Thursday, December 19, 2013

OSG's Tax Liability - $199 Million Less Than Previously Thought

Beleaguered tanker company Overseas Shipholding Group Inc. (OSG), saw today its stock jumping 36%, amid very heavy trading. The stock closed at $6.05 per share, up $1.60 for the day. The company is under Chapter 11 bankruptcy protection, and its stock is trading in the pink sheets under the symbol OSGIQ, after having been delisted from the New York Stock Exchange.

A major reason for the company’s bankruptcy petition in November 2012 was an IRS claim for approximately $463 million in back taxes. Well, after today’s market close, the company disclosed in a SEC filing that the IRS had amended its claim. The new amount will now be for only $264 million. That should be a good reason for the stock to jump.

One can only assume that the latest SEC filing was the best-kept secret for the day.

Tuesday, December 17, 2013

Diana Containerships Sells 18-Year Old Panamax Containership for Demolition

Diana Containerships Inc. (DCIX) took everybody by surprise last Monday, when it announced the sale of its 18-year old Panamax containership "Spinel" (Ex "APL Spinel") for demolition. The "Spinel" fetched $9.65 million before deduction for brokerage commissions. The 1996-built vessel had been purchased from American President Lines (APL) less than two years ago in a $30 million sale-lease back deal. As part of the deal, APL had agreed to charter the vessel for two years at a daily gross rate of $24,750. The "Spinel" had just been redelivered to Diana from that charter.

This is the fourth time that Diana Containerships is scrapping a vessel following her redelivery from a sale-lease back deal. Vessels "Maersk Madrid", "Maersk Malacca", & "Maersk Merlion" had been scraped earlier this year.

Diana Containerships had previously booked a loss of $36.9 million on the sale of the three Maersk vessels. This time will be no different, as I expect the company to record an accounting loss on the sale of the vessel of approximately $10.5 million. On a cash flow basis, Diana Containerships generated a negative IRR (internal rate or return) of -29%.

The negative investment return underlines once more the huge residual risk of acquiring vessels at premium prices in sale-lease back transactions. This was true for the 1989-1990 built Maesrk vessels, and it is also true for the 1996-built "Spinel". Unfortunately for Diana Containerships, the "Spinel" might not be the end to this vicious cycle.

The 1995-built sister-ship "APL Sardonyx" is scheduled for redelivery from APL as early as this coming January. The vessel had been purchased simultaneously with the "Spinel" on identical terms. One has to wonder, will it have the same fate as the "Spinel"? 

The article was published on gCaptain on December 18, 2013

Panamax Asset Value (5 years old)

Thursday, December 12, 2013

Scorpio Bulkers Inc. Raises $305 Million in NYSE Debut

Earlier this week I had the opportunity to write on the coming IPO of Scorpio Bulkers Inc. (SALT). As expected, Scorpio priced its IPO after the closing of business on Wednesday. The company was able to sell 31.3 million shares, more than double the originally offered size of 15.5 million, underlying strong demand from investors. The offering price of $9.75 per share remained the same as had been originally indicated. 

Scorpio raised $305 million in gross proceeds or approximately $282 million after deduction of underwriting fees and other expenses. The net haul of $282 million, cash on hand of $595 million, and a proposed $330 million credit facility, will go a long way towards funding the remaining capital expenditures of $1.364 billion for the company’s 52 new-building vessel program.

As is customary in public offerings, the underwriters have been granted a 30-day overallotment option to purchase an additional 4.695 million shares (or 15% of the number of shares sold). It would be very interesting to see how the stock will trade over the coming weeks, because this will determine the fate of the overallotment option and the ultimate success of the IPO.

Scorpio’s shares commenced trading on the New York Stock Exchange today under the symbol SALT, and closed at $9.50 per share (down 2.56% for the day), amid heavy trading of almost 10 million shares.

The article was published on gCaptain on December 12, 2013.

Tuesday, December 10, 2013

The Coming IPO of Scorpio Bulkers Inc.

This week I turn my attention to the coming IPO of Scorpio Bulkers Inc., an ambitious dry-cargo start-up led by the same management team as Scorpio Tankers Inc. (STNG). Scorpio Bulkers announced its initial public offering of 15,500,000 shares last Friday, fittingly on the same day Orthodox Christians were celebrating Saint Nicholas, patron saint of sailors & merchants. 

The IPO is due later this week, and shares of Scorpio Bulkers will concurrently commence trading on the New York Stock Exchange under the symbol SALT. The IPO will culminate a frenzy of activity since the company’s founding in March 2013. During the past nine months, Scorpio Bulkers has entered into contracts for 52 new-building vessels (28 Ultramax, 21 Kamsarmax, and 3 Capes) with a total price tag of $1.591 billion, or an average $30.6 million per vessel. The vessels are scheduled for delivery in 2015-2016, with the exception of two Kamsarmax vessels that will be delivered next year.

These blockbuster deals easily surpass the previous record for similar orders, set by Eagle Bulk Shipping Inc. (EGLE) in July 2007, when it agreed to acquire 26 new-building Supramax vessels for $1.1 billion, or $42.3 million per vessel.

During the same period, the company has also raised $824 million in net proceeds from three private placements in Europe. With its coming debut in the US, Scorpio Bulkers is aiming to raise an additional $139 million in net proceeds, assuming an IPO price of $9.75 per share. The final tally will depend on the actual IPO price and the total number of shares sold, including any exercise of overallotment option by the underwriters.

None of the new-building orders has any fixed employment attached. In fact, the company’s business strategy is to trade the vessels in the spot market, through commercial pools that are yet to be formed. It remains to be seen how efficiently these commercial pools will handle spot chartering requirements for 52 vessels. By way of comparison, I must note that when Eagle Bulk Shipping acquired its new-building contracts, 21 of its 26 vessels had long-term employments attached.

It would appear that Scorpio Bulkers is primarily aiming to capitalize on a medium-term cyclical recovery in shipping asset values. Perhaps its real goal is to sell most of the 52 new-buildings before they are actually delivered from the yard, or soon thereafter.

