Knightsbridge Tankers and Frontline 2012 announced today the two companies had reached an agreement to combine Frontline 2012’s remaining fleet 25 capesize bulk carriers with Knightsbridge. This deal will result in the formation of a new publicly-listed shipping company under the Knightsbridge brand providing investors a pure-play option into the iron ore shipping market. This new company will have a fleet of 39 modern vessels including Frontline 2012’s twenty-five newbuildings and Knightsbridge’s four new ships which are expected to be delivered over the next two years.
“We believe in the Capesize market going forward,” commented Knightsbridge Tankers’ Chairman Ola Lorentzon in a phone call this morning.
Within the dry bulk sector however, commercial risk is everywhere. Knightsbridge and many other dry bulk shippers have highlighted in recent exchange filings numerous factors that influence the demand for their vessels, many (if not all) of which are completely out of their control.
Lorentzon notes that his company’s fundamental strength, when it comes to dealing with this risk, is the relatively low loan-to-value financing on his fleet of ships, and a strong belief that the iron ore market will need more vessels.
Bringing up the point that China’s compounded annual growth rate of steel production is predicted to slow, Lorentzon believes that growth may slow down, however it still means that there will be greater demand for iron ore on a year to year basis. Along with increased need for iron ore in China, he notes that a greater portion of the iron ore will be sourced from outside of China from Australia and Brazil, further supporting the capesize shipping market.
A recent article by Reuters columnist Clyde Russell supports Lorentzon’s claims while highlighting the fact that Chinese ore is more expensive to mine and the quality of the ore is significantly less than it what it was a decade ago.
Globally, companies such as BHP Billiton, Vale, and Fortescue Metals Group are all targeting higher production figures which indicate that the mining community is ramping up to support greater future iron ore shipments to China, and elsewhere.
Commenting on the deal with Frontline 2012, Lorentzon states:
“The Frontline 2012 transaction will be a transformative step for the Company and will make us the leading US listed Capesize owner. With a fleet of 39 modern vessels, of which 34 are “Eco design” fuel efficient vessels, which could achieve higher time charter equivalent earnings than existing vessels in any market situation and a targeted breakeven rate below $15,000 per day, we are setting the groundwork to be in a unique position to benefit from an expected dry bulk market recovery. As the market recovers we expect this transaction to be highly accretive to our cash flow per share and give us the ability to pay high dividend to our shareholders.”
Chairman of Frontline 2012, John Fredriksen, notes: “We are very pleased to be able to enter into this transaction with Knightsbridge for the remaining Capesize fleet of 25 newbuidings, which is in line with our strategic plan of creating pure plays in different shipping segments through consolidation, divestments and spin offs.”
Details – via Knightsbridge
Under the agreement in principle, the exchange ratio for the acquisition and share issuance will be based on NAV using March 31, 2014 broker values. The Knightsbridge/Frontline 2012 exchange ratio will be 44%/56%. Accordingly, Knightsbridge has agreed to issue 62.0 million shares to Frontline 2012. The closing will be executed in two stages, with 31.0 million shares expected to be issued around September 15, 2014 and 31.0 million shares around March 15, 2015. Following the issuance of the shares, Knightsbridge will have 111 million shares outstanding. Including the Knightsbridge shares already owned by Frontline 2012 and Hemen, Frontline 2012 will own 70%, other existing Knightsbridge shareholders 27% and Hemen 3% of Knightsbridge.
It is expected that Frontline 2012 will distribute its shares in Knightsbridge to its shareholders over time.
The net remaining estimated Capex of the 25 Capesize newbuildings is $894 million. Assuming average debt of around $33 million per vessel the newbuilding program in Knightsbridge is expected to be fully financed. The Knightsbridge’s Board of Directors will seek to optimize Knightsbridge’s capital structure following the transaction to achieve cash breakeven rates below $15,000 per day.