The equity-friendly waves that have changed the course of both the Overseas Shipholding Group and Genco Shipping & Trading bankruptcies have many industry investors anticipating that shareholders will make a similar splash during the upcoming workout of Eagle Bulk Shipping, according to multiple buysiders. But the bullish valuation trend sweeping the dry-bulk sector of late overlooks one critical fact, they said – that rates and industry conditions have not yet staged a comeback this year.
In fact, signs of a rebound off a multi-year rate depression were drowned out in 1Q14. The Baltic Dry Index reached USD 966 today, up from USD 930 on 21 April, but down from USD 2,299 in December. The industry typically enjoys a pricing boom in the fourth quarter, followed by a short-lived slowdown after the new year — but rates still have not rebounded to the previous levels that gave life to much of the optimism driving Chapter 11 valuation arguments, according to two sellsiders and two buysiders.
For Eagle Bulk in particular, the spot rates for Supramax ships — of which the issuer owns 43 — hit USD 9,100 today, down from a high of USD 16,300 at the end of last year.
Still on the brink of bankruptcy, the New York-based Eagle Bulk recently extended a waiver agreement with its lenders for the fourth time, giving management until 31 May to reach an agreement on the terms of a restructuring plan. The issuer has been in talks with holders of its USD 1.13bn term loan since March, when lenders first agreed to waive any events of default stemming from covenant breaches.
Discussions had previously been held up due to disagreements with management, said four sources familiar with the matter. Lenders are particularly adamant that CEO and Chairman Sophocles Zoullas step down from his position, three of the sources said. But many suspect that the most recent delay is due to new concerns that the events in OSG and Genco give equity holders more justification to put up a fight, according to multiple buysiders.
“I think they’re worried about what’s going on in Genco and are trying to see if they can avoid that,” said one buysider.
Equity holders in Genco recently formed an official committee — made up of Aurelius Capital Management, Och-Ziff Capital Management, and Mohawk Capital — and are seeking to delay the debtor’s confirmation hearing. Although the company entered Chapter 11 with a prepackaged plan backed by its lenders and bondholders, equity holders have argued that they should receive a higher recovery, and are looking to either increase their recoveries under the prepack or come up with a competing plan of their own, sources said.
The Genco shareholder group has cited the example of OSG, where shareholders also won the right to form an official committee and successfully persuaded management to adopt a plan of reorganization that would give them the majority of reorganized equity.
Given the hype over distressed shipping companies, Eagle Bulk lenders may be debating whether to include equity holders in its restructuring plan or to wipe them out, the buysiders said. Looking to Genco as a precedent, the debtor’s prepack offered shareholders warrants for 6% of the reorganized stock, struck at a USD 1.295bn valuation. That decision may have been a mistake, sources noted.
“Genco took a bet when they included the equity in their prepack and gave shareholders a tip,” said one of the buysiders. “The bank debt holders screwed up — you give any of these [opportunistic investors] an inch, they’ll take a mile.”
Valuing the vessels
Eagle Bulk’s capital structure consists of the USD 1.13bn term loan due 2015, which includes a payment-in-kind (PIK) component, and an undrawn USD 20m revolving credit facility. As of 31 March, the issuer had USD 51.9m outstanding under the PIK loans, bringing its total debt load to USD 1.18bn. Lenders include Bank of America, Brigade Capital Management, Canyon Capital Advisors, Goldman Sachs, Midtown Acquisitions, Onex Credit Partners, Panning Capital Management, and Oaktree Capital Management, according to filings. Midtown Acquisitions is assumed to be an entity controlled by Davidson Kempner Capital Management, one of the sources said.
In light of Eagle Bulk having no unsecured bondholders or lenders, shareholders could potentially make a convincing argument that they deserve a recovery and have the same negotiating power that Genco’s bondholders had in negotiations, the buysiders said. “There is some hostage value there,” said one of the buysiders. “You don’t want to have a contested bankruptcy.”
Enterprise value for shipping companies is typically calculated based on the asset value of vessels, as volatile shipping rates can cause dramatic swings in EBITDA, according to industry analysts. Eagle Bulk reported USD 1.705bn in total assets as of 31 March, of which its 45 vessels accounted for USD 1.62bn. Those figures would imply a full recovery for secured lenders, with USD 440m leftover for shareholders and about USD 18m in other outstanding liabilities. Given today’s stock price of USD 3.44 and market capitalization of USD 58.14m, equity holders could potentially receive a 100% recovery.
But book value is not usually used to calculate enterprise value, since those numbers are based on the price of ships when they were new, according to two of the buysiders and the two sellsiders. More accurate estimates rely on market conditions and the age of the vessels in question, they said. “You generally discount the book value — ships depreciate over time,” said one of the buysiders.
Eagle’s reported USD 1.62bn in asset value for its ships “sounds impossible”, said one of the sellsiders. “The book value is really different from the real value.”
A more accurate estimate of the issuer’s enterprise value would be between USD 1.1bn-USD 1.2bn, the sellsiders said. On the high end, that would still mean a full recovery for secured lenders, while shareholders would recover just 34.4%, based on today’s trading levels.
Ignoring the industry
Ironically, infighting in OSG and Genco come as shipping rates continue to disappoint — a factor that could hinder Eagle Bulk shareholders from making a convincing case. While many chalked up the industry’s lackluster 1Q14 to weak demand from China as a result of the Chinese New Year, compounded by seasonal conditions in South America that slow loading docks, rates have not yet experienced an expected turnaround.
“If rates don’t rebound in the second half of the year, it’s a problem,” said one of the buysiders. “People are saying the second half will be better, but if it isn’t, I don’t see these equity guys getting anywhere.”
Given the current industry environment, many have said that shareholder activism in OSG and Genco is largely due to a lack of distressed opportunities in the market, combined with industry sentiment that shipping will experience a turnaround in 2015 and 2016. Private equity firms and hedge funds have been jumping into the sector — so distressed investors are looking at OSG and Genco as a way to get involved. And as more shipping companies move out of distressed territory, Eagle Bulk may present one of the last opportunities to take over a company in bankruptcy.
“You’ve got all these dorks who would never be able to buy a ship, but can do it by purchasing distressed debt and taking a company over,” said one source. “There are better shipping companies out there, but one that’s restructuring is worth more to them.”
Article originally appeared in Debtwire. Link here (paywall).