This article will provide a layman’s guide to the company’s IPO. I will start with the pricing of the IPO, and what it means to an investor to purchase shares at the assumed $9.75 per share. Scorpio Bulkers may have ordered its initial fleet at an average price of $30.6 million per vessel, but an investor buying its shares at $9.75 a pop will be acquiring the fleet at a higher implied cost.

Based on information provided in its IPO prospectus, and assuming that Scorpio sells 15.5 million shares at $9.75 per share, it will have approximately $734.4 million to fund its new-building program. Scorpio has $1.364 billion remaining in unpaid capital expenditures, putting its funding gap at approximately $630 million. To meet this gap, the company may issue additional shares or rely on debt finance. (In fact Scorpio disclosed in its prospectus a stand-by commitment for a $330 million credit facility, secured by 22 vessels under construction). For this analysis, I assume that Scorpio will rely on debt finance to meet its funding gap.

Immediately following its IPO, Scorpio will have approximately 116.9 million shares outstanding (including 4.155 million restricted shares awarded to management), valuing its equity at $1.140 billion at the assumed $9.75 per share. After taking into consideration the funding gap, an investor willing to buy shares at this price level will implicitly peg the company’s enterprise value at $1.77 billion, or the equivalent cost of $34 million per vessel. This is a nice 12.8% mark-up from the average contract price.

There are three factors explaining this mark-up. First, the IPO will have a dilutive effect to new investors, since existing shareholders purchased their shares at lower prices (ranging from $8.00 to $9.21). Second, the company incurred approximately $37.6 million in underwriting fees and other expenses (including the IPO). And third, Scorpio awarded 4.155 million restricted shares to members of its management.

In the following graph, I show the relationship between the IPO price and implicit cost per vessel. The graph might come handy to an investor who views Scorpio Bulkers as an asset play, and would want to translate dollars per share into cost per vessel.

Opponents of Scorpio’s business plan will dismiss it as a risky all-in punt on a cyclical recovery. They will argue that the cyclical recovery itself is undermined by excessive orders for new tonnage, and it may be lukewarm if it materializes at all.

Proponents of Scorpio’s business plan will point to low contract prices, a still reasonable order book, and advanced eco-designs that will provide sizable fuel cost savings.

I look forward to Scorpio’s initial public offering on Wall Street this week, and plan to follow up on this exciting new venture for our industry.

The article was published on gCaptain on December 9, 2013

Tuesday, December 3, 2013

Star Bulk Carriers Corp. - A Case Study on Private Equity Groups (Part II)

Last week I had the opportunity to do a case study on Navigator Holdings Ltd., and how WL Ross & Co. recapitalized the privately held shipping company prior to its successful IPO. This week I will look at a different strategy: recapitalizing Star Bulk Carriers Corp., a publicly traded shipping company. Star Bulk is based in Athens, Greece and specializes in dry-cargo bulk carriers, as an owner and third-party manager. Its shares are traded on NASDAQ under the symbol SBLK.

Star Bulk Carriers traces its history in its predecessor Star Maritime Acquisition Corp. Star Maritime began life in May 2005 as a blank check company in search of suitable vessel acquisitions in the shipping industry. In December 2005, Star Maritime raised $200 million through an IPO and commenced trading on the American Stock Exchange under the symbol SEA. Almost two years later on December 3, 2007, its successor company Star Bulk Carriers Corp. began trading on NASDAQ, after having agreed to acquire a fleet of eight bulk carriers from Hong Kong-based TMT Co. Ltd.

On the first day of trading the shares closed at $15.34 per share, or $230.10 on a reverse-split adjusted basis, valuing the company’s equity in excess of $600 million. But following its debut, Star Bulk Carriers saw its stock price & market capitalization drifting lower & lower, in correlation with declining shipping asset values. By the time management effected a 1-for-15 reverse stock split on October 15, 2012, Star Bulk Carriers had been a penny stock valued at approximately $45 million.

Even though management had successfully restructured its loan agreements to avoid a covenant breach and preserve cash, Star Bulk closed the books for year 2012 with $224 million in debt and in desperate need for fresh equity.

What happened next is a case study on how to radically recapitalize a publicly traded company, while preserving the right of existing shareholders to get a piece of the action. Instead of doing a private placement with a select group of strategic investors, Star Bulk embarked on a rights issue that gave existing shareholders the option to invest alongside strategic investors on the same terms and conditions.

In July 2013, Star Bulk raised approximately $80 million in gross proceeds through a rights issue at $5.35 per share, backstopped by Monarch Alternative Capital L.P. and Oaktree Capital Management L.P., among other investors. The two private equity groups got their feet wet by investing $20 million each.

In October 2013, Star Bulk raised an additional $71 million in gross proceeds, this time through a fully subscribed public offering at $8.80 per share. Oaktree & Monarch doubled down by investing an additional $20 million each.

Following the equity fundraisers, the two private equity groups emerged as the largest shareholders of Star Bulk, each with board representation rights. By the time the dust had settled, Monarch and Oaktree together were in control of 42.2% of the company.

Why was Star Bulk able to entice two of the savviest investors to commit a total of $80 million in equity capital? Because it offered value at a discounted price, combined with a growth story.

Starting with equity valuation, Star Bulk had conservatively a net asset value of $48.7 million, or $9.01 per share as of December 31, 2012, without taking into consideration the market premium of its time charters. Corroborating this analysis, the company’s CEO during an investor presentation in NYC in March 2013 estimated the premium of the time charters at $33 million, and pegged the company’s net asset value at $89.6 million or $16.43 per share.

Unlike shares of other shipping companies in dire financial straits that had a negative NAV, Star Bulk’s shares still had value left in them. In addition, management proceeded with a backstopped rights offering at a subscription price of $5.35 per share. The price level represented a generous discount to its NAV and was also well below its stock trading range. To this date the stock has never closed below the subscription price. 

