Saturday, February 1, 2014

Possible Genco Shipping Restructuring $GNK

The WSJ reported in early December that Genco (and Eagle Bulk shipping EGLE) had hired restructuring advisers to "pare down their debts". Genco apparently hired Blackstone and the bondholders (whose bonds are now trading high 50s) hired Jefferies.

Genco has an amortization payment for its bank loan due soon that it may not have cash to meet. WSJ also reported that Norwegian bank DNB sold its portion of the Genco bank loan for 90 cents on the dollar. Unfortunately for the Genco equity, it is sounding like the bank loans have been bought by distressed vultures that want to take over the ships.

And it sounds like the fight will be between the bank loans, who will say that they are underwater, and the bondholders, who will argue that they should be the fulcrum. Notice that no distressed investors have taken a position in the equity.

If you'll recall, the Genco fleet are mostly (32%) Supramax size vessels. Supramax rates are down more than two-thirds from 2007, and yet fleets are still growing. Too many shipyards are in countries with state-owned yards that will build ships just to give workers something to do. Imagine it: if you own ships, you're betting that Asian countries wouldn't keep spend money to justify the huge fixed cost of their shipyards!

In its financial results for the third quarter ending Sept. 30 [pdf], the company specifically noted it was "in discussions with its lenders and expects to seek waivers or modifications to its credit agreements...and may also seek to refinance indebtedness, raise additional capital through equity or debt offerings or selling assets (including vessels), reduce or delay capital expenditures, or pursue other restructuring options."

Straight out of The Shipping Man, in the Q3 2013 management commentary, they said that they "continued a short-term time charter strategy by fixing vessels on spot market-related time charters with the option to convert to a fixed rate and on short-term charters while the market remains volatile." In the novel, they talk a lot about how short term chartering is basically just gambling on shipping rates. It's crazy that banks (and unsecured bondholders!) will lend money for ships that haven't locked in long term charters with certain revenue.

It's a bit unclear from the Q3 filing, but based on the conference call it sounds like the bank loan amortization payment is due in March: "Later, in response to questions from the Imperial Capital analyst, the CEO stated that GNK is required to hold a minimum cash balance of $39.7 million against the company’s current cash balance of $57 million. This leaves only $17 million available for the amortization payment of $48.5 million due in March 2014". It's weird that management isn't more forthcoming about this. Maybe they are still hashing it out with the lenders?

P.S. One other thing to check into. Genco owns a controlling ~25% position in BALT, which must be worth about $50-75 million. It's not clear that the Genco holdco guarantees the bank loans which are secured (possibly only) by the ships and the subsidiaries that own them. If this was correct, then the bank loans wouldn't be able to go after the holdco assets like BALT for the deficiency, and they could go to the bondholders.


Anonymous said...

Oaktree sold what miniscule position they had per the 13F.

"Genco agreed to grant additional security for its obligations under the 2007 Credit Facility, consisting of a pledge of the Class B Stock of Baltic Trading Limited held by Genco Investments LLC and a second priority security interest in vessels pledged under its other two credit facilities or in connection with any new indebtedness (excluding in each case vessels owned by Baltic Trading Limited and its subsidiaries)."

But no matter what Peter will still be around. That's a guarantee.

John said...

If I remember correctly, Genco's CEO created Baltic Trading in order to speculate on time charter in a separate entity.

CP said...

Thanks, good color on the pledge of BALT stock.

If that's the case, though, why are the bonds trading at 55/60? Aren't they a zero?

Could it be worth ~$25 million to buy a majority of the bonds at ~50 so that you can vote them to confirm a plan that favors the bank loans?

Anonymous said...

The only explanation I can think of is rising rates that may help the converts argue for a higher valuation. One name that stands/stood out among them is Panning. They and FMR owns/owned about a third of the notes per their 13Fs.

CP said...

Yikes, rates aren't rising at all. The fleets are still growing and you'd have to be crazy to think China is going to increase it's burn rate on construction when they are already having trouble pretending that their existing boondoggles weren't misallocations.

Anonymous said...

This thing looks like a zero for sure.

How will Peter G get cut in? It seems that's something that dumb banks will let shippers get away with, but the debt has been bought by vultures.

Don't those funds want to start a new shipping company with their own management?

John said...

Oops. Correction: I meant spot charter, not time charter.

theyenguy said...

Distressed debt lawyers and their accounting teams are going to be in great demand during the soon coming economic downturn.

Anonymous said...

Be careful with GLK + BALT. They may be considering a backstopped rights offering, like Oaktree did with SBLK last year. Both may drop further over the short-run, but the rights offering will send the price up and benefit the equity holders who double down and hold until the tide rises, along with short-term charter rates + dividends.

