Non-Subscriber Extract
Shipping stays on course
By Barry Parker
17 April 2008
Over the past nine months, attention among ship finance participants has shifted to various manifestations of the debt spectrum, encompassing both secured bank debt and unsecured corporate bonds.
Despite dire predictions about the unavailability of credit going forward to fund newbuildings delivering in 2009 and beyond, reports continue to emerge of companies accessing bank funding.
Maritime companies have the ability to tailor funding mixes to respond to market conditions.
Corporate acquisitions in a sometimes robust merger environment have prompted maritime companies to utilise the bond markets, with some issuing high-yield debt to support asset purchases.
A widely visible trend since credit instabilities erupted in 3Q07 has been an overall lowered level of interest rates across the entire curve - particularly at the short end.
One US shipping company, Horizon Lines, in announcing the April 2008 implementation of an interest rate swap to fix its costs, says: "Over the last nine months, we have been able to reduce our blended cost of debt from 8.8 per cent to 4.6 per cent as a result of our August 2007 refinancing and the structuring of our senior credit facility borrowings to take advantage of falling interest rates."
In the aforementioned August 2007 transaction, which came on the heels of a ratings upgrade, Horizon Lines began what may soon be viewed as a trendsetting transaction. Horizon retired high-priced debt, including USD193 million of 9 per cent senior notes and USD289 million of 11 per cent senior discount notes. The company refinanced the debt through USD330 million of five-year convertible notes, attractively priced at 4.25 per cent to reflect possible conversion of the debt to equity. In the refinance move, the convertible paper was supplemented by drawdowns under a previously agreed revolver and term loan, currently priced at Libor plus 150bp based on the current ratio of debt-to-EBITDA. Following the recent swap transaction, which fixes the cost on USD122 million of the August 2007 debt at 4.52 per cent, Mike Avara, Horizon's new chief financial officer, says: "The interest rate swap locks in improvement in interest rates on a substantial portion of our debt."
John F Parker, high-yield bond analyst at Jefferies & Co, tells Jane's: "Shipping companies are flush with both cash and cheap financing options after five consecutive years of global economic expansion above 4 per cent."
Concerning the dynamics of cheaper funding, he explains: "It is not surprising, therefore, that with three-month Libor currently at 2.7 per cent, high-yield bond issuers, who can access the bank market at Libor plus 100bp or even plus 200bp levels (or 3.7 per cent to 4.7 per cent as an all-in cost) are looking at calling in high-yield debt and replacing it with bank debt."