Not only were the rights attractively priced, they were also equitable to the existing shareholders. Existing shareholders were given the option to participate on the same terms and conditions as the underwriting private equity groups. In fact, approximately 44% of rights given to existing shareholders were exercised.

Yet value for money was just one half of the secret ingredient. The other half was the company’s strategic plan to grow and modernize the fleet. Armed with approximately $150 million in fresh equity, Star Bulk embarked on a $365 million new-building spree, ordering nine fuel-efficient vessels, with deliveries starting in the second half of 2015. In addition, it acquired two modern Ultramax vessels for $58.1 million scheduled for delivery in December 2013 and January 2014 respectively.

The new-building program and recent acquisitions will radically transform the company. Star Bulk owned a fleet of 13 vessels, with a total DWT capacity of 1,290,602 MT, and an average age of 10.7 years, as of September 30, 2013. In three years time, and assuming no further asset acquisitions or divestitures, the company is projected to own a fleet of 24 vessels, with a total DWT capacity of 2,640,526 MT, and an average age of just 8.1 years.

This is the kind of growth scenario that Wall Street loves to hear. The shares of Star Bulk closed yesterday at $9.36 per share. Its market capitalization now sits comfortably at over $270 million. Star Bulk Carriers Corp. has planted the seeds to survive the current tough environment and prosper in the upcoming cyclical recovery in the shipping industry. Investors that had done their homework were able to jump on its bandwagon. I wish them and the management of Star Bulk Carriers Corp. fair winds and following seas.

The article was published on gCaptain on December 4, 2013

Correction: In the original article, I inadvertently omitted Oaktree's $20 million investment in the company's October 2013 equity offering.  The article has been updated to reflect Oaktree's additional investment.

Monday, November 25, 2013

Navigator Holdings Ltd. - A Case Study on Private Equity Groups (Part I)

The foray of private equity groups in the shipping industry has been a focal point of discussion in industry forums, ever since the high-profile investments by celebrated investor Wilbur Ross in privately held Diamond S Shipping Group (a company specializing in suezmax crude oil carriers & medium range petroleum product tankers) & Navigator Holdings Ltd. (a company specializing in liquefied gas carriers). Today, Diamond S Shipping remains a privately held company, whereas Navigator Holdings (NVGS) just consummated a very successful IPO on NYSE, selling a total of 12 million shares at $19 per share, at the high end of its expected $17-$19 price range.

Industry pundits, myself included, have attempted to explain the motivating factor behind private equity’s love affair with the shipping industry (answer: high return on investment), and the investment, monetizing, and exit strategies to maximize such return. Typically, private equity groups make sizable investments in privately held companies, aiming to monetize their investment by a subsequent IPO, and eventually divest their holdings, ideally in a three to five year time frame from their original investment.

This seems to be the strategy followed by WL Ross & Co., the main investment vehicle of Wilbur Ross. Since his first investment in Navigator Holdings in November 2011, Wilbur Ross amassed a total of 27.2 million shares in three separate transactions, at an average cost of $8.73 per share.

By the time Navigator Holdings filed for its IPO, Wilbur Ross was the single largest shareholder in the company, owning a total of 28,040,508 shares or 60.6% of total shares outstanding.

Navigator Holdings sold a total of 12 million shares to the public on November 20th, 2013. Included in the total number of shares sold were 2.97 million shares offered by a selling shareholder. The selling shareholder was, you guessed it, none other than WL Ross & Co. In fact, if the underwriters exercise their option to acquire an additional 1.8 million shares from the selling shareholder (a scenario that seems very likely given the positive reception by the market so far), WL Ross & Co. stands to divest a total of 4.77 million shares, or a little over 17% of its holdings. 

Given that the net proceeds after underwriting commissions & discounts were $17.67 per share, WL Ross & Co. stands to generate a cool return on investment of just over 100% in less than two years. Not a bad start for an investment in a staid industry.

As I begin devouring the IPO prospectus for an insight into the liquefied petroleum gas (LPG) industry and the company’s intrinsic valuation, (I plan to revert on these in a future article), I cannot help but notice the absence of any related-party items. Wilbur Ross gave the keynote speech at this year’s Marine Money Conference in NYC, and was vocal about the need for the shipping industry to adopt proper corporate governance practices. Sir, for your business acumen I offer you my compliments, but for your integrity I owe you my gratitude.

The full article was published on on November 25, 2013.  The link to the full article is as follows:

Update:  On Tuesday November 26, 2013, Navigator Holdings Ltd announced the closing of its IPO, including the full exercise of underwriters' option to purchase additional common shares.  As per my prediction, WL Ross & Co. was able to divest 4.77 million shares in this very successful IPO, but still remains the largest shareholder controlling 42.1% of the company.

Wednesday, August 7, 2013

Eagle Bulk Shipping: Settlement Gain for 2013 Q2

During the second quarter of 2013, Eagle Bulk Shipping (EGLE) was issued 538,751 shares of Korea Line Corporation (KLC), as part of its final settlement with the beleaguered Korean charterer. I estimate that EGLE will report a one-time settlement gain of $26,400,000 or $1.56 per share to reflect the incremental gain from the issuance of the above shares.

Monday, July 1, 2013

Reflections From Marine Money Week - Part I

I had the opportunity to attend Marine Money Week in New York last week, the industry’s premier trade show for all things related to ship finance. The underlying theme for this year’s conference was capital restructuring and the role that private equity may play.

The brutal freight market over the past several years has left shipping companies struggling to meet their debt obligations. In many cases the market value of their vessels is not enough to repay total debt outstanding, leaving little or no value for their shareholders. Witness what happened with Excel Maritime’s proposed Chapter 11 reorganization, or last week’s bankruptcy filings for STX Pan Ocean and TMT.

But some shipping companies have fared better than others, having charted a more conservative route. They relied less on borrowed money during the boom years and/or they employed their vessels in long-term charters with first class charterers. These companies have a different issue to address: How to modernize their fleets for their long-term prosperity.

