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NIKOLAOS NOULEZAS

Diploma in Ship Finance

LLOYDS MARITIME ACADEMY

2009
1. Research recent (2006-2008) shipping IPO’s on any exchange. Explain the final
outcome of the offering and how the collapse of the market has affected the
company.

2. Find an example of a KG company and describe their involvement in the shipping


industry. Has the financial troubles in the last year affected their involvement in
shipping?

Does money chases shipping IPO’s?

As of December 2008, NYSE Euronext had approximately 8,500 listed companies, a total
global market capitalization of $16.7 trillion (€12.3 trillion) and its equity exchanges transact
on average daily trading value of approximately $153 billion (€113 billion).
(NYSE Euronext, the holding company created by the combination of NYSE Group, Inc. and
Euronext N.V., was launched on April 4, 2007)

In 2000 there were three listed shipping companies in the U.S. with a total market
capitalization of around $3 billion, and already at the end of 2007 there were over 28 listed
shipping companies with a market capitalization of more then $34 billion. Today NYSE
Euronext lists 30 shipping companies (Source: nyse.com 19.03.2009).

Shipping companies have successfully raised equity capital in the years 2006-2008 through
both initial public offerings ("IPOs") and follow on offerings. There have been four IPO's in
2008 with listings on the New York Stock Exchange and one IPO listing on the NASDAQ
stock exchange.

A short review of specific offerings of the years 2006-2008, as well as a sample of follow on
offerings, should give us an idea about opportunities available to shipping companies in the
U.S. equity markets as well as some answers about the use of proceeds, the outcome and
reasons which mainly affected final results.

IPO’s

We will consider shipping companies from the main ship segments, the drybulk, container and
tanker market. Among the IPO listings on the NYSE and NASDAQ which we would track
there are: 1) Britannia Bulk Holdings Inc. 2) Safe Bulkers Inc. 3) Danaos Corporation
4) Omega Navigation Inc.

1) Britannia Bulk Holdings Inc. (NYSE:DWT) is an international provider of drybulk shipping


and maritime logistics services, with a focus on transporting drybulk commodities in and out of
the Baltic region. On June 23, 2008, Britannia Bulk Holdings successfully completed its IPO of
shares of common stock raising approximately $125 million in gross proceeds. The Company
used the proceeds of the offering to retire existing indebtedness and for general corporate
purposes.

Drybulk shipping markets collapsed a record 92% last year (2008) because of weakening
demand and oversupply. The Baltic Dry Index of commodity-shipping costs dived to its lowest
in more than two decades, something that brought huge losses to many shipping companies.

The company announced only three months after its IPO significant net losses which have
been resulted from the substantial decreases in dry bulk charter rates, exacerbated by the
company's increase in chartered-in capacity during the same period and its entry into
speculative positions in the forward freight agreements ("FFAs") and a bunker fuel hedge.
Britannia Bulk Holdings was forced in November 2008 into administration, only four months
after the IPO, being in this way the biggest loser among last year’s IPO’s.
(IPO price: $15/Share – Closing 19 March 2009: $0,03/Share)
2) Safe Bulkers Inc. (NYSE:SB) is an international provider of marine drybulk transportation
services, transporting bulk cargoes, particularly grain, iron ore and coal, along worldwide
shipping routes. On May 29, 2008, Safe Bulkers completed its IPO, the sole stockholder of
Safe Bulk sold shares representing approximately 19% of the outstanding shares of the
company for total proceeds of $190 million. In this offering, the proceeds went to the selling
stockholder Vorini Holdings Inc, controlled by the founder and CEO of the company, rather
than the issuer.

Fewer fleet operating days, lower freight rates, and massive interest rate swap losses
slammed Safe Bulkers in its fourth quarter, making the dry bulk ship owner's stock anything
but safe. On February 2009 the dry-bulk shipping company announced that its fourth quarter
earnings plunged 64.0%, and that it would slash its dividend to preserve cash. It's also talking
to two of its lenders to try and amend its loan covenants. This is Safe Bulkers second quarter
since its IPO in May 2008, when it came public at $19/Share – a dollar below the low end of
its target range at the time, but well above its $3.01/Share on Thursday 19 March 2009
closing price. (IPO price: $19/Share – Closing 19 March 2009: $3,01/Share)

3) Danaos Corporation is an international owner of containerships, chartering its vessels to


many of the world’s largest liner companies. Danaos was at its IPO the largest US listed
Containership Company based on fleet size and market capitalization. The shares of Danaos
Corporation (NYSE: DAC) commenced trading on the New York Stock Exchange as of Friday
6th October 2006 with a market capitalization of approximately $ 1.2 billion.

