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Spring revival for Greek offerings on NYSE

Spring revival for Greek offerings on NYSE
The Spring of 2013 has brought a revival of shipping deals for Greek shipping companies listed in New York. Following a successful $50 million offering of "preferred" shares by Tsakos Energy Navigation ("TNP"), the drybulk specialist Safe Bulkers ("SB") sold investors $20 million of a similar type of security; these shares are pitched at retail investors. 

The CEO, Mr. Polys Hajioannou, bought an equal amount of the shares, on the same terms as other investors; at SB, management has continued to hold a large portion of shares. The new securities, described here as "Series B Cumulative Redeemable Preferred Shares", are useful as listed owners must navigate the shoals of avoiding shareholder dilution while not breaching debt covenants.

These types of shares were first utilised by Seaspan in early 2011, and then in a subsequent follow-on offering. One banker told Seatrade Global: "They avoid blowing through covenants on debt issue; it has characteristics of a bond, but the accountants treat it as equity." Adam Vore, managing director of Capital Markets, at Incapital, one of two Joint Bookrunners on the deal (the other is DNB Markets) told Seatrade Global: "The structure is tax efficient for US investors, that is, Qualified Dividend Income eligible which means it is taxed as capital gains rather than ordinary income." For the typical investor, Vore explains, an 8% dividend rate works out to a "bond equivalent" yield of approximately 10.768%.

Since they are different class than common equity, existing shareholders will not get further diluted as shares are issued at a disadvantageous price, SB which had its IPO in 2008, had already done follow-on common equity offerings in Winter, 2010 Spring, 2011 and Winter, 2012. Dilution would be more substantial at SB's current price around $5/share (compared to $6.50/share, in March, 2012).

The fine print reveals steep penalties for the issuer, in the form of an increased dividend, if they are not redeemed within a five-year window, even though the shares are described as "perpetual". Most likely, the securities will be redeemed within the five-year time window, making the shares analogous to a high yield bond or to the non-amortizing loans that owners were booking during 2005 – 2007, when bank finance was abundant. Shipping analyst Lambros Papaeconomou, discussing the TEN and SB offerings, told clients: "Because of the stiff dividend escalation clause, I believe the plan is for either company to redeem the shares as soon as possible and legally permissible." For Safe Bulkers, redemptions can start after three years.

Such shares work well for cyclical capital-consuming businesses. Vore, from Incapital, a specialist in deal structuring, explained to Seatrade Global: "The structure is designed for transportation but other sectors could also utilise the structure. Offshore services has used similar structures."

TEN and SB each have construction programmes which must be funded (as Seaspan did in 2011). Safe Bulkers has seven vessels on order (five panamax, one post-panamax and one capesize) from Japanese yards, for deliveries starting later in 2013, out to the second half of 2015. As of February 2013 capital requirements totaled $193.5m (with $68.1m due in 2013). SB can still draw upon nearly $130 available under two debt facilities- a floating rate note and a revolving credit facility. But the new issue gives flexibility to fine-tune its balance sheet, because the proceeds of the share issue may also be used to retire debt.