NewLead in forced asset sales

NewLead is reported to be offloading the 135,000-dwt Newlead Spartounta (built 1989) and the 34,700-dwt Newlead Prosperity (built 2003) after breaching a loan with FBB-First Business Bank. They recently hired the Moelis & Company and Fried, Frank, Harris, Shriver & Jacobson to help it fight its debts, which stand at US$ 581.9 mio. The bad news adds to an ever longer list of struggling shipping companies: TBSI, Omega, Top Ships, Zachello, etc. selling assets or fighting with their creditors.

Initially I was not a fan of the GrandUnion - Aries merger, posing a number of questions. Thereafter, I felt sympathy to the efforts of Michael Zolotas to clean up the mess at Aries and make a turnaround in NewLead.

The basic issue is that Aries was always a big lemon. I pleaded with Stephanie Kasselakis and John Sinders at the time of this controversial IPO and offered in good faith to assist Jefferies. The facts are that their investors got badly burned from this IPO and now the successor NewLead is in jeopardy. I always felt strongly that this could have been avoided.

Looking back at the time of the GrandUnion merger, really no one else would have accepted to take on Aries. Certainly not Scorpio Tankers, which is healthy company with conservative management, who forthrightly warned investors last fall of coming tanker market turbulence.

Aries suffered from horrible technical management, lousy assets and overleverage. GrandUnion was not a strong company in terms of its ability to recapitalize Aries from its losses. They financed the merger with drop down assets and more debt. They made a valiant effort to shed bad assets, clean up the technical management and restructure, but the losses continued. They had no advantages of capital market access to dilute with additional equity or to refinance existing debt with a bond issue, but all the administrative and reporting overheads.

When the dry cargo market started to collapse this year, they were badly exposed with their elderly Capesize tonnage and high debt levels. Their current debt load is crushing. Senior lenders are forcing sales to reduce debt.

It seems to me that NewLead is going to face a difficult fight for survival. The issue for them is to save as much as they can of the GrandUnion resources put into this merger. The risk of two weak companies merging is that this drives both of them to oblivion.

NewLead turns to Scorpio for pool employment

NewLead recently announced the the 37,000-dwt Hiotissa (built 2004) and Hiona (built 2003) will join Scorpio’s Handymax Tanker Pool during the second quarter. This justifies my observations at the time of the Aries reverse merger with then Grand Union. I felt that Grand Union - a traditional vessel provider model - lacked the commercial base of Scorpio . I also had concerns about recapitalization, which are still an issue. On the restructuring, I commend the efforts of the NewLead management.

Aries (NASDAQ: RAMS) was a listing that never should have happened. The group had many weaknesses and was not a deal for institutional investors. I expressed my personal concerns at the time to Stephanie Kasselakis, who was assisting John Sinders at Jefferies and is now at Poten Capital.  It was only the skill and determination of John Sinders at Jefferies that got this problematic IPO placed. Sinders worked hard for his two main shareholders clients - Mons Bolin and Gabriel Petrides - to achieve an extraordinarily deal.

Unfortunately, these efforts went in vain and it was a downhill course thereafter for the company and its investors with a series of operational problems and operating losses that put the company on the verge of bankruptcy. It is to the credit of Jeff Parry, who came from Poten in the eleventh hour as CEO that the reverse merger with GrandUnion got done and the company did not go under.

GrandUnion did not put a lot of money initially in the new venture, which is understandable on their part. They capitalized their entry by transferring tonnage of their own to the troubled company and got some financing from the Industrial Bank of Greece. They realized their goal of a publicly-listed company, but they also took upon themselves a gigantic restructuring job with a company where almost nothing worked. They have done a commendable job so far, selling off unproductive assets, cleaning up the vessel technical management and dropping into the company new assets from the Grand Union. They moved the Aries vessel management to Nick Fistes' company NewLead and renamed Aries as NewLead, sensible management decisions in an effort to rebrand and change a tarnished corporate image.