On October 5, 2006, the company successfully priced its IPO of 10,250,000 shares at
$ 21,00/Share representing the mid point of the filing range ($20-$22) and raising
approximately $ 198.2 million net of underwriting discounts and commissions and the
estimated offering expenses. In this offering, the proceeds went to repay outstanding debt,
including $100 million of unsecured loans from the founder and CEO of the company.
(It should be noted that more than 80% of outstanding shares are beneficially owned by
officers or directors of the Company)

In the case of Danaos Corporation, even under current unfavorable market circumstances
and financial crisis, when most of container companies are increasingly coming under
pressure with regards to financial results, Danaos have managed to retain the stability of
revenues. Despite the dramatic disruptions in world trade, a dramatic and rapid drop in world
consumption of durable and consumer goods and challenging problems with charterers since
the second quarter of 2008, Danaos achieved solid earnings and strong revenue growth for
the full year 2008.

On a comparable basis, for 2008, the company reported operating revenues of $298.9 million,
net earnings from continuing operations of $118.7 million or $2.18 per share with EBIDTA of
$208.2 million. For 2007, the comparable figures were revenues of $258.8 million, net
earnings of $107.2 million or $1.96 per share, and EBIDTA $171.0 million.

Nevertheless, current market conditions have an impact on Danaos as well. Despite Danaos
satisfactory 2008 results the extraordinary circumstances facing the world economy are
dictating steps to prepare for a challenging period of unknown duration. As an example, the
drop in vessel values, as well as the unprecedented drop in interest rates which are resulting
negative valuations on interest rate swaps, have affected the compliance with certain of the
company’s financial covenants. Further, Danaos announced the suspension of dividend
payments until economic conditions allow cash dividend payments to be resumed.
(IPO price: $21/Share – Closing 19 March 2009: $3,87/Share)

Omega Navigation Enterprises Inc. (NASDAQ:ONAV), is a provider of global marine


transportation services focusing primarily on product tankers. On April 7, 2006, the Company
successfully completed its Initial Public Offering of 12,000,000 Class A Common Shares at
$ 17 per share raising a total of $204 million in gross proceeds. Omega Navigation’s Class A
common shares commenced trading on the NASDAQ National Market on April 7, 2006 and
on the Singapore Exchange Securities Trading Limited on April 10, 2006 (SGX:ONAV50).
In this offering, the proceeds went primarily to fund a portion of the purchase price of 6 double
hull product tankers.

The company continues since its IPO to return strong operating results even in this most
challenging economic environment. Based on charter rates under contracts (TC) and profit
sharing agreements with charterers, Omega Navigation is well positioned to continue to show
profitable operating results despite this economic climate.

For the year ended December 31, 2008, Omega Navigation reported total revenues of $77.7
million and Net Income of $22.7 million, or $1.50 per basic share excluding a loss on its
interest rate derivative instruments, a gain on warrants revaluation and incentive
compensation grants expense. Including these items Net Income was $11.0 million or $0.72
per basic share. EBITDA for the year 2008 was $57.1 million. (Including losses on its interest
rate derivatives the company reported a Net Loss of $4.4 million or $0.29 per basic share.)

As of December 31, 2008 the company was fully compliant with related loans.
(IPO price: $17/Share – Closing 19 March 2009: $3,45/Share)

All data as on 19th March 2009

Current
Price/19th
Company - Symbol IPO Price/Date IPO Proceeds March 09 % change
Britannia Bulk
Holdings - DWT $15/June’08 $125m $0.03 - 99.0%
Safe Bulkers Inc - SB $19/May’08 $190m $3.01 - 84.0%
Danaos Corp. - DAC $21/Oct.’06 $198.2 $3.87 - 82.0%
Omega Navigation
Enterprises Inc-ONAV $17/April’06 $204.0 $3.45 - 80.0%

Follow on Offerings

The U.S. securities markets continued during up to the 2Q,08 to offer stability for companies
and the opportunity for additional secondary offerings. Following examples clearly
demonstrate the prevailing situation up to the third quarter.

DHT Maritime Inc. (NYSE:DHT) late April 2008 received approximately $92 million in a follow
on offering of 8 million shares of its common stock. The offering was originally contemplated
to cover 7 million shares, but this was increased due to the market's appetite for the issue. In
addition, its major shareholder sold shares in a registered underwritten offering receiving
gross proceeds of approximately $119 million, thus demonstrating the markets continuing
appetite for the shares at that time.

Top Ships Inc. (NASDAQ:TOPS), a provider of seaborne transportation services for the
petroleum and drybulk industry, on July 2008 registered the resale of up to 7,268,692 shares
of its common stock by certain selling stockholders.

Teekay Offshore Partners LP (NYSE:TOO) registered an effective shelf registration


statement for up to $750 million of securities. In June 2008, it priced and sold $140 million of
its common units under the shelf registration statement. Teekay provides marine
transportation and storage services to petroleum companies.

Teekay LNG Partners LP (NYSE:TGP) completed a follow on offering of 5.75 million


common shares raising an additional $217 million in April 2008.

