their asset position for profit because their operating profits were restricted by long term time charters and this kept their stock price from appreciating as much as they would have liked to see. Just the announcement that they were planning this move caused a bounce in their share price.

Contrary to their mission statement to focus on distressed assets, the Oceanbulk-Oaktree venture recently decided to place new orders rather than to wait for opportunities in existing tonnage. At the same time, their new business development director and former investment banker, Hamish Norton, recently gave a dry bulk presentation at an industry forum in Athens where he sagely noted that the continued drybulk order book risks putting off any market recovery for another year yet in the sector. So ordering additional dry cargo vessels would at least appear to be contributing to more industry distress and counter-productive in hastening any market upturn in rates.

Perhaps a vessel asset futures market – if feasible – would be a more efficient tool for these cyclical asset plays. The ship derivatives could be based on standard type bulk commodities vessels, just as the Baltic Freight index is based on standard voyage routes. Banks could use the derivatives in order to hedge their loan exposure, reducing their credit risks to shipping companies. Shipping companies could hedge their asset purchases against fall in value and impairment charges. Hedge funds and institutional investors could take speculative positions on rising and even falling asset prices.

The beauty of a derivatives market for ship values is that it would not entail any ship ordering. Shipping companies could go back to the fundamental business of transporting cargoes for their customers. Because the derivatives market would allow for both long and short positions on vessel values, it might even assist in providing a reduction of vessel asset price volatility. Positions could be taken and unwound very quickly.

All this would relieve investors from the trouble for these cumbersome partnerships to buy physical assets, the need for bank finance, the travails of ship management and needs to charter the vessels with risks of charterer default, etc., only to lead to a game of musical chairs on market recovery to sell the assets or the shares in the company to the next guy with a mark-up.

Of course, the last guy in the chain like Excel Maritime in the Quintana merger or Berlian Laju (acquiring Chembulk from AMA at a sizeable mark-up), is invariably left holding the candle, facing bankruptcy as the market sours.

The shipping industry would become more of a logistics business, but is it not what it was supposed to be in the first place?

Greek listed shipping companies have a competitiveness problem with their peers in terms of investment returns

One of the biggest problems in Greek-listed companies is that many have been trailing on profitability. This was recently brought home in excerpts from Fearnley report tracing these companies from 2000 onwards that was recently published in the Tradewinds.

Vancouver-based TeeKay LNG (TGP) delivered a 10% return for its investors but Livanos-controlled GasLog (GLOG) late in the game is presently at -3% returns. Tsakos (TEN) with scant returns of 5% against TeeKay (TK) overall at 14%. Peter Georgiopoulos (GMR) went into Chapter 11 largely wiping out common shareholders.

The same goes for dry bulk company listings. Palios-controlled Diana Shipping (DSX) with negative returns as opposed to Danish-based Norden (DNORD) with 38% returns. Fredriksen’s Golden Ocean (GOGL) secured a 19% return for its shareholders, whereas Panayotides’s Excel (EXM) and Zoullas’s Eagle Bulk (EGLE) have lost money for their shareholders with negative returns. Both companies have had serious financial problems.

Why have so many of these Greek-controlled listed companies delivered such poor results for their shareholders?

Admittedly, the shipping industry as a whole has been under a lot of pressure lately with difficult market conditions. This has placed management under stress with extraordinary challenges. Greek shipowners are relative new-comers to capital markets. Traditionally, Greek companies have been closed private family businesses. Most privately-held Greek shipping businesses have been performing well in current difficult market conditions.

The Greek listed companies were mainly start-ups. The only case of a mature company was the Angeliki Frangou’s acquisition of Navios as a platform and she has since managed the business well, outperforming her compatriots. The start-up companies were all on the vessel provider business model, providing ships and crew for charter employment. They had no cargo books. Conceptually, they were cyclical asset plays with high dividend payouts to entice investors. This situation was fueled by the remarkable rise of China with its double-digit growth rates, insatiable appetite for raw material imports and its burgeoning export market to the EU and US in finished goods.