The Scorpio Group, who was reported to be a contender for Aries, was not for this kind of job and the existing Aries tanker tonnage would have been very problematical for them. Scorpio made a very wise decision to pass on any involvement with Aries and do a clean IPO on their own to build up their asset base with good quality tonnage at moderate prices. They already had a significant tanker commercial base with three pools and a fine management team, so the listing had inherent value.

The Scorpio Group is in stronger position than NewLead (NASDAQ: NEWL) - the renamed company -and can hardly be called a rival. Scorpio Tankers, the listed downstream company, has a fleet of ten modern, high specification product tankers. The Scorpio Group controls commercially 57 vessels of which their Handymax Tanker Pool is now 33 units including the two from NewLead.

On the other hand, it is sensible move for NewLead to join the Scorpio Handymax Tanker Pool. They do not have comparable internal capabilities that were a substantial investment of the Scorpio management to develop over time and add value to their group. NewLead already has put three of their Suezmax tankers on period time-charter. They also have a larger drybulk fleet - a number of them built in the early 1990's, which is undoubtedly facing some challenges in current market conditions. NewLead's major challenge is to complete the restructuring, turn profitable, establish a dividend policy, increase capital and scale up.

The tanker markets are struggling and the Japan earthquake has increased the turmoil. Scorpio Tankers CEO Robert Bugbee was one of the first major tanker companies to warn investors last fall of the coming challenges in the tanker sector. Both companies face turbulent market conditions this year.

A turnaround for Aries?

New CEO Michael Zolotas and CFO Allan Shaw recently gave a presentation of their plans to turn around Aries Maritime (RAMS) and use it as a platform for growth. They talked about recapitalization, fleet mix, in-house technical management, chartering strategy, steamlined GA costs and the new management team. Their new focus is on dry cargo and product trades. They have dropped in six additional units from GrandUnion and recapitalized with US$ 36 equity and US$ 182 mio additional debt. Let's evaluate.

The vessel transfer from GrandUnion consists of two 1990-vintage Capesize bulkers, two Panamax bulkers built 1990/ 2002 and two Dwt 37.000 product tankers built 2003/ 2004. The nominal purchase price is US$ 180 mio of which US$ 160 mio in debt liabilities and US$ 20 mio in shares (at a 125% premium to current price). The new management has booked the two remaining Aries container units for sale at US$ 11,4 mio .

In terms of hardware, Aries now has a fleet of 21 vessels: eleven product carriers and seven bulk carriers. Two Dwt 73.000 product tankers are on bareboat charter to Stena until 2H 2010. The two additional product carriers are time chartered until 2011. The remaining product tankers ranging from Dwt 38.000 t0 73.000 are on the spot market. All the bulk carriers are on time charters of various durations with fairly low rates mostly in the teens except the Cape unit Brazil, which has a good paying period charter with an initial rate of US$ 28.000 per day.

The large number of product carriers on the spot market presents a serious exposure problem since this sector was very hard hit this year and is suffering badly in the current market. The new management will have to determine a new employment strategy. This is a challenge but their new business director, Paul Wogan played an instrumental role in developing the Seachem pool for Livanos facilitating the Odfjell merger and is a capable person. They may have to invest to build up a chartering team. There appears to be no existing contract base from GrandUnion and they will have to create a viable customer base for Aries in the product sector.

Ironically their fleet mix is similar to Top Ships (TOPS), the other well-known Wall Street laggard of the Greek Shipping community, which seems to be doing a bit better lately. The Aries drybulk units are distinctly older than the TOPS units that were bought at the height of the market albeit with much better age profile. The Aries units are mainly Capesize units whereas TOPS focused on the Panamax size. The Capesize sector has been outperforming the market this year. Older units like the Aries vessels can be very profitable, but it is a very volatile market.  Presently they are tied up on time-charters with rate levels that are moderate compared to more modern units, excepting the Brazil charter. 

