Bank Negotiations in 2010

Now that 2009 has come to a close, many shipping companies will have to test loan to value clauses of their debt covenants again. During 2009, vessel values fell somewhere along the lines of 40% to 60% on most classes and at the year-end the banks will come calling. For some owners, this will be the second year in a row they are faced with renegotiating their loans.

Gone are the days that shipping companies could borrow at LIBOR plus spreads of below 1%. Last year, many banks were content to increase margins to around 2% or 3% in order to grant a one year waiver. This year everyone is wondering what will happen, and we have a feeling that banks won't agree to waivers with similar terms this year. While the negotiations will be on an owner to owner basis, and depend on many factors, we can see the banks becoming even more aggressive in their tactics this time around. Last year, banks started pushing for owners to use them for more than just lending, insisting that if there was a stronger "Private Banking" relationship, then they could be more lenient on their demands on the “Corporate” side. Also, if there is any ancillary business, it should be done through them (such as interest rate and currency swaps) in order to keep them happier. Some banks even started to demand being a part of any equity deal a publicly-listed shipping company may do, despite having no expertise and doing nothing to earn those extravagant fees. It may get even worse this year, as banks may start asking for additional capital repayments to get loans in-line with expected vessel values and even higher spreads. With rates where they are, this may mean that private owners may have to dig into their own pockets to comply. It may be a bumpy ride, but it is also important to note that repossessions are still very rare and if the banks start arresting vessels it will cause a spiraling effect that would be more devastating for the industry and the banks themselves at the end of the day.

Eventually, there will be a tipping point with the banks that take a heavy handed approach, and while some owners may not be in a position to do anything about it in the near-term, it will come back to haunt their business eventually. Ship Owners, especially Greek Ship Owners, have a very long memory about such things and when conditions improve and in five year’s time, we may see a few new names at the top of the lending tables.

Has the Golden Boy lost his Lustre?

We hear that Peter Georgopoulos has decided to take time away from his pheasant hunting to hit the road to pitch his latest shipping creation, Baltic Trading, to investors. There has been a lot of talk in the industry about whether this deal will be successful or not and why. The structure of the deal is certainly attractive to the investment world, a company that emulates the strategy of Nordic American Tankers (NAT) in the drybulk sector, and would replace DryShips (DRYS) and Excel Maritime (EXM) as the stock to buy if you want exposure to the Baltic Dry Index (BDI). In truth, DryShips fell out of favor with this group of investors after they started time chartering its drybulk vessels and went out and acquired drillships, and is now the stock to buy if you want exposure in that segment of the shipping space.

However, we hear the deal isn't an easy sell as you would expect as Mr. Georgopoulos' recent track record for investors has taken several hits. First was the timing of General Maritime's (GMR) purchase of Arlington Tankers around the peak of the tanker market, followed by GenCo Shipping and Trading's (GNK) cancellation of six newbuildings when the market collapsed, which in hindsight, may not have been the best move since the market quickly recovered afterwards, and finally culminating with the latest bond offering from General Maritime, which ended up with a yield even higher than the Greek Government's (Ok Greece's yield isn't even that high but it may be in the same range soon enough)!

Peter "Gold" used to be the darling of the investor world, a Greek-American who understood both, Shipping and Wall Street. Over the course of his career he has made a lot of money for his shareholders and partners, however, the collective memory of the investment world is tends to be short and losing investments are remembered much longer than winning ones. This deal is being looks upon as a bellwether in the shipping industry, and if it succeeds expect to see several more shipping IPOs launch in the coming months, both in tankers and in drybulk. However, we view this deal as more of a test of the faith of investors in Mr. Georgopoulos, not the market as a whole and it will be interesting to see what happens.