It's a good pickup for distressed debt. The book value of the boats are usually higher than people estimate. There are more, bigger bulk-carrier coming to market than ever before, however there are also strategic buyers who are willing to pay above rock-bottom market rate prices for these assets (e.g. metal + mining companies, family shipping companies (MLPs), manufacturers seeking future contracts, etc).

CP said...

This is a company that couldn't borrow unsecured and yet people are going to buy equity?

And if that's the case why doesn't anybody smart have a position in the equity already?

Notice that the smart money isn't even buying the unsecureds; they're buying the loans.

The loans are going to get the ships.

CP said...

Seriously, look at the holders:

The smart money wants to stuff Georgiopoulos and take his company.

If equity puts in money it goes straight to the loans in an amortization payment. Of which there will be more. AND next year the converts have to be paid.

If you're really crazy bullish on ships for some reason, you buy the notes and the notes take 95% of the company in an exchange and THEN you have a rights offering.

Anonymous said...

... or like Oaktree did with General Maritime, the other Peter company. The two of them went way back. Don't be surprised if they go public again soon.

CP said...

Thanks, great example.

Private equity firm Oaktree Capital Management invested about $175 million as part of General Maritime's restructuring.

Oaktree had lent General Maritime a $200 million loan in May last year prior to the company's Chapter 11 filing. That loan was converted into equity once General Maritime emerged from bankruptcy. Oaktree now owns about 98 percent of General Maritime's stock.

Anonymous said...

I agree, the secured bonds are somewhat attractive. However, this is not a good short candidate for a variety of reasons. Also, the options are illiquid and unattractively priced.

Anonymous said...

There are no secured bonds, it's a bank loan.

The put options are a steal because you know the equity is going to be a zero in a year.

Some people can't tell a silk purse from a sow's ear.

Anonymous said...

To be bullish on dry bulk you'd have to be bullish on China/emerging markets/commodities.

But at the same time if those bounced back... Asian shipyards would just build more ships.

Anonymous said...

By the way, you don't need to be bullish on bulk carriers; they make a nice hedge for either inflation (as ships) or deflation (as metal) as real assets with some tax advantages.

Anonymous said...

Ships aren't a hedge against deflation (!).

They are only an inflationary bet. Inflation thesis failed in spring 2011 and the dumb money still hasn't gotten the message.

They'll learn.

Anonymous said...

Look how well SFL did in 2008:

Great deflation trade - if you short it!

Anonymous said...

Thanks for clarifying, yes, the bank notes make attractive investments, but not unsecured loans (like the convertible bonds).

If there's a backstopped rights offering in 2014, then the 2015 and 2016 options will surely go down in value.

Peter and the PE firm both gain with a back stop. Dumb money gets diluted. And also management/board and backstopping investors always get a nice discount for back stopping.

I'm not bullish on dry bulk. I think we can agree that it's either near or at the bottom of the cycle. Eventually it will rise , which makes also makes the long put play less attractive.

Anonymous said...

Why on earth would there be a rights offering? What the loans want to do is stuff the bonds and the equity.

Anonymous said...

Banks are still required to take metal deposits. And you can earn fixed income on your deposits during a deflation.

Anonymous said...

Take a look at all of the seeking alpha analysis on the Starbulk backstopped rights offering. The back stop allowed Starbulk to restructure their German bank loan payments (so they wouldn't need to pay interest for years) and improved nearly every operating and financial metric, and even created enough of a cash pile for them to make a down payment on future orders for new boats. The banks reduced their principal risk, while raising floating interest rates and extending the maturity.

Anonymous said...

SBLK is pretty different from GNK. Less leverage.

Do you honestly think people would invest in GNK equity and give a gift to the bonds AND loans both trading below par?

You also need to read the tea leaves. The catalyst is coming up and no rights offering or exchange offering announced yet. They take time to implement.

Are you long the stock or something?

CP said...

Creditors of General Maritime Corp. (GMRRQ) are accusing the oil tanker operator and “old friend” Oaktree Capital Management LLC of contriving to give the hedge fund manager ownership of the company and leave them holding the bag.

CP said...

“Approximately three months ago, the debtors appeared before this court arm in arm with their old friend, Oaktree Capital Management, … toting a fully baked plan of reorganization that would deliver all of the equity and upside in these cases to Oaktree at the expense of the debtors’ unsecured creditors,” lawyers for the committee said Tuesday in a filing in U.S. Bankruptcy Court in Manhattan.

The committee claims General Maritime “contrived” with Oaktree to value the company at a “friendly” price while releasing company insiders and Oaktree from any liability connected to lawsuits the creditors might pursue.

CP said...

“The plan is fair and equitable,” Glenn said, noting that it restructures more than $1.3 billion in pre-bankruptcy debt. The plan’s terms will cancel all of General Maritime’s old stock, giving nothing to holders of 121.7 million common shares. Secured debt will be repaid in full and converted to equity in the reorganized company, giving 98 percent of stock in a new firm to Los Angeles-based Oaktree.

