General Maritime Chapter 11 resolution may provide comfort for lenders, but will other stressed shipping companies have the same end?

General Maritime and its patron Oaktree Capital Management sweetened a deal with creditors, including holders of $300 million in high-yield bonds, to allow an estimated 5.4% recovery. With the hurdle removed, Genmar could emerge from Chapter 11 by next month. European ship finance bankers will, however, probably not have a high degree of comfort with Chapter 11. It is a game not played on their home court and there is no assurance that the next time around for a cram down of unsecured bondholders (as in the Genmar case) to absorb the brunt of the losses. .

Since the Global Financial Crisis, we have seen many times the dilemma of losses that nobody wants to take and everyone is looking to avoid. The first option is ‘pretend and extend’, hoping for a market recovery and rise in asset prices, etc. that proves that present losses are just a bad dream. Sometimes this is accompanied by new loans to assist in repaying old loans in a game of musical chairs with creditors to buy time.

Another option, at least for publicly listed companies, is finding a source of recapitalization. Dilution by “at the market” share offerings largely to retail investors is one technique. This was practiced by DryShips a few years ago. Decline of shareholding by key investors can be partially recouped by general stock awards later on, as happened in the case of George Economou. Eventually, DryShips did a spin-off of OceanRig to the benefit of their shareholders.

A more painful recapitalization option is bringing in private equity. We have seen this in the case of Beluga Shipping and General Maritime. The private equity player faces some difficult legal issues in the structuring of the participation, not to get caught in an equity position should the company ultimately go into bankruptcy. Normally they want, however, the option of getting full control of the company should things not work out, meaning that the original investors take painful losses and lose control of the business. Generally, shipowners do not like this option. In the case of the Omega Chapter 11 proceedings, George Kassiotis has not to date shown much enthusiasm for this approach. Peter Georgiopoulos brought Oaktree into Genmar to protect his position in his other listed companies. Kassiotis does not have this fall back.

The final option is sale of assets to pay down debt. We have seen this in the case of NewLead with its lenders in a series of forced sales. It will be very interesting to see how Berlian Laju Tankers resolve their financial woes. Will the Surya Family dig into their pockets like John Fredriksen to recapitalize the company? Will they split it up into parts? Will they sell of Chembulk to raise cash to retain the remaining portion of the company?  What will they do with their bondholders?

It was of great advantage in the Genmar case that the large class of unsecured bondholders and the opportunity for a cram down with this class of creditors to the benefit of the senior lenders, who are avoiding so far any losses. Holders of Genmar’s $300 million of November 2009 bonds stand to get back roughly $16 million in the deal — a huge savings for the cash-strapped shipowner. Oaktree is recapitalizing the company and taking control. There is a fleet of vessels to repay the senior lenders so that they may come out whole.

The European Union has done something similar in the case of Greece by a forced subordination of private Greek sovereign lenders to their position as public lenders in purported debtor in possession financing. In the case of Genmar unlike Greece, the company is being recapitalized by Oaktree and there is a fleet of vessels to repay the senior lenders so they may come out whole. The Greek State by contrast still has very high debt stock including a new EU Ponzi loan of EU 130 billion that exceeds the PSI+ cramdown; but with GDP shrinking by 5-7% per annum, there is a substantial issue on its capacity to service its crushing debt loan.

Of course, Genmar moved very fast to mitigate its cash burn. I do not see this happening in the case of Omega Navigation nor the Greek state. Most distressed ship owners out there who do not have a class of senior unsecured bondholders. Normally, it is just senior debt and some trade debt, and in those cases the usefulness of Chapter 11 is going to depend on the particular numbers in that situation. It is also expensive in legal fees and transaction costs, so this will apply only to companies who can afford to go through the process.

Obviously the HSH Nordbank, BTMU and NIB Capital are very concerned in the case of the Omega Chapter 11 proceedings that they will be taking substantial losses, being crowded out by the mounting legal expenses. In the case of the Greek State, they had run out of cash and needed IMF/ EU assistance in the spring of 2010 or they would have defaulted on their existing debt and would have had difficulties even in paying state employee salaries and pensions. Their acquiescence to increasingly harsh terms like the recent Memorandum II is due to their lack of resources and fear of collapse because they do not have any reserves to fall back on.

GasLog IPO Shortfall: Investors looking at new shipping issues with a great deal of skepticism and growing appetitive for discounted entry pricing

Goldman Sachs seems to have overplayed its hand in the recent GasLog IPO. GasLog completed the deal below its target price range of US$ 16-18. Since then, it proceeded to trade down from its $14 IPO pricing to close its second trading day off a further 11% from IPO price. It is presently trading around $11. Investors have sent a clear message that they will not tolerate overpriced offerings. There is a clear preference for discounted entry prices for shipping IPO’s since the boom years.