The challenge for these newly-listed companies was that shipping is an old-fashioned labor and capital intensive industry with relatively low returns on assets. The traditional benchmark for a good ship acquisition deal is 15% return on asset on the basis of 60% leverage with cheap bank finance. This is not a big margin to cover the unforeseen if results do not work out as well as planned nor would this satisfy normal institutional investor return requirements of 30% returns for start-ups and 20% returns on existing businesses. Covering the risk profile with longer term employment from charterers entails a discount on the charter rate for the counter party risk transfer. This sort of arrangement creates additional challenges, capping further market upside in a rising market where there is premium on vessel values and lowering financial returns.

Capitalizing on magic of the China growth story for cargo, these companies could only entice investors on rising earnings multiples from fleet expansion. The concept was double the fleet with large block vessel acquisition deals. Presto: double the profits! Most of these companies expanded their fleet by buying fleets from existing private shipping companies. Peter Georgiopoulos was a forerunner with his tanker deal with privately held Metrostar in the early part of the Millennium. Indeed for some private Greek shipping companies like Metrostar, it became a lucrative business to sell their tonnage to listed shipping companies at premium prices. Eagle Bulk, for example, expanded in the same fashion in the dry cargo Supramax sector, doing a large block deal from another Greek private company rather than building the business themselves.

Ironically, this concept with investors came to a halt two years ago with a repeat deal that Peter Georgiopoulos did with Metrostar to expand and renew his Genmar tanker fleet. Investors loved the deal and gobbled up the supplementary share offering at par with no discount for the risks involved. Unfortunately, the tanker markets came under pressure shortly thereafter. General Maritime strained to secure bank finance to complete the deal. Ultimately, GMR went into Chapter 11 and investors literally lost their shirt. This debacle was a cold shower for institutional investors in shipping deals. Criteria for new money became more demanding. Institutional investors started to press for deep discount entry prices. The best placement source shifted to day-trader retail investors who, could care less whether their stock picks were solvent or their business strategies made any sense. 

All these deals were cyclical asset plays. No one cared about earnings margins or value creation from competitive advantage other than a large fleet. Profits were generated from rising freight market expectations. If you were lucky, you would sell the assets down the line to another shipping company in a game of musical chairs. Excel Maritime (EXE), for example, bought out Quintana in a merger shortly before the 2008 financial meltdown. Excel was obliged to raise a great deal of bank finance to complete the deal. Stuck in the chair when the music suddenly stopped after 2008, Excel has been reeling with liquidity problems and bank covenant violations ever since. The main shareholder was obliged put in additional cash from his personal money for recapitalization to keep his lenders happy and at bay. It is no surprise that Excel Maritime has been for its shareholders neither a profitable Norden nor Golden Ocean, but rather a source of painful disappointment.

An unfortunate derivative of these asset plays is that they distracted Greek managers from moving into other more profitable growth areas like gas shipping and offshore. Peter Georgiopoulos (and his investors) missed out entirely entirely these opportunities.  Instead Georgiopoulos moved into similar dry bulk asset plays in Genco and Baltic with poor investment returns. This ultimately ruined his tanker business where other competitors like TeeKay Shipping comfortably trumped him in the tanker markets with their franchise in shuttle tankers and nice play in LNG shipping, rewarding their investors handsomely.  His management team involvement in Aegean Marine Petroleum (ANW) (albeit his personal role here may be more of a figure-head position) does not appear to be getting any better results in the fuel supply business where competitors like World Fuel or Glencore-controlled Chemoil have much better share performance for their investors.  (See the below article with comparative stock charts and discussion of business strategy)

The future of Greek shipping lies in regaining competitive advantage and better earnings margins. Greece entering the Eurozone was a big structural setback for its shipping industry. It put its management and ship repair companies in a high cost, slow growth currency zone with a 30% premium over the US dollar. Shipping industry revenues and customer base are mainly with emerging market countries with exactly the opposite strategy of cheap currencies following the US dollar to foster their export markets in goods and services.

