Does money chases shipping IPOs?

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.

IPOs
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 years IPOs. (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 worlds 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 th 6 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 companys 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 19 March 2009 Current th Price/19 March 09 $0.03 $3.01 $3.87 $3.45
th

Company - Symbol Britannia Bulk Holdings - DWT Safe Bulkers Inc - SB Danaos Corp. - DAC Omega Navigation Enterprises Inc-ONAV

IPO Price/Date $15/June08 $19/May08 $21/Oct.06 $17/April06

IPO Proceeds $125m $190m $198.2 $204.0

% change - 99.0% - 84.0% - 82.0% - 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 2Q08, 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 its 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 LO Cs.

Germanys KG system in crisis

According to a survey by the leading sales organisation for KG investments Krger-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 Krger-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, Germanys 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. Jngerhans

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. Millers 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 Schning 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 closedend 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