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.

Innovative use of capital markets for Navios Maritime

Angeliki Frangou has been outperforming her Greek peers in innovative finance for her opportunistic expansion and aggressively picking up distressed assets in the dry cargo market. Her use of "mandatory convertible preferred shares" in the recent purchases of Capesize newbuildings lessens the leverage risks for Navios and avoids dilution. She succeeded in raising US$ 374 mio new equity for NMM at a minimum discount. Her US$ 375 bond issue to cover new buildings and debt is smart finance.

Frangou's strategy to buy a mature dry bulk company with a cargo system was quite different from her Greek peers, who started up with block vessel purchases on a vessel-provider model and scaled up on the same basis, using bank debt and raising new equity at discount. Scaling up at the top of the market prices led to sizeable losses for many listed companies with asset impairment charges and protracted negotiations with senior debt lenders for asset coverage covenant violations. Several companies were compelled to raise additional capital by massive 'at the market share issues' (ATM) that were highly dilutive. Jumping the gun in scaling up, many are now quite limited to expand their fleets at today's lower asset prices.

Initially there were issues about what direction the new Greek management under Frangou would lead Navios; but this year Frangou has been outperforming all her Greek peers in share price recovery. Whilst Navios (NM) peaked in early June, Navios Partners (NMM) surged in August when her Capesize deals attracted a lot of attention and NMM has continued to outperform NM, albeit NM has also been holding its own.

The use of convertible shares allowed Navios effectively to do the Capesize acquisitions at a discount to the nominal value. Navios funded US$ 47.9 mio of the purchase price in convertible shares. Two-thirds of the convertibles went to the previous owner and one-third to the shipyard.

Navios shares were trading at US$ 4.45 per unit at the time the deal was announced. When it comes time for the paper to be converted into Navios common shares, they will do so at no less than US$ 10 each. And they could fetch as much as US$ 14 under better circumstances. In either case, Navios gets more buying power than it would have at its current share price. Putting it another way, instead of paying about US$ 71 mio each for the Capesizes, Navios would pay only US$ 57.8 mio each if the shares convert at US$ 10. If Navios's common share does better in the meantime, however, and conversion comes at $14 each, Navios would pay only US$ 54.6 mio for each ship.

The structure also lessens the level of dilution that would occur if Navios just sold shares today to pay for the purchase. Under most circumstances, the preferred shares do not become common units for at least three years and that is in the more favorable US$ 14 scenario. Under the base-case US$ 10 conversion, they become common units five years (30%) and then 10 years from now (70%).

Navios AA rating and good track record allow them to tap the high yield market in a period of tight bank finance conditions and low interest rates. Whilst the equity buyers for recent ATM issues by weaker peer companies have been largely individual or "retail" investors, high-yield investors tend to be large institutions more fussy about where they place their money.  The offering will provide extra funds to pay for the purchase of two new vessels set for delivery in late 2009 and early 2010. It will also help cover debt on existing loans.

Navios is concentrating heavily on Capesize tonnage and expanding very aggressively. This carries risks if dry bulk recovery in the coming years is less robust than expected, but Frangou has been very prudent in fixing the new acquisitions with good charter cover and posturing her fleet with secured income. The use of use of convertible notes and bond finance is good financial posturing.

Things seem to be looking up for Navios Maritime Partners

The New York-listed company (NMM) announced recently that it would sell 2.8m units to help fund its fleet expansion. The sale of 2.8m units would bring in $34.18m at the offer price. The company has attracted a lot of attention for its opportunistic Capesize purchases of four units in June and two additional units with long term charters in August. Whilst the parent Navios Maritime Holdings reported recently a 56% decline in earnings, Navios Maritime Partners had a 34% increase in revenues.

Navios Maritime Partners (NMM) is a spin-off from Navios Maritime Holdings (NM) after it was acquired by a SPAC set up by Angeliki Frangou and sponsored by Sunrise Securities. It is part of a complicated corporate structure where a general partner company Navios GP L.L.C. owned 100% by Navios Maritime Holdings (NM) has holds a 2% interest in Navios Maritime Partners (NMM). Navios Maritime Holdings (NM) has a 44,7% limited partnership stake in the spinoff company, Navios Maritime Partners (NMM). The remaining share 53,3% limited partnership interest in this spin off company is held by 'common Unitholders', which are publicly traded common units of which 2% is held in a company controlled by Angeliki Frangou. Judging the participation of John Stratakis in the BoD, perhaps Poles, Tublin advised on this structure and played a role in the rationale.

There have recently been some intercompany transactions for vessels, where the spin off company struck a deal to escape a Capesize purchase from parent Navios Maritime Holdings and bought "all rights" to a Panamax with share exchanges. The new Capesize deals with reduced asset value have been channeled to the spin-off company. Already the parent balance sheet lacks transparency and the relations with this new spin-off company further complicate matters. Yet for the time-being in share performance, Angeliki Frangou seems to be managing better than most of her Greek peers in the dry cargo sector.

Whilst Navios Maritime Holding (NM) has made a good recovery from March lows and is outperforming most peer companies, Navios Maritime Partners (NMM) has been out performing its parent company. The parent company is an old established firm with a solid contract customer base providing far more intrinsic value than most publicly traded, Greek controlled dry cargo companies, which are nearly all vessel provider business models dependent on third-party charterers for vessel employment. Further Navios is a mature company, whereas its Greek peers are recent startups, which expanded their fleets rapidly in the boom years with large block acquisitions.