To achieve this goal shipping companies need to raise fresh capital. If they are publicly traded, they have the advantage of tapping capital markets for their funding requirements. Wall Street is there to offer a wide array of suitable products: For example, high-yield debt, convertible notes, preferred securities, or even plain vanilla common shares.

In recent weeks, Tsakos Energy Navigation (TNP) and Safe Bulkers (SB) issued preferred shares raising a total of $90 million in gross proceeds. In a win-win situation, they were able to offer a very attractive 8% coupon rate, without diluting common shareholders. Baltic Trading Limited (BALT) raised $23 million in gross proceeds in a fully subscribed offering of common shares.

And last week, Star Bulk Carriers (SBLK) commenced a $75 million rights offering in a massive equity recapitalization, that showcases one way private equity can make inroads in the shipping industry.

Star Bulk Carriers is an Athens-based dry-cargo shipping company. It owns a fleet of 13 vessels, consisting of eight supramax and five cape-size vessels, with an average age of 10.4 years and a total DWT capacity of approximately 1,290,000 MT.

Rights offering are common practice in Europe but are used less frequently in the US. I believe Star Bulk chose an equitable way to raise new funds, offering its shareholders the right, but not the obligation, to invest alongside private equity groups and company insiders on the same terms and conditions.

This is how Star Bulk’s rights offering works. Common shareholders as of May 15th, 2013 have been given the right to purchase 2.5957 new shares for each existing share at $5.35 per share. Star Bulk currently has 5,400,810 shares outstanding. With the rights offering there will be 14,018,882 new shares issued. Please note the rights are not transferable and only existing investors as of May 15th, 2013 have the right purchase new shares.

If existing shareholders choose not to exercise their right then private equity groups together with company insiders are standing by to pick up the slack. The consortium of private equity groups includes among others Oaktree Capital Management, Monarch Alternative Capital, Blueshore Global Equity Fund, & Far View Partners.

Prior to the offering, Star Bulk had an equity market capitalization of approximately $31 million. Following the offering it will increase its market capitalization to $106 million. Depending on the participation of existing shareholders and the minimum purchase rights granted to the stand-by investors, the company may sell up to an additional 8,744,282 new shares, thus raising in total more than $120 million in fresh capital.

In one stroke Star Bulk will be able to shore up its balance sheet, meet its end of the bargain with its lenders, and secure new funds to order fuel-efficient new-building vessels. More importantly it granted the right to existing shareholders to equitably participate in the offering, scoring a high grade in proper corporate governance.

To Read the full article as published on gCaptain

Thursday, June 13, 2013

Random Thoughts On Excel Maritime's Debt Restructuring

Troubled Athens-based shipping company Excel Maritime (EXM) revealed in yesterday’s press release one of industry’s worst kept secrets: The company is insolvent. In a 255 page-long report filed with the SEC, outlining a proposed pre-packaged bankruptcy reorganization plan, Excel Maritime admitted that there is so little value left in the company, even senior debt holders can hope to recover only about 77% of their $771 million debt outstanding.

Holders of the company’s $163 million convertible notes will be less fortunate, holding the bag for about two cents on the dollar. As for common shareholders whose name does not rhyme with Panayotides, Excel Maritime’s Chairman, forget about them. They stand to get nothing, nada, zilch, τιποτα. In a matter-of-fact summary of the treatment of various claims against the company in a bankruptcy reorganization, EXM disclosed in its own words that “any equity security in Excel, including but not limited to stock, warrants and options, will be cancelled”, and holders of such securities “will not retain any property or receive any recovery under the plan”.

As I begin scouring the lengthy report I would like to share some initial thoughts about EXM, that may also relate to two other troubled shipping companies, Eagle Bulk Shipping (EGLE), and Genco Shipping & Trading (GNK), that are teetering on the brink of insolvency.

Big Fleet Acquisitions Lead To Big Headaches.  Excel Maritime consummated an aggressive takeover of Quintana Maritime back in April 2008. It transformed itself overnight from a ho-hum owner to one of the largest dry bulk shipping companies in the industry. It increased its fleet size from 18 vessels to 47 vessels plus an additional 8 new-buildings.

Eagle Bulk Shipping had pulled a similar stunt a few months earlier, when it paid Kyrini $150 million just to acquire previously signed contracts for 26 new-building vessels. Genco, a company created as the result of a fleet acquisition in 2005, went all-in in 2010 when it acquired a total of 18 vessels from Metrostar and Bourbon.

Was the industry consolidated because of these three big acquisitions? Were the companies able to earn an above market rate because they controlled more vessels? Were they able to achieve economies of scale? I am afraid the answer to all these questions is no. Despite what many corporate executives and investment bankers want us to believe, growth by itself seldom works well in the shipping industry.

A Rising Tide Cannot Lift A Sunken Boat.  There has recently been renewed optimism among investors in publicly traded shipping companies. Catch phrases like cyclical recovery, freight market reversion to the mean, etc have created the impression that a return to profitability is just around the corner. Investors argue that stock prices are forward-looking mechanisms and should reflect this eventual recovery. It is true that when markets eventually recover shareholders will benefit, assuming they are still around.

The problem is many companies are heavily indebted and have no value left for shareholders. They would have to restructure their balance sheets long before the industry recovery. In most cases, witness the proposed EXM restructuring deal, this means wiping out the hoi polloi.

Not All Shareholders Are Created Equal.  At the darkest hour, when most common shareholders of EXM are about to get wiped out, company insider & majority shareholder Gabriel Panayotides lives to see another day. He gets to apply $20 million of funds already committed to the company, plus an additional $10 million, to acquire 60% of the new equity. He gets an option, should things go well over the next two years, to raise its equity stake to 75% for an additional $20 million. During this initial two-year period, he will also keep control of the company by having the right to appoint a majority of board members. Now here is a fine example of value creation that unfortunately is unavailable to the rest of us.

I like to be as optimistic as the next ship-owner and I believe that the supply overhang will not stay with us forever. But I also like to be realistic that many companies have dug themselves so deep into the hole, there will be nothing left for their shareholders when the recovery comes. Unless you are a related party it is not worth looking at these companies as sound investments.