As can be seen from this sampling, the U.S. public equity markets continued to provide
capital to the shipping industry for internal expansion, acquisitions, and debt repayment.
Although we certainly need to weather the current economic crisis and disruption among U.S.
investment banks, we should remain hopeful that when the markets return and opportunities
arise, especially the U.S. public equity markets should continue to provide a valuable source
of capital for the shipping industry, particularly for those who are ready to take advantage of it
when the right time comes.

Shipping market, Cyclicality and Financial Crisis

The shipping market is cyclical in nature and freight rates generally tend to be volatile. The
current financial crisis has brought the shipping activity especially for dry-cargo and container
companies to an unexpected halt, as is evident from the freight rate and share price
performance.

Deep understanding and further analysis suggests that most of the markets peaked during
2Q’08, the time when crude oil & Baltic Dry Index (BDI) peaked. Since then the oil has
declined by more than 75% and the worst hit being BDI, that plunged by 92%.

The decline was primarily led by the strength of the Dollar and also because of the shrinking
global trade due to slowdown in economic growth. Demand for oil remained muted as in US
(major consumer of oil) because of rising oil inventories. The oil inventories stood at 835.2mn
barrels growing at 3% y-o-y. This is above the 5yr average inventory level of 818.5mn barrels.
Similar is the case for iron ore, where China has a huge build up of inventories. But the
impact was felt more on the Dry bulk and Container day rates (declining more than 90%) than
on Tankers (that carry crude oil, chemicals, LNG,) rates that fell around 59%.

This time it’s not just simple the trade related activities that led to a decline in freight and
charter rates, but the consequences of the financial crisis are also being felt in the shipping
industry, since bank credit plays a vital role towards the rampant growth of the shipping
activity and also for the foreign trade by issuing letters of credit (LOC). It should be noted that
according to the data released by World Trade Organization (WTO), $13.6 trillion worth of
goods are traded each year across the globe and importantly 90% rely on LOC’s.

Germany’s KG system in crisis

According to a survey by the leading sales organisation for KG investments Krüger-Gruppe


(Krueger-gruppe.com), the KG market volume shrank by €2.5bn-€2.7bn last year (2008). The
data are quite convincing while the Hamburg based Krüger-Gruppe surveyed 26 major
financing houses which actually represent three quarters of the German KG market volume.

In 2007, the financing houses collected €3.5bn from private investors for shipping projects,
but 2008 saw large financing houses such as LIoyd Fonds close the year with losses. The
survey reveals that the sale of shipping funds to private investors almost came to a halt in the
fourth quarter. According to figures from Hamburg based investment house Maritim Equity
(maritim-equity.de), German owners have some 1,430 vessels on order with a combined
value of €50bn to be delivered over the next four years. A large number of them were meant
to be financed through the KG market.

As a clear example of the prevailing situation, on March 25, 2009, Germany’s leading KG
investment house MPC Munchmeyer Petersen Capital announced its first ever annual deficit
of €96m loss for 2008 (mpc-capital.com). It should be noted that the company is among the
two biggest players in the area of closed-end investment models where it is second only to
HCI Capital AG in which MPC Capital AG holds a 40.8 percent interest.

The problem for the classic KG scheme is that it does not work well in a falling market. In
falling markets KG investments have a problem due to the time lag of one to three years
between ordering a ship and its delivery. In such a situation, high vessel prices meet declining
charter incomes, while private investors have lost confidence in the capital markets for
shipping projects. Their readiness to invest in KG capital investment products has declined
significantly. A toxic environment for returns and invested equity.

The Failure of the KG Investment House FAFA Capital

Fafa Capital, developed from the Jens Fastenrath investment agency (fafacapital.com),
issued in close cooperation with various German shipping companies (e.g. Jüngerhans
Maritime Services, Klaus tom Woerden shipping company and Rohden shipping company)
several shipping funds:

• In 2003 the bulk carrier MS Tinos, together with the renowned shipping company
August Bolten WM. Miller’s Nachfolger.
• In 2003 exclusive placement for BUSS Logistics container fund no.1
• In 2004 the MS JRS Capella and its sister ship the MS JRS Canis in cooperation with
the Schöning shipping company.
• In 2004 the MS Corinne and the MS Charline together with the Alfred C. Toepfer
shipping company in Hamburg.

In January 2009 the fund MS Charline, which invested in an 800 teu containership and was
managed through the Alfred C. Toepfer shipping company, went insolvent. The container ship
was finally arrested in Singapore due to unpaid invoices to third parties.

It is more then evident that the financial crisis has already reached several KG houses in
Germany. Fafa Capital is certainly not the last one which declares insolvent troubled closed-
end funds. In the same time, two further funds managed by Emden-based Embdena KG
house (embdena.de) - the MS Carl C, which owns a 369 teu containership and the MS
Hannes C, which owns a 740 teu vessel, both entered administration.

Nikolaos Noulezas

26.03.2009