GasLog is a latecomer for capital in the LNG space, contracting new LNG tonnage at relatively high levels well after the 2011 upswing in the market. The Livanos family is a top shipping name and there is even minority participation from the Onassis Foundation and an indirect participation from the Radziwill Family. The GasLog IPO appears a plain vanilla LNG story, laced with some well-known shipping names, based on continual rising demand without taking account that this sector has been prone to booms and busts from over investment with historically modest average returns on capital. The LNG story is known from 2011 and most people have already made their bets there.

Investors were left wondering how much upside story was left for the higher asset prices involved and whether this was a good entry level. Indeed GasLog’s charter cover on six of the eight newbuildings in its fleet (averaging approximately US$ 75,000 per day over five years) was not a plus for the IPO because it illustrates limited upside on higher asset prices.

The GasLog have been technical managers for many years with a solid relationship with the BG Group, who charter their present fleet of two LNG units delivered in 2010. Their management suffers by comparison to their peer company Golar because they were late in commercial timing and behind the curve in deal structure. The issue lacked the attraction of high dividend yield or an MLP structure. Arctic Securities analyst Erik Nikolai Stavseth, said from the outset that GasLog was overpriced — at least compared to fellow LNG owner Golar LNG Partners, one of his recommended “buys”.

Of course, Goldman did manage to raise US$ 329 million for GasLog despite the reduced pricing level. There have not been many shipping IPOs in the last five years raise more than US$ 200 million and shortfalls are now more the rule than the exception. Consider that of the last round of shipping IPOs in 2010, all four traded down from their IPO price and only one (Costamare) managed to get investors their money back over the next two years.

Should GasLog cover the shortfall in capital by raising more senior debt, this would be ample justification for the shares to trade down even further. A quick reading of the GasLog prospectus filing with the SEC shows that the company itself warns about substantial debt level. There was US$ 283.11 million of outstanding indebtedness as of December 31, 2011 and GasLog expected to borrow an additional US$ 1.13 billion in connection with the financing of contracted newbuildings. GasLog openly admitted in their prospectus potentially limited flexibility under this debt load to obtain additional financing and pursue other business opportunities. This flexibility is now negatively impacted by the shortfall in the equity raise.

There is no doubt that it is a much more demanding market for investment bankers to raise capital for shipping issues than the heady boom years. People really have to work hard to develop a value proposition in the business plan and it is difficult to find shipping deals with good investment yield at present charter rates.

The Gounaris Syndrome: Greece, Expansionary deflation and the Euro

The Greek political elite have taken public debt to 168% of GDP, done a debt restructuring that crams down private creditors, but increases E.U. public debt by roughly the same amount (€110bn “haircut”/ €130bn EU Ponzi loan money), hoping to reduce public debt to 120% of GDP by 2020. Greek GDP is declining at a rate of 5-7% per annum in this deep recession. The elite’s efforts are reminiscent of former Greek Prime Minister Dimitrios Gounaris, who chased Ataturk into the depths of Asia Minor for an elusive victory. Will the current obstinate, incompetent leadership meet the same tragic end of Gounaris at Goudi?

With a growing pre-election climate, the Greek political class does not seem to have learned much from the Greek sovereign debt crisis. They seem dangerously out of touch with changing circumstances in Greece and the EU, with slogans that largely belong to the past. The major Greek parties still see Eurozone membership as the key to prosperity, despite massive 20% unemployment, bankruptcy of 25% of the Greek private sector and 15% GDP compression to date from IMF/ EU financial engineering. They continue to cling to EU transfer money and public investments as a developmental model. The two major parties – PASOK and New Democracy – claim an economic recovery around the corner totally overlooking the difficulties in implementing needed structural changes and the rapidly dimishing capacity to service crushing debt burden as the country moves into every deeper economic depression in a Fisher vortex.

They discard the work of economists like Nouriel Roubini and others, who see deep structural flaws in the Eurozone system and Greece with an insurmountable debt load in a state of debt deflation that may well oblige Greece to return to the drachma. They ignore that Greek EZ membership never met the Mundell optimal area criteria. They are indifferent to trade balance issues and the real exchange rate. They do not seem to have any understanding of the purpose of central banks much less the fact that the ECB's failure to stabilize and restore nominal spending to expected levels - as proxied by the 1995-2006 trend - during the crisis as the real culprit behind the Eurozone crisis.

