Description
Event: Distressed Equity/Recap
Duration: 9-15 mos
Situation Overview:
- On 3/17, GMR announced that it was delaying the release of its 10K as it explored a recapitalization transaction. A special committee of the board of directors was formed to evaluate the restructuring, as Chairman Peter Georgiopoulos was acting as a potential participant in the recap (Georgiopoulos also owns ~ 6.3% of GMR common stock).
- Upon news of the release, GMR shares traded down to ~ $1.75 (~ 1:1 NAV), with the $300m unsecured bond issue trading as low as 75 (albeit briefly).
- On March 30, the Company announced a recapitalization consisting of the following:
- o $200m "3rd lien" PIK toggle note, 7yr maturity, L+900 PIK (L+700 post financing) or L+600 with 3% Libor floor, 19.9% penny warrants
- o New $550m revolver, 6 yr maturity, L+400, cash sweep (yrs 1-2), qtrly amort yrs 3-5
- o New $46m equity offering
- PF capitalization as follows (assumes $125m 2011 EBITDA, $1.68bn fleet value):
| |
$ |
EBITDAx |
% Cap |
% Fleet |
| Cash |
-51.5 |
-0.41 |
-3% |
-3% |
| 2010 Facility |
335.8 |
2.27 |
17% |
17% |
| New Facility |
550.0 |
6.67 |
51% |
50% |
| PIK Toggle |
200.0 |
8.27 |
63% |
61% |
| Unsecured 12% Notes |
300.0 |
10.67 |
82% |
79% |
| Total Net Debt |
1334.3 |
10.67 |
82% |
79% |
| Market Cap (141.1m shrs est) |
294.8 |
13.03 |
100% |
97% |
| Total Capitalization |
1629.1 |
13.03 |
100% |
97% |
While we do not portend to have the crystal ball on the inflection point, we believe this restructuring signals a near-term bottoming in rates which will instill fleet build discipline/increasing incentive to scrap aged vessels as the weakest tanker business has the dry powder to survive (hence the industry is unlikely to drive them into liquidation).
Background:
As a backdrop, the tanker day rate environment is dismal, with little visibility to see when rates will see a rebound. This rate environment has been exacerbated by global supply/demand imbalances as ~ 2% growth in oil shipments has been far outpaced by new build deliveries over the last 3 years. A history of corporate activity is outlined below - in summary, GMR has been active in fleet building, largely financed with debt (and some equity) in the face of declining rates (now ~ 40+% below historical 10-yr average day rate levels).
- 5/12/08: Acquired 2 Aframax ($137m)
- 8/16/08: Merges with Arlington Tankers in a $2bn transaction (fleet up from 21 vessels to 29)
- 10/29/09: Private placement of senior notes
- 6/9/10: Acquires 7 vessels (5 VLCC, 2 Suez) for $620m
- 6/14/10: Equity offering of 30.6m shares ($6.75)
- 10/5/10: Amends credit agreement (equity issue waiver for 1 year), bridge loan entered to finance vessels
- 1/18/11: Sale-leaseback of 3 vessels (1 pana, 2 handy) for $61.7m
- 1Q11: sale of 4 vessels (19yrs avg age, 3 afra, 1 suez) for $33.3m
- March 31: announces recapitalization
Company Overview:
- GMR owns 34 tanker vessels consisting of:
- o 7 VLCCs (YTD contracted daily rate of $33.6k vs. 10 yr avg. of $57.2k)
- o 12 Suezmax ($32.8k vs. $44.1k)
- o 9 Aframax ($14.9k vs. $31.8k)
- o 2 Panamax ($16.1k vs. $28.1k)
- o 1 Handymax
- o 3 Handymax charted in
- Proforma for the sale of 4 vessels (average age of 19 years), the Company's fleet is 7.7yrs vs. global average tanker age of 8.5 years
- 5.3m dwt capacity
- No FFA's
- 40% time charter coverage for 2011
Based on current second hand vessel prices, GMR's current fleet has a value of $1.68bn:
| |
# of Vessels |
2nd Hand Price |
$ |
| VLCC |
7 |
80 |
560 |
| Suez |
12 |
57 |
684 |
| Afra |
9 |
38 |
342 |
| Pana |
2 |
35 |
70 |
| Handy |
1 |
26 |
26 |
| Total |
|
|
1682 |
Given GMR's cost and capital structure (~ $160m in fixed costs, $110m in debt costs), earnings is highly leveragable to day rates. 40% charter coverage in 2011 declines to ~ 12% in 2012, and we estimate a day rate to EBITDA factor of ~ 1.5x. Below illustrates a scenario analysis on share price to rates based on a historical range of forward EV/EBITDA multiples. Simply returning to the 10 year average rate yields a 150+% return to the shares.
