Sunday, July 26, 2015

A Few Thoughts on Greek Shipping and Taxes

We have all witnessed a lot of Greek drama during the past few weeks as the impasse between the Greek government and its international creditors reached a climax. It now appears that after months of terse negotiations between the two parties, Greece has finally agreed to pass and implement austerity measures in exchange for financial aid.

One of the innocent bystanders in all this has been the Greek shipping community. As part of the broad agreement between Athens and the Eurozone, the Greek government has undertaken to increase the tonnage tax, a flat tax that is assessed each year on all ships that are managed by shipping companies based in Greece.

As expected the shipping community has been up in arms crying foul over the proposed tax and threatening to leave to more tax-friendly locales like Monaco, Dubai, or Singapore. This has made me wonder: what would be the effect of increased tonnage tax on a shipping company’s running costs?

Tonnage tax is the only tax levied by the Greek government, since shipping companies based in Greece are not subject to income taxes on their profits. I have calculated the tonnage taxes per ownership day for three of the largest dry cargo shipping companies based in Athens: Diana Shipping Inc. (DSX), Safe Bulkers Inc. (SB), and Star Bulk Carriers Corp. (SBLK). Tonnage taxes are a component of vessel operating expenses.

Tonnage taxes remain a rather small component of vessel operating expenses, ranging between $113-$153 per day for year 2014 for the three dry-cargo companies in my sample.

Let’s assume for argument’s sake that the Greek government unilaterally doubles the tonnage tax in accordance with the agreement provision. Is this amount really the straw that will break the camel’s back and force a mass exodus of Greek shipping companies to greener pastures? I don’t think so.

But let’s further assume that Greek shipping companies do decide to move to Monaco, Dubai, Singapore, or even London or New York. Have shipping executives done a cost of living comparison between say Monaco or New York City and Athens? The argument that shipping companies will migrate to substantially higher cost locations to avoid tonnage taxes seems ludicrous.

I believe the lobbying on behalf of Greek ship-owners is not about tonnage taxes, but about keeping their income tax-free status. Greek ship-owners are some of the hardest-nosed traders you can find. I don’t believe a tempest in a teapot will cloud their business acumen. I suspect that they will cut a deal with the taxman sooner or later, and if I may add for the benefit of both sides.

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Saturday, July 25, 2015

Why is Diana Shipping Issuing High-Yield Securities?

I recently had the opportunity to analyze two types of securities issued by Diana Shipping Inc. (DSX), namely the 8.875% series B perpetual preferred shares (DSXPRB), and its 8.5% senior notes due on May 20th, 2020 (DSXN). There has been a broad consensus among shipping analysts that these securities offer an attractive low-risk, high-yield profile. Both have consistently traded at or above par.

This should not come as a surprise: Diana Shipping has long been considered the safest play among publicly traded dry-cargo shipping companies. It has high levels of cash reserves & low levels of debt among its peers and vis-à-vis its market capitalization. Such conservatism has allowed the company to sail through a prolonged bear market dating back to 2011.

Which brings the question: If Diana Shipping is in solid financial footing why did it elect to raise $128 million in high yield debt and preferred equity? As of the end of 2014, Diana Shipping had $210 million outstanding in a revolving credit facility with an interest rate of 0.95%. It also had $276 million of bank term loans with a weighted average interest rate of 2.68%. Why issue high-yield securities at an average cost of more than 8.50%?

During the past five years Diana Shipping has nearly doubled its operating fleet by growing organically. To achieve this milestone, it has relied on cash generated from operations and proceeds from long-term debt. However during the same period DSX has experienced a dramatic downward trend in daily revenue per vessel as measured in TCE (time charter equivalent) rate per day.

This has resulted to an equally dramatic reduction of operating cash flow, especially when measured on an ownership day. The reduction in cash provided from operating activities is what has forced the company to seek alternative sources of funds.

Given that operating cash flow is not currently expected to contribute more than $15-$20 million on an annualized basis, the company might have to tap capital markets again to supplement its funding requirements. When this happens, it will be interesting to see whether DSX will issue common equity or rely again on high-yield securities.

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Diana Shipping: Senior Notes or Preferred Shares?

