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.

Continue reading the full article published on Seeking Alpha

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. 

Continue reading the full article published on Seeking Alpha