Wall Street investment banking firms face bear market in shipping issues

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?

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

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

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

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

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

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.