Restructuring example: Golden Ocean

M.Cap = $170M, EV = $810M, P/E = 0.5x, EV/EBITDA = 1.8x

Saturday, April 04, 2009

Golden Ocean Group Limited is a Bermuda based dry bulk shipping company. Golden Ocean de-merged from Frontline Ltd.
in the end of 2004 and was listed on the Oslo Stock Exchange in Dec-2004. The company’s primary focus activities are on
the Capesize and Panamax markets. Golden Ocean is in the news currently due to financial distress and a restructuring
arrangement. This note covers the broad points related to the restructuring and notes the key developments which brought
the company to the brink of financial collapse.

Background
2008 was a terrible year for the shipping industry – dry bulk in particular – as demand destruction and falling freight rates on
the back of global meltdown became the norm. China which was hitherto the biggest value driver for the dry bulk shipping
segment with its seemingly insatiable demand for commodities like steel and iron ore saw a reversal of sorts.

A collapse in the demand for iron ore saw spot prices falling below contract prices, a situation which led to halting of
shipments by the Chinese. To compound Golden Ocean’s problems several of its counterparties ran into financial trouble
themselves, leading to them defaulting on their Golden Ocean obligations. Hit by this double whammy Golden Ocean found
itself teetering on the brink of bankruptcy.

A financial restructuring was the only way to help the company survive and tide through the present crisis. Here’s a snapshot
of the company’s financials in the years leading to the distress situation.

Summary Financials

in $MM 31-Dec-06 31-Dec-07 31-Dec-08

Balance Sheet items Income statement metrics showed strong growth in 2008
Cash 41 306 51 and the company’s efforts at de-levering the balance
ST debt 64 241 126 sheet proved to be reasonably commendable as it led to
LT debt 290 553 567 some improvement in the stretched credit metrics seen in
Total debt 354 794 693 2007. Notice, however, the short-term debt to cash ratio
Equity 137 182 195 in 2008. The company did its bit in repaying debt through
Capital 491 975 889
2008, but the flipside was that it relied on short-term
refinancing to repay debt. With no improvement in
business conditions coupled with defaults by its
Income Statement items
counterparties, Golden Ocean quickly found its short-
Revenue 266 704 877
term debt at 2.5x its year-end cash leading to financial
EBITDA 60 257 444 stress.
EBITDA (ex-extras) 60 183 235
Net Income 36 201 400 Golden Ocean’s short term liquidity situation was
challenged, as the company was unable to draw on
Cash Flow existing committed financing lines due to non compliance
Operating Cash Flow 68 169 186 with certain loan agreements. This meant that the
Capex -64 -182 31 company could not proceed with its new ship build
Free Cash Flow 4 -14 217 delivery plan and was forced to scale back, postpone or
cancel outright some of its deliveries over the next couple
Change in debt -34 448 -71 years. It mentioned in the 4Q2008 report that its survival
Dividends 0 -171 -347 was contingent on it being able to come with a
Change in Shares 20 0 1 restructuring plan, involving a new equity issue and
Financing Cash Flow -14 276 -417 restructuring of its debt obligations.

Change in cash -10 263 -253

Beginning cash 41 304
Ending cash 41 304 51

Credit Metrics
D/E 2.6 4.4 3.6
D/C 0.7 0.8 0.8
TD/EBITDA 5.9 4.3 2.9
SD/Cash 1.6 0.8 2.5
SD/NWC -2.6 5.5 1.7
EBITDA/Int 3.1 13.2 22.9
EBITDA/Int (adj.) 3.1 9.4 12.1
Source: Company filings

1
The Restructuring…
Following are the broad points of the restructuring package that Golden Ocean came up with to help it survive and tide over
the current crisis.

1. The company raised $110M by way of an equity offering in April-09, $10M more than originally planned. The offer
was for 180M shares at $0.63/share. Golden’s largest shareholder, Mr, John Fredriksen’s Hemen Holding was the
underwriter to the issue. Hemen Holding was allotted 72M shares (40%) of this issue to keep its holding unchanged.
2. A reduction of its new building commitments by $350M by delivery postponements, cancellations and transfer of
vessels into a single purpose company that can be project financed.
3. Re-purchase of the majority of its $200M convertible bond issue. The company had issued $200M of 3.625%, 5-
year maturity convertible bonds in 2007. Firstly, Hemen Holding successfully purchased $165M of the convertible
bond from existing bondholders paying cash (offer price was 30% + accrued interest). Hemen hoped that this
capital commitment would be viewed positively by shareholders and would help in placing new equity. Golden
Ocean subsequently spent $58M buying back the $165M from Hemen Holding at a price of 35c. It offered the same
price to four other significant bondholders who rejected the offer price. Following this buyback, Golden Ocean’s debt
stands reduced by $155M and it should report a profit of $96M in 2Q2009.
4. It has reached agreements with providers of syndicated loans which will enable it to access $40M.
Post restructuring, the company targets that it should be in position to generate positive cash flow after debt service and
payment of new buildings even if average spot market rates for Capesize and Panamax were as low as $15,000 and $7,500
per day, which are lower than indicated through current forward market. Under improved scenarios it should generate
substantial free cash flow.

