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.

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.