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.

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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.

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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.

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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.

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