Continue Reading the full article as published on gCaptain

Friday, June 7, 2013

Safe Bulkers Preferred Shares Priced At 8%

Last Wednesday I had the opportunity to write an article about the epidemic, more like trend to be exact, of Greek shipping companies issuing preferred shares to boost their equity capital. As per my projection Safe Bulkers (SB) announced the pricing of its preferred shares after the closing of markets on Thursday. SB issued a total of 1,600,000 preferred shares at $25 per share. The shares pay an annual dividend of 8%, the same dividend rate like compatriot Tsakos Energy Navigation (TNP) that had priced its securities almost a month ago.

CEO Polys Hajioannou bought 800,000 shares or 50% of total shares issued, aligning once more his interests with those of shareholders, common and preferred.

I have already analyzed in my previous article the main terms of these hybrid securities and motivation behind their issuance. The important thing to remember is that the preferred shares are very likely to be called, or redeemed, at the company’s discretion, as early as three years after payment of the first dividend. All going well, an investor stands to earn an annual dividend of 8% for the next three to five years and get his/her money back at the end of the period.

How does this dividend yield compare with the current yield on the common shares? The current annualized dividend rate is $0.20 per share or approximately 4%. (SB closed at $5.01 on Thursday). Unlike the preferred shares, the dividend on the common shares is not guaranteed. But common shareholders have a residual claim on the company’s assets and stand to benefit if freight markets improve over the next three years. They also stand to lose money if the stock price falls under $5.01, and have a junior claim if things go awry (not that I think or wish they will).

Potential investors might wish to consider allocating their dollars in both securities. Overall, it is a very nice dilemma to have, because I like the company’s management and especially its low cost structure.

Continue Reading the full article as published on gCaptain

Wednesday, June 5, 2013

Preferred Shares For Sale From Greece's Finest

During the past few weeks, two of Greece’s most respectable shipping companies, namely Tsakos Energy Navigation (TNP) and Safe Bulkers (SB), have decided to issue preferred securities, to fortify their equity capital and better deal with capital expenditure requirements and debt-covenant compliance.

Tsakos Energy Navigation was the first to take the plunge, issuing 2,000,000 shares of Series-B Cumulative Redeemable Perpetual Preferred Shares at $25 per share, for total gross proceeds of $50 million. The preferred shares pay an annual dividend of 8.0%. Last Monday, Safe Bulkers made an announcement for an IPO of similar type securities. I expect Safe Bulkers to successfully price the new shares later this week.

In the table below I have outlined the main characteristics of the preferred shares. In this article I will provide a layman’s guide to the these hybrid securities.

These securities are preferred because in case of liquidation they have a senior claim to all outstanding common shares. For both companies, the liquidation preference is $25 per share, which means that if you purchase these shares at par, you stand to collect your investment back before common shareholders get a dime. They are cumulative, because preferred shareholders have a claim on any unpaid dividend.

Now here comes the tricky part. Why are they both redeemable and perpetual? Let’s start with perpetuity. In theory, these shares never expire. In practice there is nothing perpetual about them. Each security issue comes with an optional redemption period. In the case of TNP the optional redemption period starts 5 years after the payment of the first dividend. In the case of SB it starts sooner, only three years after the payment of the first dividend.

Unless the companies redeem the preferred shares during the optional redemption period, the dividend rate starts going up, potentially rising up to 30% per annum, assuming there is any money left. Because of the stiff dividend escalation clause, I believe the plan is for either company to redeem the shares as soon as possible & legally permissible.

Will they be a good investment opportunity? Preferred shares are a funny species of hybrid security, sharing characteristics with both debt and equity. They look like equity, because their principal is not guaranteed. But they behave like debt, because their holders stand to collect a fixed annual dividend. Since they are considered riskier that debt, the dividend yield is higher that debt interest. Tsakos Energy Navigation will pay an 8.0% annual dividend. Safe Bulkers has not priced its securities yet, and it would be interesting to see if their annual dividend will be higher or lower than 8.0%, especially since their optional redemption period kicks in two years earlier.

Continue Reading the full article as published on gCaptain

Eagle Bulk Shipping: Digging Through The Surprise First Quarter Earnings

Eagle Bulk Shipping (EGLE) announced on May 15th a surprise first quarter profit of $1.4 million or $0.08 per share. The surprise profit was due to a dramatic increase in quarterly revenues to $73.6 million from $54.8 million a year ago. In comparison, the street was expecting on average a loss of $2.03 per share.

In my previous Seeking Alpha article, I had argued that the earnings surprise was due to the company’s settlement with Korea Line Corporation, and had analyzed the cash value of the settlement. In this article I will look closely at how exactly the Korea Line settlement affected the accounting earnings for the quarter, and how its earnings would look in the absence of such settlement. I find it very important to understand the accounting impact of the Korea Line settlement, because it is a one-time, non-recurring event.

Based on my analysis, the KLC settlement affected the income statement in two ways. First, it increased revenues by $32.8 million and generated an operating gain of $3.3 million on the termination of the KLC time charter agreements.

Second, it generated an expense of $3 million, following an impairment loss of previously issued KLC shares. The expense was classified as other income/expense in the income statement.

The above items resulted to a net gain of $33.1 million, which is in line with what EGLE had reported in its earnings conference call.

In addition to the one-time items following the KLC settlement, EGLE also recognized a one-time benefit of $3,438,145, which reduced its general & administrative expenses for the quarter. This one-time item does not appear to be related to the KLC charters, and it was a reversal of bad-debt allowance that the company had taken a year ago. Nevertheless, it is a non-recurring item.

The net effect of all above items was a gain of $36.6 million. Without the non-recurring items, EGLE would have reported a net loss of $35.2 million or ($2.08) per share, below the analysts’ consensus of ($2.01) per share. The company would also have reported TCE revenues (that is revenues less voyage expenses, a non US GAAP measure that is commonly used in the shipping industry) of just $31.2 million, again below analysts’ consensus of $35.6 million. I must note that the average TCE, excluding the one-time items, was a paltry $7,746 per day, which is below its cash-break even rate of approximately $9,000.