Greece is tied to the mill stone of a low-growth economic zone that is getting progressively poorer as time goes by.  It is also facing significant fiscal drag from massive barrage of taxes due to an unsustainable debt overhang held by EU government creditors in debt peonage.  The PSI+ debt restructuring bankrupted local Greek banks, severely limiting bank credit for small-medium Greek shipping companies.  The aggressive high tax environment may even ultimately eliminate the tax-free offshore status of Greek shipping companies. A Eurozone venue means continued higher administrative and crewing costs for Greek seamen than Far East competitors. Greek companies will struggle to compete with peer vessel management companies in business friendly places like Singapore free from these issues.

Given erosion of their cost structure, Greek shipping companies may have to focus more and more on niche markets and new growth areas to make up for their higher operational cost structure and sharp competition from foreign competitors with more disciplined growth strategies with emphasis on earnings margins, investment returns and risk profile on the business that they develop.

It is fair to say that this cyclical downturn in shipping markets will also open new opportunities in asset play strategies for those who have the wallet, financial backing  and patience. In these cases, the first-ins and early-outs are generally the most fortunate. The last-ins get caught when the music stops. Too many Greek listings proved to be in this category.

Is the Chinese eldorado that fuels shipping investments coming to an end?

This year has seen considerable new investment in large block speculative shipping deals. Peter Georgiopoulos did a US$ 886 mio deal in May to buyout the Metrostar fleet, and now a US$ 545 mio deal for 16 bulkers from Bourbon. Metrostar paid a record price of US$ 180 mio for five container vessels. The driver is anticipated economic recovery driven by Chinese export growth. Good times again as if the 2008 meltdown never happened. Yet already there are signs of a slowdown. Will China save the day?

Global growth since the 1980's has depended increasingly on monetary easing to induce asset inflation for stimulus, each dose of monetary stimulus resulting gradually in weaker recoveries with increasing joblessness. Wages in Western countries have remained fairly static and the government authorities have encouraged consumer lending to prime consumer spending with households becoming increasingly indebted. As an example, much of the growth in the US since the Dot.com meltdown of 2000 was due to easy money that fueled a real estate bubble and led to the subprime mortgage crisis and massive foreclosures. The housing market in the US remains moribund.

The Asian emerging market countries since their financial crisis in the late 1990's moved to a neo-mercantilism whereby they kept their currencies undervalued to generate large trade surpluses through aggressive export policies. They recycle the money into developed western countries keeping down their exchange rates and financing their trade partners' deficits. One of Ben Bernanke's major speeches a few years before he become FED chairman was characteristically entitled "The Global Saving Glut and the U.S. Current Account Deficit" as a sign the times.

Eerily reminiscent of the defunct Dot.com investment craze, China has become the rage with investors as an eldorado of unlimited growth potential. This optimism fueled interest for shipping issues on Wall Street, especially for dry cargo vessels to transport iron ore and coal for the steel production with the increased demand created by the real estate boom in coastal areas. Likewise investors went wild over the container sector where the only concerns of Seaspan (SSW) CEO Jerry Wang were whether Los Angeles could expand its port facilities to cope with the insatiable demand for Chinese goods.

Since the 2008 meltdown, there has been a modest recovery in both the US and EU but there remains a huge sovereign, corporate and household debt overhang in a balance sheet style recession. The most robust growth has been in emerging markets where there are much lower sovereign debt levels. The Chinese could finance their stimulus out of their trade surpluses, but there is growing evidence that the stimulus money has resulted in commodities inventory stocking as well as an over-heated housing market that is causing a serious real estate bubble.

Growth in the US seems to be slowing now that we are moving to the second half of the year. The EU has been confronted with serious sovereign debt problems in their weaker members of which Greece is now under a joint IMF-EU workout. Bad management of the Greek crisis and serious structural deficiencies in the Euro system resulted in contagion in other member countries, which led to a massive emergency EU bailout facility funded by member states and IMF participation. The ECB balance sheet is filled with toxic EU government securities.  It even suspended minimal ratings standards for Greece. The weaker PIIGS members are all under strict austerity programs. The UK, whilst in a somewhat better position free of the Euro albatross, has also voluntarily started an austerity program to address its fiscal and debt problems.