| |
|
Multiple |
|
|
|
Equity Value/Share |
|
|
|
| 2012 EBITDA |
DR Change |
7.5 |
8 |
8.5 |
9 |
9.5 |
10 |
10.5 |
11 |
11.5 |
| 127.5 |
-10% |
-2.68 |
-2.23 |
-1.78 |
-1.32 |
-0.87 |
-0.42 |
0.03 |
0.48 |
0.94 |
| 138.8 |
-5.0% |
-2.08 |
-1.59 |
-1.10 |
-0.61 |
-0.11 |
0.38 |
0.87 |
1.36 |
1.85 |
| 150.0 |
0.0% |
-1.48 |
-0.95 |
-0.42 |
0.11 |
0.64 |
1.17 |
1.71 |
2.24 |
2.77 |
| 161.3 |
5.0% |
-0.89 |
-0.31 |
0.26 |
0.83 |
1.40 |
1.97 |
2.54 |
3.12 |
3.69 |
| 172.5 |
10.0% |
-0.29 |
0.32 |
0.94 |
1.55 |
2.16 |
2.77 |
3.38 |
3.99 |
4.60 |
| 183.8 |
15.0% |
0.31 |
0.96 |
1.61 |
2.26 |
2.92 |
3.57 |
4.22 |
4.87 |
5.52 |
| 195.0 |
20.0% |
0.91 |
1.60 |
2.29 |
2.98 |
3.67 |
4.36 |
5.06 |
5.75 |
6.44 |
| 206.3 |
25.0% |
1.51 |
2.24 |
2.97 |
3.70 |
4.43 |
5.16 |
5.89 |
6.62 |
7.35 |
| 217.5 |
30.0% |
2.10 |
2.88 |
3.65 |
4.42 |
5.19 |
5.96 |
6.73 |
7.50 |
8.27 |
| 228.8 |
35.0% |
2.70 |
3.51 |
4.32 |
5.14 |
5.95 |
6.76 |
7.57 |
8.38 |
9.19 |
| 240.0 |
40.0% |
3.30 |
4.15 |
5.00 |
5.85 |
6.70 |
7.55 |
8.40 |
9.26 |
10.11 |
| 251.3 |
45.0% |
3.90 |
4.79 |
5.68 |
6.57 |
7.46 |
8.35 |
9.24 |
10.13 |
11.02 |
| 262.5 |
50.0% |
4.50 |
5.43 |
6.36 |
7.29 |
8.22 |
9.15 |
10.08 |
11.01 |
11.94 |
| 273.8 |
55.0% |
5.10 |
6.07 |
7.04 |
8.01 |
8.98 |
9.95 |
10.92 |
11.89 |
12.86 |
| 285.0 |
60.0% |
5.69 |
6.70 |
7.71 |
8.72 |
9.73 |
10.74 |
11.75 |
12.76 |
13.77 |
| 296.3 |
65.0% |
6.29 |
7.34 |
8.39 |
9.44 |
10.49 |
11.54 |
12.59 |
13.64 |
14.69 |
Probabilities
Given limited visibility in day rates (and we won't attempt to call a bottom), our probability assumptions are based on 70% status quo or declining rate environment with only a 30% chance of a normalized rate environment (normalization = 10 year average rate by vessel). The revised capital structure effectively buys time to opportunistically secure charters at higher rates over the next 12-18 months.
| |
Price |
% |
|
| Bankruptcy |
0.67 |
10% |
$ 0.07 |
| ~ 45% NAV |
1.04 |
20% |
$ 0.21 |
| ~ 90% NAV (current) |
2.09 |
30% |
$ 0.63 |
| Acquisition, Status Quo Rates |
1.75 |
10% |
$ 0.18 |
| Day Rate Normalization |
4.79 |
30% |
$ 1.44 |
| |
|
100% |
$ 2.51 |
Entry Catalyst: Restructuring Announcement
Exit Catalyst: Normalized/improving day rate environment, increased industry scrappage/fleet addition deferrals.
Catalyst
Event: Distressed Equity/Recap
Duration: 9-15 mos
Situation Overview:
- On 3/17, GMR announced that it was delaying the release of its 10K as it explored a recapitalization transaction. A special committee of the board of directors was formed to evaluate the restructuring, as Chairman Peter Georgiopoulos was acting as a potential participant in the recap (Georgiopoulos also owns ~ 6.3% of GMR common stock).
- Upon news of the release, GMR shares traded down to ~ $1.75 (~ 1:1 NAV), with the $300m unsecured bond issue trading as low as 75 (albeit briefly).
- On March 30, the Company announced a recapitalization consisting of the following:
- o $200m "3rd lien" PIK toggle note, 7yr maturity, L+900 PIK (L+700 post financing) or L+600 with 3% Libor floor, 19.9% penny warrants
- o New $550m revolver, 6 yr maturity, L+400, cash sweep (yrs 1-2), qtrly amort yrs 3-5
- o New $46m equity offering
Given limited visibility in day rates (and we won't attempt to call a bottom), our probability assumptions are based on 70% status quo or declining rate environment with only a 30% chance of a normalized rate environment (normalization = 10 year average rate by vessel). The revised capital structure effectively buys time to opportunistically secure charters at higher rates over the next 12-18 months. Probability weighted edge offers 25% upside, defined downside, and longer term 150+% upside in a normalized rate environment.
Entry Catalyst: Restructuring Announcement
Exit Catalyst: Normalized/improving day rate environment, increased industry scrappage/fleet addition deferrals.