Does Greece have more leverage with the EU than perceived?

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

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

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

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

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

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

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.