Continue Reading the full article as published on Seeking Alpha

Monday, May 27, 2013

Buy Baltic Trading: Dry Cargo Shipping Exposure At A Discount To NAV

Baltic Trading is a subsidiary of Genco Shipping & Trading, and is separately listed on NYSE. It owns a modern fleet of nine vessels with an aggregate DWT capacity of 672,000 MT and an average age of 3.4 years as of March 31st, 2013. GNK has a 24.8% ownership stake in the company, but through a dual class of shares it controls the majority of voting rights. GNK also exercises full managerial control.

But whereas GNK has been saddled with a massive debt load (its total debt outstanding at the parent level was $1,437 million as of March 31st, please also note I have examined GNK’s debt situation in my recent Seeking Alpha article), BALT had a relatively manageable $101.25 million in debt outstanding as of the same date. More importantly BALT is not required to make debt repayments before November 2015. 

What has attracted me to BALT is its value proposition. The stock has been trading at a discount to its Net Asset Value (NAV), as calculated based on fair market values and not accounting (book) values. Nobody knows when a cyclical recovery in the dry-cargo shipping industry will get under way, and the supply-demand fundamentals don’t exactly look rosy. Yet, if I want to execute a buy-and-hold strategy, I might as well acquire assets at bargain prices.

Monday, May 20, 2013

Diana Containerships Inc. - Earnings Preview 2013 Q1

How to Boost Your Bottom Line Out Of Thin Air

Let’s assume that SHIPCO, a fictional shipping company, purchases a new-building vessel with a three-year time charter attached. At the time of purchase, the fair value of similar vessels on a charter-free basis, i.e. without any time charters attached, was $30 million. But the company paid only $27 million for the vessel, a bargain price at the time. Why the $3 million discount you might ask. Well, at the time of purchase the three-year time charter attached was considered below the market rate for a vessel worth $30 million. US GAAP and the auditors step in and guide the company on how to record the transaction in the books. Here is the accounting entry.

Please note that the vessel is recorded in the books not at $27 million, the price SHIPCO actually paid, but at $30 million, the price SHIPCO should have paid if no time charter had been attached.
Please also note that SHIPCO has created a corresponding liability (Fair Value Below Contract Value of T/C Acquired) to balance the difference between what was actually paid and what should have been paid. 

Since we have established the book value of the vessel at $30 million, courtesy of US GAAP, let’s see how that cost is being depreciated over time. Vessels are typically depreciated over a period of 25 years. Since the book value was recorded at $3 million more that the actual acquisition price, that means SHIPCO has to take an additional depreciation expense of $120,000 every year for the next 25 years. Here is the annual accounting entry for the extra depreciation expense. Please note that SHIPCO will make the same entry for the next 25 years.

Now comes the juicy part. What about that little liability SHIPCO had recorded in the books, when it first acquired the vessel. Remember, the $3 million “Fair Value Below Contract Value of T/C Acquired”. No worries, US GAAP is here to guide us. The liability will be amortized over three years (the term of the charter). Since SHIPCO has to report a higher depreciation expense, it is entitled to report higher revenue to compensate for it. Here is the annual accounting entry for the revenue recognition. Please note that SHIPCO will only make this entry for the next three years, the duration of the time-charter.

Assuming you are still reading this and haven’t completely lost it, you will realize a small difference over the timing of revenue and expense recognition. Over time, well over the next 25 years assuming both SHIPCO and yours truly are still around, expense and revenue will cancel each other out, as it should. Remember the $3 million figure is purely fictional, an accounting gimmick really to try to assess the “true” vessel value at the time of acquisition. 

But, whereas depreciation expense will be recognized over 25 years, revenue will only be amortized over three years. In layman’s terms, SHIPCO will be able to boost its net income over the next three years to the tune of $880,000 per year. Not bad for a day’s work I suppose.

If SHIPCO wants to continue boosting its bottom line out of thin air, it would be foolish not to buy more vessels like the first one. The trick is out of the bag. The more vessels SHIPCO buys with lousy charters, the more money it makes in the short term, at least on paper.

This series of articles on ship finance is the intellectual property of Lambros Papaeconomou. It is a work in progress and is fictional. Any resemblance to real shipping companies or events is purely coincidental.

Safe Bulkers: A Success Story in an Otherwise Uninspiring Dry Bulk Shipping Market

Safe Bulkers Inc. (SB) is a rare gem among the doom and gloom surrounding high-profile dry-cargo shipping companies. SB owns a fleet of 26 dry-cargo vessels, plus eight vessels under construction. It is mainly a panamax owner, since 31 of its 34 vessels are panamax, kamsarmax or post-panamax type. Yet it is the two cape size vessels currently on the water, plus a new-building vessel scheduled for delivery in the first half of 2014, that hold the most promise for the company to stay above water in the near and medium term.

The key to the company’s success in the cape size sector has been to only acquire vessels with long-term charters attached. It has been very careful in securing fixed-rate contracts with first class charterers, and has spread these contracts among different parties. The result has been a diversified portfolio of long-term charters that combines strong cash flow visibility with minimal charter party risk.

Assuming a cash break-even rate of $8,500 per day (the figure includes vessel operating expenses, dry-dock maintenance, G&A expenses, and cash interest expense), the three charters alone can generate an operating cash flow of approximately $22 million per year. To put this figure in perspective, the current portion of the company’s long-term debt as of March 31st, 2013 was $22.576 million. This means SB uses approximately $22.5 million every year to pay down its debt. The operating cash flow generated from the three cape size charters alone is sufficient to make all current scheduled debt payments for the entire fleet.

The company has never disclosed the charterers of its three cape size vessels. But during last Thursday’s conference call to discuss the earnings results for the first quarter of 2013, CEO Polys Hajioannou shed enough light to assuage investors of the credit risk involved.

