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.