Shipper Must Pass Low Water, Then Smooth Sailing

Shipping company Global Ocean made an offer for its $126 million of outstanding high yield bonds last week, but industry insiders the offer was a low-ball and that there is really no chance bondholders will accept it.

The offer was for 25 cents on the dollar, plus 25% of the equity - effectively about 29 cents on the dollar, sources said. The debt was trading last week at 35, and two weeks ago it was getting bids in the mid 40s.

"Anytime the bid price is that much more than the tender (offer), the market thinks it won't be accepted," said one source familiar with the situation.

An official from Chase Securities, which is handling the deal for the shipper, said the offer was extended based partly on the plunge in EBITDA of some of the company's vessels. However, it is likely just the first step in a compromise with noteholders, he said.

There is no official deadline on the offer, but a coupon payment is due July 15, and the issuer is hoping to finalize the deal by then, the Chase official said.

The company is generating cash flow of about 1.4 times its debt, and as such has potential as a good investment, one source said. But like the rest of the shipping industry, Global Ocean faces steep challenges first.

One of those challenges is simple supply and demand. Capacity is increasing with new ships coming on-line at the worst possible time - that is, when demand is slumping.

However, some market participants believe that an economic improvement is in the offing in Asia and Europe. And if that happens, the shipping concerns will see better times as improving companies try to export their goods.

The paper and steel companies in Asia, as well as the oil concerns in Latin America, are largely high yield players and require the shipping sector to transport their goods. The market is probably a year or more away from that, but some are already seeing it on the horizon.

One analyst said a big problem underlying the industry is the difficulty in researching potential investments. A lot of the high yield shippers are based abroad and have very few assets in the U.S.; consequently, investors have a tough time fighting for their rights if things turn ugly.

"With assets in the middle of the ocean, it's hard to keep track of them," he said.