The CEO stated that one of the vessels has been fixed with the biggest steel mill company in the world. The second vessel has been fixed with the biggest coal power producer in India. Finally the third vessel, presumably the one under construction, has been fixed with a first class shipping company based in France.

Based on my analysis of the company’s counterparties, as disclosed in its latest earnings presentation, I believe that the charterers of the three cape size vessels are most probably Arcelor Mittal, Tata, and Louis Dreyfous Armateurs respectively, all of which are arguably first-class signatures.

Safe Bulkers is a success story in a rather uninspiring stock market for dry-cargo shipping companies. It is a low-cost premier service provider in a cutthroat industry. It can rely on long-term fixed-rate charters to pay its bills during the downturn. The interests of management are perfectly aligned with those of the shareholders. It may not be as high profile as other shipping companies that have sizable free floats, but this fact alone makes it an ideal candidate for a value-seeking investor.

Friday, May 17, 2013

Eagle Bulk Shipping: Enjoy The Good News For Now But Tread Very Carefully

Eagle Bulk Shipping (EGLE), a dry-cargo shipping company that owns 45 supramax vessels with an average age of 6.0 years as of March 31st, 2013, reported earnings for the first quarter on May 15th, that caught many investors by surprise, managing to snap an eight-quarter losing streak. For the first quarter of 2013, EGLE generated net income of $1.4 million or $0.08 per share. The stock yesterday bounced with gusto rising intra-day almost 67% to $5.93 per share, amid very heavy trading. 

What prompted this explosive reaction were more details about the company’s settlement with troubled charterer Korea Line Corporation (KLC). Under the latest terms of the settlement, EGLE received a combination of cash, long-term note receivable, shares in KLC, and a release from a $3.5 million accrued bunker liability. Based on my analysis, the total cash value of the settlement with KLC is approximately $40.2 million or $2.32 per share.

However, the company’s long-term debt has continued to climb with the $7.1 million addition of payment-in-kind interest during the first quarter. As of March 31st, 2013 total debt outstanding stood at $1,152 million. The current fair market value of the company’s fleet is not sufficient to pay-off the debt outstanding. Based on regulatory filings with the SEC, the company’s fleet as of December 31st, 2012 was valued at only $882 million, i.e. a shortfall of approximately $368 million.

There is no denying that Sophocles Zoullas-led Eagle Bulk Shipping had a very good day yesterday, squeezing $40 million in value from troubled Korea Line Corporation. But EGLE does not have any more tricks like this to dig itself from under its $368 million debt shortfall. Investors that were lucky enough to realize over-sized short-term gains may want to tread very carefully and seriously consider caching-in their chips.

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Thursday, May 9, 2013

Genco Shipping & Trading Could Use Some Extra Cash

How the mighty have fallen. Genco Shipping & Trading Limited (GNK), the one-time jewel in Peter Georgiopoulos’ shipping empire, may very well be the next shoe to drop among high-profile shipping companies heading for bankruptcy court.

Today Genco, a dry-cargo shipping company that owns a fleet of 53 vessels, is a shell of its former self. Its stock price has fallen from an all-time high of $84 per share in May 2008 to Tuesday’s all-time intra-day low of $1.12 per share. Its market capitalization has shrunk from approximately $2.4 billion to just above $60 million.

What caused Tuesday’s sell-off amid very heavy trading volume, (the stock did manage to close at $1.44 per share, down only 18.64% for the day) were renewed concerns about the company’s ability to serve its debt beginning in 2014, including rumors that it may have hired bankruptcy specialists to guide it through restructuring talks with its lenders.

Because of the uncertainty in meeting its covenants and servicing its debt, GNK had to reclassify its total debt outstanding as current liabilities, which has a lot to do with the recent sell-off in the stock.
I believe that GNK will hit the wall well before the first quarter of 2014, and possibly as early as this summer. As always the devil is hiding in the details. GNK appears to have enough cash to sustain the current market environment for a few more quarters. Its total cash on hand as of March 31st, 2013 was $65.2 million. But, after adjusting for $39.75 million (or $750,000 per vessel) that the company must maintain to meet its minimum cash covenant, and another $1 million that belongs to its subsidiary Baltic Trading Limited (BALT), that leaves GNK with just about $25 million in breathing room, before it has to go hat-in-hand back to its lenders.

To put this in perspective, during the first quarter of 2013, GNK actually burned through $17.7 million in cash to fund its operating shortfall!

Monday, April 29, 2013

Baltic Trading Limited - Earnings Preview 2013 Q1

Baltic Trading Limited (BALT) is scheduled to report earnings for the quarter ending March 31st, 2013, after market closing on Wednesday May 1st. I estimate BALT to report a net loss of ($5,000,000) for the quarter or the equivalent of ($0.22) per share. TCE revenues were negatively affected by continuing softness in spot freight markets, especially in the cape size sector. I estimate that TCE revenues were $5,625,000. The fleet average TCE per day on this basis would be $6,950, below the company’s operating cash break-even rate of about $7,900. I expect BALT to report negative EBITDA & Operating Cash Flow for the quarter.

BALT has moderate debt leverage. Its debt outstanding is $101,250,000. As of March 31st, 2013, the company had the capacity to borrow an additional $28,750,000 under its credit facility, including $23,500,000 for working capital purposes. The credit facility expires in November 2016. Based on the facility’s amortization schedule and current debt outstanding, BALT does not have any scheduled debt repayments before November 2015.

BALT has in the past declared variable quarterly cash dividends based on cash available for distribution, but also after taking into account the company’s cash flow, liquidity and capital resources. Based on the company’s formula for cash available for distribution, BALT would not have the capacity to declare a cash distribution this quarter. But after taking into account that: (I) BALT has paid a consecutive dividend since its IPO in March 2010, and (II) BALT has previously declared dividends in excess of cash available for distribution, I expect BALT to declare a cash distribution of $0.01 per share for the first quarter.

BALT operates a diversified fleet of 9 dry cargo vessels, consisting of 3 handy size vessels, 4 supramax size vessels and two cape size vessels, with a total DWT capacity of approximately 672,000 MT, and an average age of 3.4 years as of March 31st, 2013.