In this environment, Chinese capital surpluses are becoming harder to export. The weaker EU members were the second largest importer of these surpluses, but now austerity programs make this unsustainable. There is is already evidence of falling trade volume on western bound container trade lanes from the Far East. Meanwhile dry cargo freights as represented by the BDI have plummeted to levels not seen since the fall of 2008. The dry cargo pundits feel that the drop in dry bulk rates is only temporary due to Chinese contract renewal negotiations with producers. Likewise, container operators like Maersk, euphoric over recent transpacific rate increases, are projecting a surge in profits that match 2008 levels. External signs, however, are troubling.

What we see is that China has an increasingly volatile economy with large swings. The real estate is showing signs of decline. Non-performing loans are on the rise. Dependence on the US to export trade surpluses has risen since EU sovereign debt problems and austerity programs. The next tension is likely to be between the US and China on trade surpluses, especially if US unemployment remains at present levels. The last thing that China wants is to import the surpluses domestically because this would lead to currency appreciation and risk bankrupting the exporting companies.

All hopes at present are on another Chinese stimulus program to shore up the output gap. There appears a growing internal debate on how to manage their housing bubble and overheated economy, but the other major issue is the sustainability of the export model and how to deal with the shock from the EU and US taking measures to address defensively their large unemployment problems in a time span that is out of their control.

As FT's Walter Munchau put it:

The pessimists believe that a strong global recovery is unlikely given the persistence of financial stress, and the deleveraging of the private and public sectors across the industrialized world.

The optimists divide into two groups. There are those who have difficulties counting to zero, who cannot add up the global private, public, and foreign balances, which must equal zero by definition.

And then there are the rational optimists, whose expectations of resurgence in private sector demand must surely rest on the assumption of a return to even greater global imbalances than before the crisis, to which the eurozone will this time contribute actively. But this is surely not a sustainable position.

The pessimists would argue that global demand growth will not be sufficiently strong to support a selfsustained recovery in the eurozone. Even the rational optimists, who believe that this is possible, would probably conclude that these imbalances are not sustainable, and may trigger another financial crisis down the road. And if that is what you expect, you are not really an optimist.

What we know is that some of our societies are deeply over-leveraged, and that de-leveraging them means running trade surpluses, not deficits. That is not good for China nor the 'smart money' in shipping!

A prolonged, sluggish global recovery with high levels of unemployment in Western consumer economies and possibly a series of sovereign defaults of which the restructuring of the Greek public debt is high on the agenda would lead to renewed stress on the banking system, particularly in Europe. Overleveraged companies having already negotiated covenant extensions with their banks may be forced to sell assets at distressed prices that everyone has been trying to avoid the last few years.

We see a lot of 'smart money' in shipping assets. The new IPO's earlier this year like Baltic (BALT), Crude Carriers (CRU) and Scorpio (STNG) are all trading at discounts.  Albeit these companies have bought marked down assets and have low leverage, it is unlikely there will be appetite for further issues unless the discount is closed. It will be interesting to see what levels, Genco (GNK) obtains in raising equity and debt funding to close the 16-vessel Bourbon deal. Generally, Wall Street remains soft and shipping issues have generally never recovered to pre-2008 levels. Many of them are trading below US$ 10.

Peter G's big gamble

Peter Georgiopoulos has been aggressively scaling up his 3 publicly listed companies: Baltic (BALT), Genmar (GMR) and Genco (GNK) with massive block vessel acquisition deals. Whilst asset prices are down from boom year levels, bulk carrier prices have risen considerably off the meltdown lows. Bulk carrier freight rates have fallen sharply. Economists like Nouriel Roubini predict a weaker 2H 2010 and a sluggish recovery ahead, with potential public debt defaults ahead. Does Peter G's timing make sense?

Baltic was conceived in late 2009 as a pure dry cargo play based on opportunistic vessel purchases, spot employment and low leverage with a high dividend payout. Baltic's IPO was successful, but at a larger discount than anticipated. It was priced between US$ 13-14 but it is currently trading at US$ 9-10. It is a captive company of Genco (GNK) who manages the vessels and earns commissions on its fixtures and S+P transactions.