What is worrisome is the high level of debt on the six additional vessels (US$ 160 mio liabilities out of a purchase price of US$ 180 mio) and the large amount of additional debt in the recapitalization (US$ 182 mio against US$ 36 mio new equity). The 30.09.2009 pro-forma balance sheet looks ghastly with the shrunken asset values, high level of debt, free cash down to zero, US$ 124 mio loss of which a US$ 91 mio asset impairment charge and distinctly negative net worth.

It would have been helpful with all the additional changes and recapitalization that they had included in their presentation a restatement of their balance sheet after the additional changes in the fleet and capitalization. I find, however, difficult to see any major improvement in leverage in these subsequent events.  The largest share of new funds has been raised by additional debt. The new equity is small in comparison to the new debt and the drop-in units are highly leveraged. Aries still appears to be a company swimming in debt. Perhaps they preferred debt in the recapitalization to limit share dilution, assuming limited downside risk on further fall in vessel market values and looking to enhance returns. The positive hope is expectations of improved earnings from the expanded fleet and new management.

The new members of the management mark a considerable qualitative improvement from the previous management (the former CEO Jeff Parry was probably the sole credible person). It was a good move that they wrote down the assets and renegotiated the debt. Adding Newlead management was a very positive step. The previous technical management was disastrous and had a horrendous insurance record. It is now largely a matter of their commercial team and their opportunistic accreditive acquisitions to create value in their business.

They have secured additional funds for this, but they still appear to have a strained balanced sheet as a limiting factor. If there is a nice market upturn in 2010, it will provide them much necessary uplift in free cash flow and retained earnings to rebuild shareholder equity and deleverage. Rising asset prices will also help.  On the other hand, they will be at risk if market recovery is delayed and 2010 proves a poor year. In the negative scenario, they could end up with some of their new funds being cannibalized for debt service and require further financial restructuring.

Aries certainly shows significant progress, but it is still work in progress and a speculative play.

Grand Union-Aries merger: where is the value?

This reverse merger is one of the strangest shipping deals ever done. Aries (RAMS) is an ailing NASDAQ-listed company with nine product tankers, two container ships and big financial problems. The original IPO had a rough start with a lot of question marks and thereafter there were operating setbacks. Things improved somewhat when Jeff Parry, formerly of Poten, took the helm at CEO. The deal is a barter where Aries (RAMS) acquires three middle-age Capesize bulk carriers in return for a complicated share exchange agreement as well as management and debt restructuring. Whilst the deal may be attractive to major shareholders, it not so clear whether investors are getting much of deal.

Grand Union is Greek shipowning venture launched by Newfront Shipping boss Nick Fistes and Stamford Navigation’s Michael Zolotas. It also by coincidence the name of a well-known US supermarket chain. This is a privately owned, family-controlled shipping company with a fleet of 46 bulkers, tankers and newbuildings. The companies have been around for a number of years, but this is a fairly new venture that has had a very aggressive expansion plan. As a private firm, it difficult to assess its financial condition and how it has been impacted by the financial crisis and bear shipping market environment. Aries (RAMS) is a penny stock and it has had a balance sheet qualification about its future as a going concern.

The vessels that Aries is acquiring are the 135,364-dwt Yiosonas (built 1992), the 151,738-dwt Grand Nike (built 1995) and the 172,972-dwt Grand Mirsinidi (built 1993) in return for transfer a complicated share exchange and debt restructuring. 2,67 million Aries shares are being transferred to Rocket Marine (controlled by Mons Bolin and Gabriel Petrides), giving Rocket 36.8% of the total shares and Grand Union (controlled by Michael Zolotas and Nick Fistes) control of 34.2%. But the voting agreement gives Grand Union control of 71% of Aries. As part of the overall transaction, Investment Bank of Greece is buying $145m in 7% senior unsecured convertible notes, due in 2014, which Aries plans to use for vessel acquisitions and paying down debt, among other potential uses.

The Securities Purchase Agreement is subject to a number of conditions, including but not limited to (1) the entry into definitive agreements for the issuance of the Convertible Notes and the closing of that transaction; (2) the entry into definitive agreements with the Company's existing syndicate of lenders for the refinancing of the Company's existing credit facility; and (3) the absence of any event reasonably likely to have a material adverse effect on the Company or the three Capesize drybulk carriers.