Navios Maritime Partners is more along the lines of its Greek peers. It is a new start up operation, but unlike its peers it is now expanding its fleet in present market conditions with marked down asset prices. It is concentrating on Capesize vessels, which have had the biggest revival this year in the dry bulk sector. The vessels have been conservatively chartered on long term contracts with profit sharing. The company holds options for further vessel acquisitions in 2010, 2012 and 2013 and additional growth through Navios Holding-controlled vessels.

Lately the Capesize market has been waning to lower levels. The tonnage supply on order in this category is substantial but the real question is the sustainability of the Chinese demand for iron ore and coal and the inventory restocking. The domestic stimulus plans have been centered on the construction industry and thus steel intensive, but China has a substantial overcapacity problem in both construction and industry. Export demand continues to be weak.

It is a reasonable play that Navios Maritime Partners (NMM) benefits from lower asset prices with the marked-down Capesize vessel acquisition transactions and better break even levels than most peer companies. The ultimate success of the venture depends on the fate of the dry bulk sector in the coming years and the major driver is Chinese supply chain needs for steel and iron ore.

NM comes with a discount due transparency issues

In the current investment climate, companies with complex balance sheets are at a disadvantage. Off balance sheet items are an anathema at present. Investors want clarity and unexpected surprises make them uneasy.

Transparency facilitates good stock analysis. Companies with clean balance sheets without off sheet items generally get a premium with investors because they can more easily quantify their risks.

Unfortunately many publicly listed shipping companies are not sufficiently forthcoming on full fleet employment details and many other matters.

NM appears to have significant number of chartered in vessels that can potentially impact solvency. Navios also has a new Greek management who bought out the company in good times, but is untested in the current crisis. Generally Greek managers have less experience and performance has been mixed in freight derivative markets where Navios has a tradition.

These are most likely some of the issues that have led investors lately to sell the company. The future depends on credibility that the management builds with good performance and improvement in general market conditions.

Navios (NM) revisited: Setbacks in latest quarterly earnings from non-transparent transactions

There is more than meets the eye at Navios (NM). Investors needs to keep a careful watch on management decisions and balance sheet results. Management performance in the near future is critical.

In a previous analysis, I have commented on the complexity of the Navios (NM) balance sheet. My views have been cautious on this company. I feel justified in the latest NM earnings announcement.

Soaring expenses and large exceptional costs saw annual profit dive. Losses on warrants, swaps, doubtful accounts and newbuilding cancellation fees eroded a much-improved sales figure to leave the bottom line 56% down year-on-year.

The company continues to take on debt. NM revealed a total of $353.5 mio in debt financing “with favorable terms in difficult credit conditions”. The new deal includes a 10-year term deal for $120m secured at 60% of original vessel values to be used to partly fund the purchase of two Capesize newbuildings. There is also a three-year $33.5 mio convertible loan to partly fund another ship purchase and a $200 mio two-year revolving credit facility “for general corporate purposes”. This has to been seen in context of off-balance sheet items.

DnB NOR Bank shows NM with significant financing needs in 2009 and a shortfall of US$ 270 mio yet to be covered.

The rewards in NM are not without some risks.

NM: good logistics model, complex financial structure

A careful analysis of NM requires examination of its commercial and financial risks in the current financial crisis. NM recently has had its stock downgraded by several analysts. The company is carrying a large number of chartered in vessels in addition to owned fleet. NM has made a sizeable investment in coastal South American trading. In the long run, NM may be poised for growth. Short term if dry bulk market conditions do not improve and South America has a hard landing in the current financial crisis, management may have its hands full. A lot depends on the length and severity of the market downturn in the dry cargo sector as well as the general financial crisis.

NM has an interesting logistics model that differentiates them from many other publicly listed dry bulk operators. Navios was originally a spin off of US steel has a reputation of being one of the most sophisticated dry cargo operators in the market place.

Bought out a few years ago by Greek shipping interests through a SPAC, the new management acquired last year Horamar, an Argentinean company in the market of inland waterway cargo transportation in South America with a fleet of more than 100 vessels.

NM stock started to slump after this acquisition. Several analysts like Natasha Boyden of Cantor expressed disappointment. Boyden felt that the company’s complexity and opaque accounting treatment was often discouraging to investors.

The latest quarterly earnings report that came out last November indicates a reasonable debt/ equity ratio and good term employment through 2009 starting to fall a bit in 2010 unless renegotiated earlier.

Navios in fact controls a much larger fleet of 53 vessels of which 25 are owned and 28 are chartered in. The chartered in vessels are an additional liability in poor market conditions as there is the risk that voyage results may be less than the charter rates that NM has to pay out. This was the main reason for the recent Britannia Bulk bankruptcy. In such case, NM could be exposed to possible trading losses, drain on free cash flow and face the need to renegotiate charter rates with owners under threat of bankruptcy proceedings such as the Armada Group in Singapore.

Recent economic articles indicate that South America may face new difficulties in the financial crisis. Ecuador is in financial default and Argentina, where Horamar is established, is one of the economically weaker countries in the region. Further debt defaults in the region may affect adversely their inland transport business. There may be increased political instability with populist governments in Venezuela, Bolivia and Ecuador spreading to other countries in the region.

South America is definitely an emerging market growth story with long-term potential. Of course, Navios has some valuable end user client relationships and a solid customer base.