On May 20th Diana Shipping Inc. (DSX) sold 8.5% senior notes in a public offering. The notes have a five-year term, maturing on May 15th, 2020. The total principal amount sold was $63,250,000 including the underwriters’ over allotment option, which was fully exercised. A total of 2,530,000 notes were sold at a par value of $25 per note. The notes are traded on the New York Stock Exchange under the symbol DSXN.

Last year Diana Shipping had raised $65,000,000 in gross proceeds, selling 2,600,000 preferred shares at $25 per share. The 8.875% series B cumulative perpetual shares are also traded on the NYSE under the symbol DSXPRB.

With the exception of the above offerings, Diana Shipping has shunned public markets for several years. Its last equity offering is dating back to May 2009. Since then the dry-cargo shipping company has relied on cash generated from operations & commercial debt to finance its fleet growth. Even though the dry-cargo market is currently very depressed and with no signs for a speedy recovery, Diana Shipping has been the most conservative company among its peers by maintaining a very comfortable level of net debt to total capitalization.

Poor fundamentals for the dry cargo shipping industry in general have raised borrowing costs, which in turn have made Diana’s senior notes and preferred shares very attractive to long-term yield-seeking investors. In this article I will compare the similarities & differences between the two securities. 

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Tuesday, April 28, 2015

The NYFEX Report: Analysis of the Golden Ocean Group Sale & Lease-Back Deal

Last Monday Golden Ocean Group Limited (GOGL) announced the sale & leaseback of eight modern cape size bulk carriers to Ship Finance International Limited (SFL).

The eight vessels have an average age of approximately five years and are scheduled for delivery to Ship Finance in July. The vessels were sold for $34 million apiece, and will be chartered back to Golden Ocean for ten years at base rate of $17,600 for the first seven years and $14,900 for the remaining three years. Golden Ocean will have the option (but not the obligation) to buy the vessels back from Ship Finance at the end of the 10-year term for an average $14 million per vessel.

The deal comes with a twist: Ship Finance will also receive a 33% profit sharing if prevailing spot rates during the 10-year period are in excess of the base rate. A profit sharing agreement is identical to a call option on the spot market for cape size vessels. What makes it particularly attractive is that spot cape size rates are the most volatile in the dry cargo industry. 

Assuming an operating cost of $8,000 per day (inclusive of G&A and dry-dock repairs) and 97.50% capacity utilization, the base rate yields an internal rate of return (IRR) of 4.25%. But if we add the value of the profit sharing agreement, using the Black-Scholes pricing formula, the deal yields an IRR of 6%.

Golden Ocean will be able to effectively borrow at a relatively low rate of 4.25% and at the same time improve its leverage ratio. I presume that the charters will be classified as operating leases and be taken off the books. Golden Ocean will give away a 33% profit sharing above the base hire, but in effect it is writing a covered option, since it will retain commercial control of the vessels.

I believe the deal is a win-win for both companies. Ship Finance will get cash flow visibility and profit sharing potential. Golden Ocean will get off-balance-sheet financing at a reasonable rate and will keep commercial control of the eight cape size vessels.

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Saturday, April 4, 2015

The NYFEX Report: Dryships Sells Its Suezmax & Aframax Fleets

Last January Dryships Inc. (DRYS) filed an IPO registration statement with the SEC to spin-off its tanker fleet into a separate publicly traded company. Yesterday Dryships completely reversed course and announced instead the sale of its tanker fleet to entities related to CEO George Economou. It also formally withdrew its registration statement.

What prompted such stunning reversal is anyone’s guess, particularly since the transaction is between related-parties. It has been the worst kept secret on Wall Street that publicly traded shipping companies are rife with related-party transactions. I find such transactions an anathema to proper corporate governance. It is true that related-party transactions must be disclosed and executed at arm’s length. But company insiders always get to choose when to do them, and in shipping timing is key to financial success.

Allegations aside, is this a good deal to shareholders or not? In this article I will analyze the transaction from an arm’s length, cash flow and earnings point of view.

The company’s tanker fleet consists of four suezmax tankers with an average age of 2.9 years, and six aframax tankers with an average age of 3.2 years. The suezxmax tankers were sold en-bloc for $245 million, or an average price of $61.25 million per vessel.

The aframax tankers were also sold en-bloc for $291 million but on a contingent basis. By allowing the buyers to confirm the agreement by June 30th, 2015, Dryships effectively wrote a three-month call option at an average strike price of $48.5 million per vessel.

