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  • winomaster winomaster Dec 26, 2011 10:45 PM Flag

    VLCC Deal Now A Loser

    I just read some news on Tradewinds (Full text below)regarding the NNA VLCC fleet. There is a convention in the works that is going to essentially require the junking of 5 of 7 vessels in the NNA VLCC fleet. (excepting the Shinyo Kieran (2011) and the Shinyo Saowalak (2010) The rule change is projected to take effect in about a year.

    The agreement will require adoption by mid 2017 of water ballast management equipment, an upgrade that will cost about 8 mm per VLCC. The 5 ships that will require a decision on whether scrapping is justified will be the following ages in 2017: 21, 20, 17, 16, 16.

    This situation is going to force some difficult decisions on shippers that most would prefer not to have to grapple with. Currently an average 16 yr old VLCC is worth 20.5 and the scrap value is 17.6-20mm (depending on which account you accept). So, it's not clear an 8 million upgrade is economically justified.

    Some Thoughts:
    1) Do the two VLCC’s built in 2010 & 2011 already have the required equipment installed?

    2) If a ship is chartered past 2017 but is scrapped instead, can the charter be switched to another, newer vessel without disturbing the above market charter? Or does the charterer get away free?

    3) Regarding The Discounted Bonds: It would appear that the current 25% decline in price of the bonds relates to the decline in value of the assets that are the first line security for the bonds. When the bonds come due, 5 of the 7 ships will be worth little more than scrap (100K max currently). The two newer vessels (Then 6 & 7 yrs old) will be worth about 100K based on current values. So we will have bonds of 505 mm secured by 200 mm of assets at the time the bonds come due. Bond buyers are a cautious sort, and they take notice when the assets that secure a debt have been degraded. NNA may currently be healthy enough that the bonds are secure. But that has a way of changing over time. So, the bondholders concerns may be realistic.

    4) It would be interesting to see if the terms of the bonds require that the securing assets must be maintained at some dollar level. NNA might have to put up additional ships as security if the VLCC’s decline too much or are scrapped. The Shinyo Splendor, for one has a charter expireing in 2014 when it will be 21 yrs old. If it can’t be put out on a short charter (likely) they will want to scrap it.

    5) Given that the 5 older vessels will have only scrap value after mid 2017, the deal NNA made for the VLCC ships now appears to have been a bad one. Straight interest + principle on the bonds used to finance this transaction come to 805 mm. A rough estimation of cash flow from the seven ships looks like maybe 710mm (including the scrappage) through 2017, and some of those ships may even be scrapped sooner to avoid a traffic jamb at the breaker yards in mid 2017. So, when you consider the value of the two remaining vessels (Built in 2010 & 2011) will be worth roughly 100 mm, based on current valuations, the whole deal looks like a wash, at best.

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    • Whoa Whoa Whoa...Wait a second here. You are making a precipitous claim here. First of all the BWM regulation is not in effect yet. There is a good chance it will be watered down or changed in a material way. Second, the NPV of $8 MM, five years from now is quite small and the $8MM is a guesstimate - there are a small number of suppliers of these systems currently; should the mandate go into effect, more suppliers will enter the market and drive the price to retrofit down. Furthermore, tanker values are linked to rates and rates only. Capex requirements and regulations factor in at the margins, but rates are the determinative factor. If rates are strong in 2017, tanker values will be strong, so you cannot extrapolate any add'l capex requirement into a impairment of underlying collateral.

      You've made an illogical jump from the IMO proposal on ballast-water to trashing the VLCC deal. The proposal's effect cannot be determined satisfactorily at this point and, in the end, is likely to be much less of a factor than people are currently hyperventilating over.

      I've been investing in tankers and the shipping industry for close to ten years. The ballast water proposal is small potatoes and does not change the NNA VLCC deal from a winner to a loser just like that.

    • I don't see the article anywhere on the tradewinds site, so I've no idea what you are talking about.

      That said, it is highly likely that the two oldest ships will be scrapped at the end of their current charters. That is market reality these days. The remaining 5 VLCCs will likely continue trading for varying lengths of time.

      More importantly, lets not forget you are talking about something that happens in 6 years. Given the volatility of the shipping industry, that is like a century to the rest of us. We cannot have any idea what the state of the VLCC marlet will be at that time. What I can tell you is that over 6 years it is almost inconceivable that the VLC market will not return to strength at least for a time. Count upon Ms. Frangou and her team to take advantage of that strength to either liquidate ships or refi the bonds.

      I will also point out that the bonds are secured by the VLCCs but also by the guarantee of NNA. So bondholders are first in line on the cashflow and value of the rest of the fleet after the banks get paid.

      • 1 Reply to trubulator12345
      • “I don't see the article anywhere on the tradewinds site”

        At the top, click on “Tankers”. Scroll all the way to the bottom of the page. At the right corner is a green icon with the title below saying “WBC to spell end for more VL’s”

        “More importantly, let’s not forget you are talking about something that happens in 6 years. Given the volatility of the shipping industry, that is like a century to the rest of us. We cannot have any idea what the state of the VLCC market will be at that time…”

        I agree, and the article makes the same point and references the difficulty owners are going to have making this decision. They need to wait to see how the market evolves, but they can’t wait too long or there will be a long line of owners needing the upgrade all at once. My guess is that the newer ships will be upgraded immediately. There is no doubt they will not be scrapped. The ships that are the more marginal players are going to present harder decisions. The article suggests ships older than 15 yrs old may be scrapped if values and rates are still depressed. But even so, if owners saw any reason for hope, that could color their decision.

        One thought that I had was this: A 16 yr old ship is only going to become increasingly difficult to charter. If its value in 2017 was anywhere near its 20 mm scrap value, (a value at least in part depressed by the 8 mm upgrade mandate) the owner would have to worry that he could spend to upgrade and then still have trouble finding a charter because its advancing age makes it unsuitable for anything but shorter term charters. His option would to scrap the ship and put the 20 mm into a downpayment on a new ship that could command a good price for as long as he wanted to charter the vessel.

        Earlier, I had been leaning toward the idea that the low cost of an older vessel would make them more profitable to operate. But if a market glut makes it impossible to charter these vessels, then the proposition is turned on it’s head. The shipping sector seems to have an irrationality about it. New ships continue to be bought by buyers despite a glut of ships, and this new supply then proceeds to push the older but still very usable ships into the breaking yard. I'm back to thinking that only newer ships make any sense in this environment. I've decided to join the insanity.

        "I will also point out that the bonds are secured by the VLCCs but also by the guarantee of NNA. So bondholders are first in line on the cashflow and value of the rest of the fleet after the banks get paid."

        Sure, that is why I referenced the VLCC’s as the “first line security” for the bonds. But we are already 5 years into this shipping swoon and still waiting for the shake-out. If we were not hearing the unsettling reports from Europe, I would have no reservations about presuming that we are on our way back up. Instead, I find myself considering less encouraging scenarios.

        One Encouraging Development: The charter NNA was able to get on the Shinyo Kieran this past June suggests that solidly profitable charters can be had, even at a moment when VLCC’s are profoundly depressed. The 48,153/day rate would allow NNA to pay off the loan, the downpayment and the balloon with only the cash flow from the first six years. If that scenario can be repeated with the newbuilding ships, then it’s is irrelevant how long rates remain depressed.

    • It seems the board has some way of preventing me from posting the article. You'll have to go to their site.

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