Insider’s Perspective: Marine Money Week – Part I

Marine Money and Clarkson Capital Markets at the NASDAQ Closing Bell during Marine Money Week, June 19, 2013. Photo courtesy Marine Money.
Marine Money and Clarkson Capital Markets at the NASDAQ Closing Bell during Marine Money Week, June 19, 2013. Photo courtesy Marine Money.

I had the opportunity to attend Marine Money Week in New York last week, the industry’s premier trade show for all things related to ship finance.  The underlying theme for this year’s conference was capital restructuring and the role that private equity may play.

The brutal freight market over the past several years has left shipping companies struggling to meet their debt obligations.  In many cases, the market value of their vessels is not enough to repay total debt outstanding, leaving little or no value for their shareholders.  Witness what happened with Excel Maritime’s proposed Chapter 11 reorganization, or last week’s bankruptcy filings for STX Pan Ocean and TMT.

But some shipping companies have fared better than others, having charted a more conservative route.  They relied less on borrowed money during the boom years and/or they employed their vessels in long-term charters with first class charterers.  These companies have a different issue to address: How to modernize their fleets for their long-term prosperity.

To achieve this goal, shipping companies need to raise fresh capital.  If they are publicly traded, they have the advantage of tapping capital markets for their funding requirements.  Wall Street is there to offer a wide array of suitable products: for example high-yield debt, convertible notes, preferred securities, or even plain vanilla common shares.

In recent weeks, Tsakos Energy Navigation (TNP) and Safe Bulkers (SB) issued preferred shares raising a total of $90 million in gross proceeds.  In a win-win situation, they were able to offer a very attractive 8% coupon rate, without diluting common shareholders.  Baltic Trading Limited (BALT) raised $23 million in gross proceeds in a fully subscribed offering of common shares.

And last week, Star Bulk Carriers (SBLK) commenced a $75 million rights offering in a massive equity recapitalization, that showcases one way private equity can make inroads in the shipping industry.  Star Bulk Carriers is an Athens-based dry-cargo shipping company.  It owns a fleet of 13 vessels, consisting of eight supramax and five cape-size vessels, with an average age of 10.4 years and a total DWT capacity of approximately 1,290,000 MT.

Rights offering are common practice in Europe but are used less frequently in the US.  I believe Star Bulk chose an equitable way to raise new funds, offering its shareholders the right, but not the obligation, to invest alongside private equity groups and company insiders on the same terms and conditions.

This is how Star Bulk’s rights offering works. Common shareholders as of May 15th, 2013 have been given the right to purchase 2.5957 new shares for each existing share at $5.35 per share.  Star Bulk currently has 5,400,810 shares outstanding.  With the rights offering there will be 14,018,882 new shares issued. Please note the rights are not transferable and only existing investors as of May 15th, 2013 have the right purchase new shares.

If existing shareholders choose not to exercise their right then private equity groups together with company insiders are standing by to pick up the slack.  The consortium of private equity groups includes among others Oaktree Capital Management, Monarch Alternative Capital, Blueshore Global Equity Fund, & Far View Partners.

Prior to the offering, Star Bulk had an equity market capitalization of approximately $31 million.  Following the offering it will increase its market capitalization to $106 million.  Depending on the participation of existing shareholders and the minimum purchase rights granted to the stand-by investors, the company may sell up to an additional 8,744,282 new shares, thus raising in total more than $120 million in fresh capital.

In one stroke Star Bulk will be able to shore up its balance sheet, meet its end of the bargain with its lenders, and secure new funds to order fuel-efficient new-building vessels.  More importantly it granted the right to existing shareholders to equitably participate in the offering, scoring a high grade in proper corporate governance.