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

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

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

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

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

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

Eagle Bulk once a Wall Street darling now facing forced sales

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

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

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

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

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

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

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

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

General Maritime close to filing for Chapter 11 for reorganization

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Lessons learned from this:

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

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

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

Cosco losses could lead to charter renegotiation in the containership sector

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

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

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

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

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

Omega Navigation appears to be insolvent

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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