Based on Monday’s closing price of $3.42 per share, BALT has a market capitalization of $79,000,000.

The stock has consistently traded below its net asset value (NAV) for the past six quarters. Based on figures provided by BALT in its annual report filed with the SEC, the fair market value of its fleet at year-end was $204,000,000. On this basis, the company’s NAV was $4.62 per share.

I expect BALT to continue treading water for the foreseeable future, since all its vessels are trading in the spot market. Also with scheduled dry-docks coming due this year, I expect the company’s cash break-even rate to increase. But I like the stock for its moderate debt level and discount to its Net Asset Value.

Thursday, April 25, 2013

Diana Containerships – Lessons Learned From The Disposal of Maersk Madrid

Maersk Madrid was delivered in June 2011, and commenced a two-year charter at a gross rate of $21,450 per day. Diana had purchased the vessel for $22.5 million, as part of a $70.5 million en-block deal for three panamax containerships. Following the delivery of the vessels, Diana had invested an additional $2.2 million to improve efficiency & safety onboard.

Diana decided to scrap the 24-year old vessel Maersk Madrid this month for $8.8 million.  In the table below I summarize the profit/loss and IRR analysis for Maersk Madrid. Taking into account daily operating expenses of $9,000 per day, and general & administrative expenses of $1,300 per day, the investment generated a negative IRR of 22%. On an undiscounted basis, Diana will be out of pocket approximately $7 million, a substantial loss considering the initial purchase price of $22.5 million.

Bruised investors will learn some very helpful lessons. First, charter rates based on a sale/lease-back deal are extremely hard to replicate once their original term is up. 

Wednesday, March 13, 2013

Diana Shipping Inc. - Earnings Estimate For 2012 Q4

For the quarter ended December 31st, 2012, I estimate that Diana Shipping Inc. (NYSE: DSX) generated basic earnings per common share of $0.07 on net income of $5,500,000. I estimate that TCE Revenues were $46,400,000 and the average TCE rate was $17,800.

As of December 31st, 2012, I estimate that book capitalization was $1.730 billion including shareholders’ equity of $1.270 billion, and debt outstanding of $460 million. Its debt to capitalization ratio stood at 26.7%. I also estimate that DSX had approximately $452 million cash on hand as of the end of the quarter.

Following the acquisition of M/V Polymnia in Nov 2012, and M/V Myrto & M/V Maia in Jan & Feb 2013, the company currently owns a fleet of 32 dry cargo vessels (consisting of 17 panamax size vessels, two kamsarmax vessels, three post-panamax vessels, and 10 cape size vessels), with a total DWT carrying capacity of 3,541,000 MT, and an average age per vessel of 6.7 years.

The company has on order two panamax vessels, scheduled for delivery in the fourth quarter of 2013, at a contract price of $29 million per vessel. Diana Shipping also has a 10.4% interest in Diana Containerships.

Monday, March 11, 2013

Buy Safe Bulkers: Smart Management With Skin In The Game

Safe Bulkers (SB), a small-cap dry cargo shipping company, is a rare gem for an investor looking to add exposure in this sector. I like the company a lot for its modern fleet, smart hands-on management team, and above all because its CEO has skin in the game. I also believe that the current valuation level (SB closed Wednesday at $3.93 per share) is an excellent point for a new entry or to add to an existing position.

Safe Bulkers is perfectly positioned to navigate through another challenging year for the dry cargo shipping industry. It is a low-cost provider of first-class transportation services, it has the capacity to generate operating surpluses from a balanced mix of fixed-rate and spot market charters, and is well positioned to meet its capital requirements for year 2013 while maintaining a quarterly dividend of $0.05 per share. At a current dividend yield of over 5%, it represents a safe bet on a market recovery, and I am a buyer at this price level.

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Wednesday, February 20, 2013

Baltic Trading Is Still A Buy: Earnings Preview For 2012 Q4

I had recommended Baltic Trading (BALT) last August as a value stock, as it was trading at a discount to its net asset value (NAV, as defined later). In this article, I will review the current financial position of BALT, including my estimates for its upcoming earnings results. Baltic Trading is scheduled to report earnings for the fourth quarter of 2012 on Wednesday, February 20th, after the market closing.

BALT is a dry-cargo shipping company that owns a fleet of 9 vessels ranging in DWT capacity from 34,000 MT to 178,000 MT. The average age of the fleet as of December 31st, 2012 was 3.2 years, so BALT owns one of the most modern fleets among publicly traded shipping companies. Based on last Friday's closing price of $3.36 per share, the company has a market capitalization of $77.3 million.

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Diana Containerships Earnings Preview For 2012 Q4

Diana Containerships (DCIX) is scheduled to report earnings for the fourth quarter of 2012 on Tuesday, Feb. 19. In this article I will provide an overview of the company's current financial position, including a preview of its upcoming earnings results.

Diana Containerships owns and operates a fleet of 10 panamax containerships, with an aggregate carrying capacity of 42,151 TEU and an average age of 14.8 years as of Dec. 31, 2012. The company was initially formed as a subsidiary of Diana Shipping (DSX) and was spun off as an independent entity in January 2011. DSX has retained a 10.4% equity stake in the company, in addition to full managerial control. Since the spin-off, DCIX has tapped the capital markets twice, raising a total of $184 million in gross proceeds.

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Nordic American Tankers Is A Sucker's Bet

For many years Nordic American Tankers (NAT) has been a favorite shipping stock, particularly among dividend-yield chasing investors, by offering outsized cash distributions to its shareholders regardless of freight market conditions.

But since current management took over operational control of the company in October 2004, its stock price has steadily drifted lower and lower, generating huge capital losses that have trampled in size the supposedly generous cash payouts.

In this article I will analyze how the company has managed to maintain a high-dividend payout strategy (while pursuing an aggressive fleet expansion at the same time) and why such strategy is unsustainable. In short, I will showcase why investing in NAT is a prime example of a sucker bet.

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