The deal will see Fistes become chairman of Aries, while Zolotas will become executive director and president, as the board swells to seven members. It is difficult to evaluate the financial impact of this complex transaction on Aries. The management and BoD changes are significant.

Financially no party appears to be putting cash in the deal. The 'equity' appears to be in the vessel transfer. Further there appears to be some additional debt and refinancing from a bond issue with the Investment Bank of Greece, not a run of the mill shipping finance entity. It is not clear whether this increases Aries leverage. Some cash in the deal would have provided more transparency and plain vanilla comfort for investors.

The weakest point is the lack of commercial synergy. The biggest value in Aries is its nine product carriers (their container business is a dead letter, but the product sector is also in deep recession), but Grand Union brings no expertise or contract base to service these units. A merger with a group like Scorpio (of Monte Carlo) would have offered a better synergy, adding more value here. Aries (RAMS) is clearly betting all their strained resources on the Capesize unit additions in the dry bulk sector. This follows the Top Ships example of opportunistic fleet diversification to get out of their hole at the time, but at much lower asset price entry levels and ready financial structuring that purports to improve the balance sheet.

It would be helpful if Aries (RAMS) prepared an investor presentation to make sense of this complicated transaction. Perhaps something will be soon available so we can make further comments.

Aries IPO/ Jefferies - financial considerations

The roadshow will depend in part on the financial parameters of the deal:

The way the Aries deal is structured of the offered share price of US$ 15.00 there is an immediate dilution of US$ 9.35 to shareholders, whilst Mons and associates make a profit of US$ 4.62 on their shares. Compare this to theTOP Tankers IPO where out of an offered share price of US$ 14.00 there was a much smaller dilution of US$ 2.96 to shareholders, albeit the Pistiolis family make a somewhat larger profit of US$ 6.04 on their shares. TOPT is presently trading around US$ 15.00. So the propective Aries investors willface a substantial dilution of 62%. This is quite a big hit.

The big selling point of the Aries business is the long term charters,especially on the container vessels, which they acquired very recently in2004 backed with employment from CMA. This is most likely an incentive in the Fortis and CSFB participation.

There is considerable debt restructuring in the Aries deal. It isinteresting to note that Aries was paying quite high pricing on their bankdebt: 1.75% over LIBOR, which is usually charged for smaller and higher risk companies.

On the other hand, whilst I have not examined the DCF for Aries, I would note that the fixed rates for the tankers, which is my market, areconsiderably lower than prevailing spot rates. I cannot comment on thecontainers - a business that I do not know very well. I do see, however,that Aries appears to have acquired the container units in 2004 - veryrecently. It is all CMA-related and dependent. CMA is their majorcustomer. It is likely that the financial returns are moderate inconsideration of the premium in asset values and rate discounts for thelong-term employment cover.

Of course, long-term time charters are not 'hell and high water'. If rates plummet, they can be renegotiated and there can be frustration. Furtherthere is the matter of performances.

Whilst there are professional ship managers in the TOPT deal: Unicom and V.Ships, the Aries management is in-house where there can be a unexpected setbacks and performance problems. As you probably know, a very modern Aries tanker was detained in the fall 2004 and they have not had a lot ofinspections. On the container side, I have no idea about their operatinghistory, but it is certainly not an established company in this field.

Another point to note is that Aries appear to be members of the AmericanClub, which is one of the weakest of the major Pandi Clubs and usuallyreserved for those owners, who cannot find coverage elsewhere very often due to poor claims records. The case of Polembros is illustrative.

NB Subsequent to this article, Aries has had two severe setbacks in their product tankers due bad technical management. The UK Port Authorities found a hidden crack on the deck of their vessel 'Citius' sealed with metal lock. This resulted in the immobilization of the vessel and extensive repairs on site with prolongned off-hire. Aries troubles were further compounded with a second a costly incident on another tanker. As a result, the company results have fallen into the red and they have recently taken on a new technical manager under pressure from investors.