First International

No turkey for shipping stocks

Paul Slater
Tuesday 29 November 2011

A WEEK is a long time in politics and two weeks is an eternity in shipping. Certainly the last two weeks up to Thanksgiving.
The workings of the US bankruptcy system are playing out in full public view as Omega and Marco Polo jostle with creditors in the courts of Houston and New York.

Two new Chapter 11 filings were recorded. Trailer Bridge, a small barge operator founded by container pioneer Malcom Maclean, serving the Dominican Republic and Puerto Rico, and General Maritime, the tanker owner founded by Peter Georgiopoulos with some 57 tankers, which ran out of cash and sought the protection of the bankruptcy courts in New York.

Meanwhile, several companies reported that they were in negotiations with their bankers:
-Torm saw its shares reach an all time low of $0.54 in New York, as the company reported a third quarter loss of $70m and announced it was working on a range of financial initiatives. As several analysts observed, its proposed rights issue is unlikely to be successful unless the company’s major shareholder, Gabriel Panayotides’s Alpha Trust, underwrites it.
Saddled with the expensive purchase of OMI in 2007, in conjunction with TK, the company has struggled through the declining products tanker markets which show no sign of improvement.

Meanwhile Mr Panayotides’ other public company Excel Maritime Carriers saw its shares reach a new low of $1.63 following a Standard & Poor’s downgrade and then withdrawal of its debt rating.

Newlead is working with the Genmar adviser Moelis & Co to help solve its financial problems. Its shares have barely traded recently and its market cap is now less than $6m.One of its tankers was arrested in the US, over the Thanksgiving holiday, for non-payment of crew wages
Eagle Bulk Shipping’s shares continue to come under pressure, reaching an all time low of $1.05 mid-week.

On November 17 the company received approval by a narrow margin of its proposal to effect a reverse stock split of the company’s shares, presumably to avoid a possible de-listing if the shares trade below $1 for a six-month period.

The company also obtained shareholder approval for its 2011 Equity Incentive Plan.

The company needs to restructure its whole operations and finances to survive a continuing depressed market for its specialised bulk carriers. It may need to shrink its large fleet or break it up into smaller parts to attract investors.

The most dramatic news came from Frontline, which announced terrible third quarter results and disclosed it was actively exploring a complete restructuring of the company. Its shares were off more than 50% on the week ending November 25, and 90% on the year to date.

Clearly the Genmar actions and Frontline announcement sent shockwaves through the tanker sector as investors braced themselves for continuing losses in the fourth quarter. OSG saw its shares dip below $10, Nordic American touched $12 and the Navios trio of companies also set new lows.
The future requires radical actions.

As we come to the end of the fourth quarter and the worst year for shipping in decades, the auditors of public companies in both the wet and dry sectors will face the challenges of impairment charges on ship’s values and doubts over the ability of many companies to continue to trade.

These issues will add to the stress already prevalent in many boardrooms, as directors grapple with their own fiduciary responsibilities ,while their companies continue to trade in the face of dwindling cash and mounting losses with the prospect of worse to come in 2012.

Shipping will continue to expand as new economies emerge and the older ones slowly recover from their various recessions. Meanwhile, the way forward is to bring shipping companies back into line with the prevailing economics.
This will require shrinking balance sheets by bringing asset values into line with market values and persuading lenders to reduce their outstanding loans to match the revised asset values.

The banks could convert some of their debt reduction to equity, conditional on new equity coming in, and thereby create a newly capitalised structure able to operate profitably in the prevailing markets and benefit from any recovery in the future.

This radical approach is unlikely to be achieved with either the present management or the founding shareholders of the companies remaining involved. The main stumbling blocks to restructuring have been inexperienced management and the insider shareholders who are reluctant to relinquish control or give up their various financial benefits.
They should have begun the restructuring process at least two years ago, but have been in a state of constant denial as markets have continued to decline.

Now they are faced with the alternative of foreclosure and sale of the assets as banks run out of patience with the lack of any plan for restructuring. This brings with it the complete collapse of the company and any equity value it may have had.

The plus for the industry as a whole is a new breed of financially sound companies with experienced management running economically priced ships on long-term contracts with charterers who benefit from lower freight rates. This will also put pressure on shipyards to reduce capacity and lower prices in line with the new market conditions.

Paul Slater is chairman of First International

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