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Birds of a Feather by BarryParker May 14, 2009 04:30 AM Companies with debt in place, but running afoul of their bankers have really three courses of action to make things right. They can sell assets (using the cash to pay down debt), reduce the calls on cash (such as operating costs, but also dividends to shareholders) to free up more operating inflows for debt service, or they can raise equity. That third alternative- raising equity in the public capital markets, has kept financiers busy in recent months. Some of these forays come after companies have struck deals with their banks on covenant waivers. Others are motivated by pure opportunism- equity markets have brightened a bit, and drybulk freight has stopped going down. At the other end of the spectrum, we see are seeing infusions necessitated by weakened balance sheets and linked, at least implicitly, to the demands of bankers. Diana Shipping (DSX), which raised $100 Million in early May, is in the enviable position of not requiring the money. Following the shares offering, leverage is calculated to be at a very conservative 22% on a balance sheet of almost US$1.2 Billion. Diana has been talking about a role as a "consolidator", so it is basically building up a warchest. Elsewhere in the market, Navios Maritime Partners ("NMM"), a partnership rather than a corporation, raised US$32 Million in a sale of limited partner units. This funding will go towards funding of a Capesize bulk carrier to be purchased from Navios Maritime Holdings ("NM") for $130 Million in mid 2009. NMM will also draw upon available credit resources. Outside of New York, there are also fresh offerings afoot. Financial restructuring at Golden Ocean ("GOGL"), with a raft of unfunded newbuildings on order, involved cancellations of some orders, deferral of others, agreements with lenders, and a new share issue totaling the equivalent of $110 Million. Reports have Nordic American Tankers raising money, and a share offering is said to be in the works by Pacific Basin. Dryships ("DRYS"), in the process of repairing broken covenants with its banks, has now gone to the equity markets for a third "At the Market"(ATM) equity offering. In the ATM structure, shares aggregating an overall monetary amount are sold. After having successfully sold $500 Million of shares over a three month period (actually its second ATM, announced in January), DRYS then announced another US$475 Million ATM in early May. The trade-off for a bolstered balance sheet is that a rising number of issued shares will "dilute" existing equity holders. In early May, 2009, some 185 million shares were outstanding, versus 43 million last November (before the first ATM offering). At mid May shares prices shy of $10/share, the latest ATM could provide an additional 50 million shares. Other companies have also laid the groundwork for ATM offerings; reporting rules mean that sales can be reported after the fact. At the highest level- shipping is hurt by deflation. Commodity price slides have pounded shipping from all directions- including the values of actual ships. Vessel values, where they can be determined (which is a whole other question) have slid to levels that violate covenants built into shipping loans. For listed companies, whose actions we can observe in the marketplace, the banks have been granting waivers of breached loan/ value (LTV) covenants (in return for higher margins or adjusted repayment schedule) rather than forcing a prompt repayment of the loan. At least for now, waivers rather than foreclosures have been part of the path forward. Shipping's financial turmoil may now be shifting to the container trades, where reduced economic growth is multiplied in arriving at TEUs moving at sea. For ships already in layup, after months of no cash flow- the hard choices are now beginning. Media reports that German owners of small container vessels (and potentially not so small, if building plans are not cancelled) with CSAV exposure are being pushed to agree to lower charter hires from the Chilean giant- which charters in much of its tonnage. In return, foregone cash inflows would be converted into CSAV equity. Such solutions, reminiscent of bankruptcy solutions where debt is converted into equity, may ultimately prove o have been the prudent course of action, but "ultimately" could take a long time. In an episode of the cycle yet to emerge, private equity, which may be financial investors or possibly a shipowner, will become an important factor in the next phases of the cycle. But, so far, these potential buyers have done little swooping because of the borrowers and bankers mainly agreeing. These buyers seem to feel it's "too early" for asset purchases, but clearly they are massing on the sidelines. They all hate the word "vulture"- but those big birds sure ain't sparrows. Tags: Comments (0)
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