They continue to see a bright future in the EU with the domineering Germans, the inflation-hawk culture of the ECB inherited from the Germans and its influence on the evolution of ECB monetary policy. This expansionary deflation crank economics does not address the serious trade balance problems from these locked exchange rates and puts the adjustment entirely on the EU Periphery, (trade deficit countries) without any demands for change in German export policies that largely generate these trade imbalances; thus, the Greek leadership has not even come close to a proper framing of the issues. Their mind-set remains in the previous status-quo. It still has not dawned on them that these policies drowning Greece and impoverishing the general Greek population have changed everything in the minds of the voters. There is really no open debate in Greece on these matters.

The Greek political establishment has not been truthful to the general population. Their psychology seems dangerously close to their predecessor, Dimitris Gounaris. They want to be liked by their allies with a false sense that they will always support them without dealing with the substantive challenges. They chase impossible targets without the slightest scruples to put the heaviest of burdens on the Greek population; meanwhile, they retain their positions and privileges despite their enormous policy failures

If economic conditions do not improve in Greece and Greece is obliged to move to hard default and Eurozone exit, as many American economists foresee and is reflected in market pricing of Greek securities; it seems that no one in Greece has any Plan B to leave the Eurozone and renegotiate its debt in as orderly and negotiated a matter as possible. This means a very high risk of disorderly default. How will Greece’s political elite survive such an enormous Tsunami?

Berlian Laju Tankers accused of diverting US$ 135 million in cash from company accounts

Last week BLT informed the Singapore Stock Exchange that it has defaulted on its interest payments on bond loans and bank debt.  BLT called in FTI Consulting as a financial adviser for its debt payment freeze and now it has added leading Asian insolvency specialist, Borelli Walsh.  Now there are serious allegations from Delos Shipping that BLT’s largest shareholders, the Surya family, have diverted $135 million in cash from company accounts to their coal business. Will all these high paid advisors be able to turn around this lame duck company or will the fees just increase creditors’ losses?

Until recently, BLT was everyone’s darling in the market. As a rapidly growing company it was an ever-expanding source of brokerage fees and high yield financial placements. Industry rumor has it that AMA Capital Partners earned a 100% mark-up in selling BLT the Chembulk business from the original price that AMA paid Doug MacShane for the Connecticut-based firm. This acquisition needed massive financing, and leasing firms and banks earned exceptional financial yields.

Last year, BLT had to negotiate a massive $685 million senior debt restructuring by a 6-bank consortium plus a $90 million sale leaseback deal for four chemical tankers, including one new building under construction with Standard & Chartered (S&C). S&C also participated in the consortium deal that refinanced $593 million of BLT’s debt to repay 10 outstanding loans. Both the 6-bank consortium and S& optimistically considered the Surya Family’s involvement to make BLT as good as sovereign risk (albeit with the recent Greek PSI+ this sort of risk is what not is used to be….).

Yet, if you take a glance at the BLT balance sheet over the years, this was not a company that was ever making a lot of money. Historically, chemical tankers have seen return on assets below 10%. BLT promoted their Indonesian cabotage business, but in fact the Buana spin-off last year showed a small operation that accounted for only a relatively small part of BLT’s total turnover. Indeed Buana had made losses the previous year.

BLT also pointed investors to its low manning costs. We investigated these claims two years ago with MTM Singapore, who originally managed the Chembulk vessels. MTM told us that such assertions were false and misleading for chemical tankers in international trading. Crew costs for competent chemical tanker crews were converging and under constant upward pressure. One possible explanation could be that BLT was skimping on maintenance with very new vessels to keep costs so low. Declining maintenance standards is a common failure path for chemical tanker companies on the verge of bankruptcy that eventually leads to withdrawal of Majors approvals and increasing operating losses.

BLT’s computer glitch last spring on its accounts seemed rather disingenuous, especially when results later came out that showed widening losses in 2010. Was this a coincidence? Were BLT’s creditors diligent in their credit analysis in their restructuring negotiations last year? Why with such generous terms were there no requests for the Surya Family to support the operation with more equity as a condition for the debt restructuring?

Finally, after the declaration of default, I looked into a recent financial analysis of the company from major shipping investment bank. The analyst forecast a reasonable cash balance through 2011. For these reasons, I can sympathize with the ire of Delos’s Brian Laden. Clearly BLT and the Surya family owe Delos, as well as their other creditors, some serious explanations.