Dryships has been in dire financial straits for some time now. If both deals are consummated, they will provide the company with much needed free cash to the tune of $275 million, all in a relatively short amount of time. Yes, the originally proposed IPO would have alleviated any red flags from related-party transactions. It might have even achieved a better return for shareholders if the company had waited for the right timing. But I am afraid that Dryships does not have the luxury of time on its side. For this reason alone it might be better to deal with the devil you know than the devil you don’t. 

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Thursday, March 19, 2015

The NYFEX Report: A Survey of Suezmax Shipping Companies

In this installment of The NYFEX Report (a newsletter aiming to provide expert equity research analysis & commentary on the shipping industry) I will look into publicly trading companies that have material ownership interests in suezmax vessels.

The recent collapse in oil prices may have been bad news for oil producers but not so much for ship-owners. Tanker shipping companies have been the beneficiaries of increased demand for oil transportation to take advantage of low prices.

Another positive factor working in ship-owners favor is the moderate order book for new-building deliveries. This stands in sharp contrast to the dry cargo industry, which has been plagued by a chronic tonnage over-supply and still has a significant order book to digest.

Whether the increased demand for oil transportation is just temporary to replenish inventories at low prices or the beginning of a secular up-cycle remains to be seen. Until then tanker ship-owners can put a long-overdue smile in their faces and enjoy the ride.

Suezmaxes are million barrel tankers than are employed in a variety of medium-range trades. Despite the sharp reduction of North American imports from West Africa, suezmaxes have managed to develop new trading routes, particularly in Asia, and even compete in long-haul trades with VLCCs.

This article will provide a survey of publicly traded companies that own large suezmax fleets and can offer investors exposure to that particular market.

There are currently four such companies: Euronav (EURN), Nordic American Tankers (NAT), Frontline (FRO), and Tsakos Energy Navigation (TNP). I have also included in the survey privately held Principal Maritime (PMAR). Principal Maritime has filed a registration statement with the SEC for a pending IPO on the New York Stock Exchange.

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Wednesday, March 18, 2015

North American Tankers: Is The Dividend Sustainable?

Nordic American Tankers (NAT) has been an attractive stock to yield-seeking investors for quite some time. The company last quarter raised its dividend to $0.22 per share from $0.14 per share. Based on yesterday’s closing price of $10.31, you can own a stock that currently yields 8.6%. Is this a good deal or not?

The company’s management likes to remind us that since NAT’s founding in 1997 it has paid a dividend for 70 consecutive quarters, which seems like an eternity in the shipping industry. The only problem is that if you decide to buy the stock today it will not be for its dividend history, but for its capacity to pay dividends in the future. 

In this article I will focus on the company’s dividend policy but instead of analyzing the past I will try to answer a more poignant question: Is the current dividend sustainable over the next five years? I will try to answer this question first by looking at the company’s capacity to generate cash from operations. But I will also look at the company’s fleet and the capital expenditure requirements to replace its ageing vessels.
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The Expensive Shipping News For Wall Street's Smart Money

The shipping industry, in particular the dry bulk sector, has provided an excellent, if somewhat expensive, education for Wall Street’s smart money over the past six years.

Here is the link to a recent Financial Times article on dry cargo shipping and private equity.

THE NYFEX Report: The IPO of Navios Maritime Midstream Partners

The IPO of Navios Maritime Midstream Partners (NAP) is the fourth public flotation by Navios Group, a conglomerate headed by Angeliki Frangou. It has been preceded by Navios Maritime Partners Inc. (NM), the group's holding company and flagship, Navios Maritime Partners L.P. (NMM), a master limited partnership with ownership interests in dry-cargo bulk carriers and container ships, and Navios Maritime Acquisition Corp. (NNA), an owner of crude oil & product carriers and sponsor of the recent IPO.

As with any master limited partnership, NAP has a sponsor or general partner, which holds a 2% interest, and limited partners that are called common unit holders. The sponsor of NAP is a subsidiary of Navios Maritime Acquisition Corp. Following the IPO, Navios Maritime Acquisition will own a 57.5% interest in the partnership, including the 2% general partner interest.

The partnership was formed to own crude oil tankers under long-term time charters, or employment contracts. Its initial fleet consists of four VLCCs, all acquired from the sponsor. Based on the IPO prospectus, the company aims to employ its vessels on long-term charters of at least five years.

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