Genco (GNK) crashed in 2008 to US$ 6,50-7, but then made a modest recovery in 2009. Lately it has been under pressure, trading around US$ 14-15.

Genmar (GMR), the oldest Georgiopoulos company concentrating on tankers, is trading around US$ 5,40, which represent new lows for the year. In 2009, it underwent debt restructuring with its senior lenders, which it partially refinanced by a bond issue that cost more than originally anticipated. The successful US$ 200 mio equity raise for the Metrostar 7-vessel block deal was priced at US$ 6,75, only a modest discount. Investors are presently under water, but the increased equity strengthened the company balance sheet by lowering the leverage to 70% down from 75%.

The latest Platou market reports makes subdued projections for the drybulk sector that would indicate that Peter G's timing may not prove to be the best in making his bulker acquisitions. The tanker market is looking better, but Genmar remains with fairly high bank leverage. This would generate exceptional returns if the tanker markets continues to improve, but it also means further covenant violations with senior lenders in a poor market.

The investment thesis depends on China and emerging market growth. China slowdown in construction has sent dry bulk rates southwards lately. Supply-demand conditions and cyclicals are more favorable for the tanker sector but projected demand growth in crude oil transport is low in coming years.

Time will tell whether Peter G's was overly aggressive in his massive block deals of 2010. I think that analysts may have been overly optimistic on the timing. At least, the market has been pricing the shares differently from the analysts.  The next test will be the forthcoming equity raise for Genco to support the 16-vessel Bourbon block dry bulk acquisition deal.

Georgiopoulos gives thumbs up to dry bulk in an opportunistic play

Peter Georgiopoulos is aiming for an opportunistic asset acquisition play thorough Genco's (GNK) new Baltic Trading, which could seek US$ 230 mio in its initial public offering (IPO) with a plan to purchase five to seven vessels by the end of 2010. He is betting on recovery in this sector, carefully sheltering his existing dry cargo company Genco and he is demanding top dollar for his participation and management in the new venture.

Georgiopoulos's concept is to set up a new company "Baltic Trading" with a symbol BDI as a speculative play in the dry cargo sector using equity capital to purchase vessels, avoiding senior debt and operating the vessels in the spot market at least initially. His NYSE-listed Genco (GNK, an owner of 34 bulkers, plans to contribute US$ 75 mio to the company in exchange for Class B stock, giving the parent 50% of the voting power.

It will be a full-payout company, paying dividends that amount to all net income minus cash expenses. The fleet will likely be made up of Capesize, Panamax and Supramax bulkers through timely and selective acquisitions. Baltic pledges to grow through follow-on equity issues that require little debt financing but says it may use a revolving credit line for bridge loans.

This will be the first initial public offering (IPO) in New York since the ill-fated Britannia Bulk in June 2008. Morgan Stanley and Dahlman Rose, who both have strong connections with hedge funds, will be the underwriters.

Genco chairman and founder Peter Georgiopoulos will also serve as chairman of Baltic Trading. Genco finance chief John Wobensmith will play the same role at the new outfit. Genco board member Basil Mavroleon will also hold a Baltic seat, but there will also be a significant number of independent directors.

Genco also is to receive management fees of up to 1.25% of gross charter revenues for commercial services, US$ 750 per vessel per day for technical management and up to 1% of gross purchase price in sale-and-purchase (S&P) transactions. Genco farms out technical management to Wallem and Anglo Eastern. Charter-oriented Genco is to have first rights to charter opportunities, while spot-focused Baltic gets first look at voyage deals.

Georgiopoulos is making heavy use of investor equity capital in this venture, yet he retains considerable control over the operation though Class B voting power. Further Genco will benefit in fees and commissions both on vessel sale and purchase and chartering. Peter Georgiopoulos has a strong track record with investors and he is demanding his price for involvement and participation.  He is taking a conservative position in sheltering his existing dry cargo business and limiting his risks.