Balance sheet snapshot: Post-restructuring

Post-
Balance Sheet ($MM) 31-Dec-08 Comments
restructuring
Cash 51 103 Increased net of the $58M payout to Hemen Holding
Debt 693 538 Decreased by $155M following the CB transaction
Equity 195 305 Increased by $110M following the new equity issue
Capital 889 844

Credit Metrics
Debt/Equity 3.6 1.8
Debt/Capital 0.8 0.6
TD/EBITDA 2.9 2.3

Stock price chart

Source: Yahoo Finance

The fall in stock price is noticeable over the last one year. However, the stock has risen over 160% since bottoming in early
March on the back of the restructuring package.

2
Closing thoughts
Several interesting things come out of this example with the benefit of hindsight. A look at the cash flow for 2008 reveals
something striking. The company’s free cash situation was strong and it had succeeded in reducing debt. Both of which are
positives from the value creation standpoint. To reward shareholders with the sale of assets, it upped the dividend payout
resulting in a huge cash outflow over the first three quarters of 2008. (It didn’t pay a dividend in the fourth quarter). It was
able to support this payout without resorting to external debt due to the strong cash balance at 2007 year-end. Here’s a
snapshot of the quarterly movement in key operating metrics.

Quarterly snapshot
$MM Dec-07 Mar-08 Jun-08 Sep-08 Dec-08
Key operating metrics
Cash 306 151 120 53 51
ST Debt 241 223 179 206 126
LT Debt 553 579 502 510 567
Total Debt 794 802 681 716 693
Equity 182 134 183 171 195
Capital 975 936 864 887 889
EBITDA 100 64 212 124 44
Interest expense -5 -6 -6 -4 -4

Gain from sale of assets 32 0 146 54 9

Dividends 136 84 152 111 0
Credit Metrics
Debt/Equity 4.4 6.0 3.7 4.2 3.6
Debt/Capital 0.8 0.9 0.8 0.8 0.8
Debt/EBITDA (annualized) 2.0 3.1 0.8 1.4 3.9
ST debt/Cash 0.8 1.5 1.5 3.9 2.5
EBITDA/Interest 21.6 10.2 37.9 35.3 11.0
Source: Company filings
Notes
EBITDA includes gain from sale of assets
LT debt includes Finance lease obligation

It is easy to possibly find fault with the company’s high dividend payout in 2008 especially given the bleak prevailing business
conditions and outlook. Maybe it should have preserved cash? With the benefit of hindsight, the answer is yes it should have.
But often management’s actions need to be viewed in light of the business conditions prevailing at specific points in time in
history. Given the huge sale of assets, management felt that the best way to maximize shareholder value was to share the
benefits from the cash inflow by increasing the dividend payout. Management did mention that the huge dividend payout was
a function of rather one-time’ish’ gain on sale of assets and as a consequence, the high dividend payout was a temporary
increase. As a shareholder I would have been happy with the high payout.

It is interesting to take cognizance of the fact that businesses, in general, are more dynamic than investment analysts are
willing to admit or allow. The fixation with EPS for the next quarter and/or next year shifts focus from core point of
investing…which is (or at least, should be) business analysis. Even if we give negative marks to management for choosing to
payout dividends in bleak business conditions, several factors were out of its control. It had no control over steel and iron ore
demand drying up, over its counterparties defaulting as they battled with their own set of problems etc. In my opinion, it is far
more prudent to make decisions on-the-fly as information changes over time rather than focusing intensely on next year’s
earnings number. A business-oriented approach to investing makes tremendous sense to me.

This brings me finally to the oft-used management cliché: “Our aim is to maximize value for shareholders”. While this is good
I’d prefer a slight modification and replace ‘shareholder’ with ‘all capital providers’. The original convertible bond investors
who sold to Hemen at 30c took a big hit. Hemen Holdings itself came out with a rather indecent 1-month gain of 16% on the
convertibles. But it is carrying equity risk and betting on Golden Ocean coming back on track over the medium-term. In a
restructuring, admittedly everyone cannot go out the door happy, but a reasonable (and hopefully equitable) sharing of the
mess is the only workable solution in most cases. Think bank bailouts!

Hemant Sreeraman
Blog: http://haphazardlinkages.blogspot.com/