General Maritime, which operates in more than 230 ports in more than 70 countries, filed for bankruptcy in November. The company listed assets of $1.71 billion and debt of $1.41 billion in its Chapter 11 petition. In February, when Glenn approved a draft of the plan, he told creditors to either prepare evidence for a fight over the final plan or negotiate an agreement.

An amended version of the plan resolved objections from most unsecured creditors, improving their estimated recovery from as much as 1.88 percent to a maximum of 5.41 percent. The majority of creditors voted in favor of the plan and Glenn overruled the three objections that remained at the opening of today’s hearing.

CP said...

This all happened in the case of General Maritime.

First, Oaktree dictated hard terms. The loan terms look very much like those only a company on the verge of bankruptcy, and therefore with few negotiating options, would agree to. Oaktree is getting a right to 19.9 percent of the company. The interest rate that Oaktree is charging fluctuates, but in June it was at 12 percent a year.

This is far from your typical subordinated debt deal, where a lender simply lends money at a rate of interest. General Maritime was in distress, but it also had assets like tankers that it could sell and did not appear to near insolvency. It also had at least another year before it needed to secure this financing.

Second, Oaktree has provided Peter C. Georgiopoulos, General Maritime’s chairman and owner of about 6 percent of its stock, 4.9 percent of the profit from the loan. It does not appear that Mr. Georgiopoulos paid for this interest.

Instead, it appears to be a reward bestowed by Oaktree — but a reward for what? This is the worst sort of conflict. The chairman is making money off his company’s distress. Because of the conflict, the company’s independent directors needed to approve the loan, which they did, but this is still poor optics at best.

CP said...

General Maritime Corp. (GMR), the second- largest U.S. owner of oil tankers, won approval of financing agreements with Oaktree Capital Management LP after changing terms to address creditors’ objections.

U.S. Bankruptcy Judge Martin Glenn in Manhattan today approved a $75 million loan from lenders including Nordea Bank Finland Plc and a $175 million equity investment from Oaktree. Glenn questioned expense reimbursements and a breakup fee for Oaktree, a junior secured lender to General Maritime that will be the lead, or stalking-horse, bidder at an auction to sell the company.

“This has all the hallmarks of a loan-to-own structure,” Glenn said. “Even if the committee is satisfied, I’m not necessarily satisfied.”

CP said...

Determine an industry that has staying power (i.e. will be around in 20 years) that is under severe stress
Purchase the senior bonds of a company in that industry at distressed levels
File the company, and convert your senior ownership to a majority equity share
Clean up operations

CP said...

Institutional Shareholder Services, the proxy advisory firm, said on July 27 that the entire transaction, not just the most recent proposal, was "thin gruel served cold - a clear and striking failure of governance by the entire board, not simply its chairman."

CP said...

One guide who is leading a pack of recreational participants to the top of this tanker market is New York-based shipowner Peter Georgiopoulos, or Peter G as he is ubiquitously known. Peter G's General Maritime, the largest private shipowner in the US, has assembled a party of adventure-seeking backers that includes both hedge funds and private investors. With today's rising tide of the tanker market having reversed General Maritime's ill-timed acquisition of four aframax tankers from Euronav, market sources indicate that General Maritime is shopping for an underwriter to lead the company's IPO this autumn.

Anonymous said...

Here's what we know:
1. The bank debt has secured every asset under the sun. Nothing can be sold or borrowed against without the banks getting proceeds.

2. The company doesn't have the cash to make the 4/1 amortization payment and still make covenants.

3. DnB NOR (admin agent) sold its entire position in the bank debt, somewhere between $500-600m.

Thus, the company needs the banks to play ball, and a large owner of the bank debt is not a bank.

We can surmise that the bank debt holders want to own the company in some form. The bank debt may be "covered", but LTV of this paper is usually 70% or less. TBC...

Anonymous said...

In a Ch11 recap, there would typically be impairment of the debt in exchange for the equity (or a very large portion of it).

Assuming that the bank debt holders want a very quick resolution (get the company out of Ch11 with the equity before rates improve), the convertibles have nuisance value. As the converts are a small part of the cap structure, cut them in a bit on the equity (maybe warrants) and give them a chance to buy in some additional equity as well. Leave a 2-3% tip of NewCo equity to the old equity holders to get them to sign off. Then exit Chapter 11.

The End. Coming soon to a Southern District Court near you.

CP said...

Very good two most recent comments.

I don't see the equity getting cut in on a new deal.

John said...

Great discussion!

Now, unless I miss something obvious, doesn't it mean the simplest way to play in the dry bulk space is to buy the equity after the company comes out of bankruptcy, after the smart money has done all the leg work, and wait for the industry to recover?

CP said...

At the *earliest* you buy in after the company comes out of bankruptcy, after the smart money has done all the leg work.