Rough couple of weeks, random thoughts - IPOs first

The team here at the Tanker Insider has been travelling a lot this month and hasn't had time to post. A lot has happened since our last posting, Baltic Trading (BALT) and Crude Carriers (CRU) priced their IPOs, Alma pulled their offering, Aframax rates shot up to over $50k p/d in the Med, and $80k for the Baltic (ice), and came crashing back down to reality a week later. VL and Suez earnings have entered the doldrums of spring. There were also some goings on in New York and Connecticut that appeared well-attended, and the rumblings are that Tankers is the space to be in over the next two years. So much to talk about, but so little time!!!

Let's start with observations on recent IPOs. Our thoughts are that the investment banks misjudged the amount of interest out there for new Shipping Deals. BALT got priced because of Peter G.'s reputation in the investment community. Investors trust him; he has made good deals and bad deals, but has always been up front with investors and stays in front of them so he has earned their trust. CRU should have been an easy sell from an owner that also has a solid reputation with investors but turned into a very hard sell because of attacks from another tanker company, NAT, about the structure and other "fees" related to the deal. Fee structures in shipping have always been an issue with investors, and the only way to alleviate any concerns about fees is to show that your running costs are either in-line or lower than your peers. Unfortunately for Crude, there was no historical financials to show how competitive their operating costs are, so they were an easy target that couldn't defend themselves. The deal got done despite all the negative sentiment following the deal and its stock has traded down since the offering. All this culminated to haunt Alma, and it wasn't so lucky. After the Crude IPO, Alma followed on its heels and was caught in the middle of a storm. The spotlight shined even brighter on Alma after CRU traded down, and issues about its fee structure, the newbuilding delivery schedule, and the mixed fleet became conversations following the deal in press and in private as they were trying to get the deal priced. It proved to be too much for a fragile IPO market and the deal was pulled in the end. Our take is that the mixed fleets along with the prospect of waiting for mid-2011 for the Suexmaxes on T/C to be delivered were the toughest aspects of the deal for institutional investors, and the negative press probably killed retail interest.

Now cut to today and Scorpio Tanker, the Italian Tanker company, that priced last night slightly below the range. Scorpio was masterfully scripted as the deal for people who want to invest in tankers but are unsure if the timing is correct. Their whole pitch was "Give us the money now and we will invest it when the time is right". Only someone with the reputation of Robert Bugbee could have gotten away with such a pitch in today's markets and they did a great job getting the deal done.

What does this mean for future IPOs? We would guess that the markets will be quiet at least until the summer, and that BALT, CRU and STNG will have to show some positive momentum before we see another shipping IPO.

Tanker IPO Rumblings

Over the past few days, we have heard rumblings about several shipping IPOs in the pipeline. BDI has been out there, a Tanker Company, Scorpio Tankers, announced their IPO last night, and we hear a few others may be following. The new model appears to be; small fleet with low debt, strong management team, sell a large portion of the company, and use proceeds to buy cheap assets at "distressed" levels. BDI has been looking for such vessels for a while now, and others are out there searching on both the dry and wet side so that they can try and push through the IPO window over the next six months.

Gone are the high dividend payout model, and we say good riddance! Almost every high-dividend payout tanker model was doomed to fail from the start (Arlington and DHT being the most prominent). Paying out all your cash is a sure way to a slow death since they are dependent on the capital markets to raise money to replenish their fleet. The only company that succeeds at this is NAT since they have NO Debt and a management team that has executed this model for a long time now, but NAT's return on equity remains low compared to others in the industry and if the market was to recover in a big way, its valuation would revert back to below its levered peers.

Growth is always important for shipping companies, and we were always surprised about how popular the "high dividend model" was as it is a great tool for investment bankers to guarentee fees (as companies must continually do follow-on offerings), for shipowners to get high premiums to their Net Asset Values, but not great as for long-term shareholders as these companies couldn't retain enough of its cash to either grow the fleet or pay down debt if/when the markets turned sour as they did in 2009 and ended up having to restructure their dividend policies or sell out. Dividends are important, but a prudent dividend strategy (ala TNP) should be prefered to wild dividend swings although it doesn't seem that way.

We think these new tanker deals will hinge on investor's trust that the management teams will be able to effectively execute their business plans. So it will be important to have names that are respected in the industry behind these deals. However, with the current tanker market backdrop, it will be interesting to see how much appetite there will be for these types of deals.