Effort to prevent triggering of Greek public debt credit default swaps: major control fraud with government collusion

S&P has declared that the Greek government is in default.  Most common sense definitions of default — failing to make payments on a timely basis, declaring your intention to default, etc. — have already occurred. Yet the International Swaps and Derivatives Association, in a nonpublic meeting of derivatives bankers, declared this to be a NONDEFAULT!  This leaves those bankers who earned a premium by selling Greek CDS instruments as insurance to the hapless purchasers with pure risk-free profit. This sad story is one of the largest government-sponsored financial swindles of all time!

This saga started in the U.S. with The Commodity Futures Modernization Act of 2000, sponsored by Texas Senator Phil Gramm. According to FusionIQ CEO Barry Ritholtz, Gramm did this as a favor to his wife Wendy who sat on the Board of Directors of Enron, which wanted to trade energy derivatives without oversight. The Bill was rushed through Congress in 2000 and signed into law by President Bill Clinton.

This rule change exempted CDSs from insurance oversight and led to a very specific economic behavioral change: Companies that wrote insurance had to explicitly reserve for expected losses and eventual payout in a conservative manner. Companies that wrote credit default swaps did not. AIG was permitted to underwrite over THREE TRILLION DOLLARS worth of derivatives, without any obligation to maintain any reserves against potential claims, leading to the notorious U.S. government bailout in the fall of 2008.

The E.U. hypocritically argues that they do not want to trigger these CDS instruments by a Greek sovereign default because it would reward ‘speculators’. In fact, these actions are blocking mainly banks hold these instruments as default insurance from being reimbursed for the premium money paid.

What EU authorities really want to avoid is any market-based pricing system outside of their control that objectively rates default risk in the Eurozone. The same perverse logic and self-denial applies to their constant railing against rating agencies that question the solvency of their member states, the viability of their debt load and the wisdom of E.U. debt deflation policies.

The E.U. has a badly undercapitalized banking system, where banks are considered quasi-public utilities and sovereign lending has been heavily subsidized. The single currency euro system makes heavy use of its commercial banks to finance public debt and does not require any reserves for possible losses, exhibiting the same pernicious mentality that led the U.S. authorities to allow their financial institutions to write CDS instruments freely without any backstop for losses. Public policy makers and politicians hide a multitude of sins….

It is said that the majority of the CDS instruments were underwritten by U.S. financial institutions and purchased by E.U. banks with weak balance sheets as a means of cover.

This E.U. political turn-say propaganda about the CDS trigger is just one of many E.U. manipulations that come at the expense of the general public at large. The looming question is whether saving this single currency union is worth the sacrifices of its members, when the burden sharing is so unequal and the results so pernicious in terms of low growth, asset misallocation, credit mispricing and high rates of unemployment.

Greek debt crisis: the Greek political elite just committed national suicide!

Only fools commit a nation to a course of action without providing any emergency alternatives in case of policy failure. Greece has signed off all its sovereign rights to its creditors for a half-baked debt exchange and a €130 billion bailout loan that resembles a Ponzi scheme and that the IMF’s debt viability studies deem insufficient.   Swedish finance minister, Anders Borg, cynically remarked that the agreement was not to solve the Greek problem, but to isolate the Eurozone from it. Greece has nothing to fall back on in the eventuality of a hard default and ejection from the EZ.

 

The third Hellenic Republic is now a dead letter. Greece is effectively a colony of the E.U.! The Greek political elite have sent Greece into oblivion as a nation, even pledging its gold reserves to E.U. Creditors.

The Greek political elite are obsessed with a failed ideology. For the last 30 to 40 years, being part of the E.U. was their sole national strategy. Instead of building a productive economy, opening markets for export of goods and services and developing a sense of national pride from economic accomplishment, the Greek political elite preferred artificial credit enhancement from Eurozone accession and E.U. transfer money to buy votes and support a corrupt, crony capitalism centered on a bloated public sector.

Eurozone membership (effectively a greater Deutschemark zone) wiped out local production and accelerated substantial E.U. import dependence. The artificially low interest rates led to massive asset misallocation and over indebtedness. The hard currency rates destabilized the Greek balance of payments without having currency depreciation or national monetary tools as an adjustment mechanism.

The E.U. initially looked the other way in the interest of economic integration, until Greece lost access to public markets and the crisis started to threaten Europe’s single currency union. The ensuing E.U. austerity measures resulted in classic debt deflation. From a public debt ratio of 110% GDP in October 2009, the ratio soared to the present 170-180% of GDP due to the E.U. program.

The latest E.U. imposed ‘voluntary’ PSI+ scheme forces substantial ‘haircuts’ on private creditors but gives E.U. public creditors seniority. This gives Greece alleged debt sustainability at 120% by 2020 – far higher than the 110% at the outset of the crisis! While the IMF questioned this restructuring scheme, the EU coerced them to recant.

The Greek political elite - and the middle class who supports them - have collectively sadomasochistic consciousness. They derive a perverse joy in the pain resulting from the humiliation and economic carnage that has gone on in Greece: 25% of the Greek private sector is in bankruptcy, There is 20% unemployment and 50% youth unemployment. GDP has compressed 14% (more than the U.K.’s GDP drop in the Great Depression) and is accelerating.

After so many years of living parasitically on E.U. transfer money, mired in ever increasing dependency, the Greek political elite have an atavistic, myopic desire for more Ponzi-type loans and transfer money to remain in what is an economic prison for its citizens with drastically lower living standards for many years ahead.

The European Commission, the ECB and the IMF are only getting away with this carnage in Greece because of a confidence game. They assert in bad faith that the necessary "tough medicine" will restore solvency and the economy will grow again. The reality is that the Greek government has been systematically sacrificing the well-being of its citizens and colluding with foreign creditors to shift the cost and burden onto the Greek people to minimize public creditor losses.

Unfortunately, Eurozone membership on an empty stomach and poverty for a large part of the Greek population is not opium that will last forever. The growing public rage is leading to collapse of the political system and social revolt.

Impact of China real estate slowdown on future cargo demand: is it the turn for the dry bulk sector to disappoint?

Despite present historically low freight rates, dry bulk owners continue to talk up their book with very rosy demand projections, as demonstrated in a recent Capital Link webinar on the dry bulk sector. Yet China observers see a hard landing coming and already  a very serious real estate slow-down. Last November, Chinese steel output was down -8.8% month-on-month, down for the sixth month in row.

Patrick Chovanec, a professor at Tsinghua University's School of Economics and Management, reports that Chinese domestic iron ore prices have plummeted as unused stockpiles have accumulated. In addition, more than one-third of Chinese steelmakers saw serious losses in October and November, and the industry as a whole saw a net loss of RMB920 million ($146 million) excluding investment gains. Chovanec sees real estate affecting as much as 20-25% of Chinese GDP. He makes the case of overall Chinese GDP growth down from 9.2% to 6.6% this year.

Wall Street shipping analysts like Cantor’s Natasha Boyden have begun taking a pessimistic view of 2012, expressing “concerns about a Chinese economic slowdown mean that there are real risks to weaker Chinese steel production growth in 2012” Evercore’s Jonathan Chappell expressed similar concerns about the oil tanker market due to slowing Chinese crude imports.

By contrast, RS Platou like many other shipping industry analysts, projects world trade in dry bulk commodities to increase some 5-6% per annum with iron ore and coal as the strongest drivers for tonnage demand. Participants in a recent Capital Link dry bulk webinar are similarly bullish on dry cargo demand from rising world steel production and fledgling Chinese coastal trade that soaks up dry bulk tonnage.

The conventional dry bulk industry viewpoint is that 2012 will continue to see low freight rates due to order book overhang, rather than any significant drop in demand. The tonnage supply-demand gap will narrow and finally will turn positive in 2013, bringing up rates. Jefferies’ Doug Mavrinac shares this recovery scenario.

No one expected the fall in dry cargo rates to be as large as it has been. Dry cargo owners are now suffering from the same margin pressures as their tanker owner brethren. There is a rash of cargo operators in increasing financial difficulties. The recent Deiulemar case, for example, led to the cancellation of a contract with Paragon for its Supramax tonnage. Paragon’s stock has been below $1 dollar since last fall. Now Cantor is setting a price target of 30 cents for Paragon stock with its Supramax tonnage on the market at rates close to vessel operating costs. Paragon is also facing loan covenant violations from deteriorating loan to hull value ratios.

There are plenty of other listed dry cargo operators who made over-valued purchases in the boom era and are saddled with very high leverage: Eagle Bulk, Excel Maritime Carriers, just to name two. They all have vessel provider business models with heavy exposure to charterer counter party risk and spot rates that cannot cover their debt obligations.

Indeed, 2012 may be the dry bulk sector’s turn to suffer what tanker owners like General Maritime and Frontline have been going through for some time now.

All this makes 2013 a very crucial year. In such a tight scenario, disappointing Chinese growth and lower demand for dry bulk raw materials for its steel and construction industry could mean serious structural market disruption unlike any we have seen in shipping since the 1980’s and aftermath of the petrodollar boom.