John Fredriksen has made no secret of his ambitions to expand his footprint in the shipping business when the time is right. When that time comes is currently the subject of much debate, especially after his lieutenant Tor Olav Troim recently saw “brutal downturn” times ahead for oil tanker owners. Booms are usually followed by busts, and what we currently see in the oil tanker market certainly deserves the “bust” name, after the bountiful boom years of the end of the last decade. Large crude carriers on the spot market currently earn a pittance that in most cases does not cover the cost of owning and running the ships (depreciation, insurance, debt service, bunker fuel, crew etc). Of course busts are generally also followed by a new boom, and those that manage to survive the “black death” can emerge stronger and more powerful than before. The question is when supply and demand will rebalance so as to provide earnings power to shipowners, how to survive until that time comes, and how to gobble up the maximum amount of ships at rock-bottom prices to take full advantage of the ensuing upturn.
In that sense, Mr. Fredriksen must be preparing for his very own battle of Trafalgar. On October 21, 1805, the British Royal Navy under Admiral Lord Nelson confronted the combined forces of the French and Spanish navies off cape Trafalgar in one of the fiercest battles in the history of naval warfare. Lord Nelson’s fleet was in numerical disadvantage, with only 27 British ships facing 33 French and Spanish ships. However, using the unorthodox tactic of attacking the enemy head-on in two columns, Nelson achieved a glorious victory – sinking 22 enemy ships without losing a single one of his own fleet.
Nelson himself was wounded in the battle and did not survive it, but his victory made Britain king of the seas for a long time. Now, what unorthodox manoeuvre might Mr. Fredriksen be plotting to achieve future supremacy on the high seas, and what is the status of his fleet?
In the game of chess, the knight is the piece with the most unusual move. It moves in the shape of an “L” and is the only piece that can jump over others to strike its target. The Knight in Fredriksen’s chess game might be Knightsbridge Tankers (VLCCF), a company most probably named after the exclusive London district of the same name – judging by the names of the ships in its fleet, which are all named after parts of London surrounding Trafalgar square, where Nelson’s famous column stands (Mayfair, Kensington, Hampstead, Belgravia and Battersea).
Mr. Fredriksen does not hold a direct equity stake in Knightsbridge, but his dry bulk shipping company Golden Ocean (GDOCF.PK) obtained a 10% stake in the company last year by selling two of its ships to Knightsbridge in exchange for shares in the company. Furthermore, Frontline (FRO) subsidiary Frontline Management manages the Knightsbridge ships. Mrs Inger Klemp, the CFO of Knightsbridge, is also the CFO of Frontline Management and a director of Frontline subsidiary ITCL (ITKSF.PK).
Knightsbridge has currently a strong standing among the tanker companies because nearly all of its ships are chartered out on profitable fixed rates, avoiding the currently abysmal rates of the spot market. It is also financially on very solid ground with an equity ratio of about 70% as of last quarter (pdf) and nearly no short-term debt. This allows Knightsbridge to still pay generous dividends, while Frontline was forced to reduce its dividend to an absolute minimum.
It is therefore rather surprising that such a well-capitalized company would want to tap the capital market, especially at the current stage in the cycle. But that is what Knightsbridge is planning, according to a registration statement (F-3) filed with the SEC on Friday.
According to the statement, Knightsbridge is looking to raise $200m from the markets via various possible instruments (shares, bonds, warrants, etc). Also, Golden Ocean is potentially offering its 10% equity stake for sale.
$200m is not small for Knightsbridge. The market capitalization of the company is currently about $540m, and that also roughly corresponds to the size of its balance sheet. New buyers of such issued securities could thus end up owning a little more than 25% of the company. Together with Golden Ocean’s stake, more than a third of Knightsbridge is potentially up for grabs.
(Click chart to expand)
What are Knightsbridge and the people behind the scenes planning to do with $200m? We don’t know yet, as the registration statement only states “We intend to use net proceeds from the sale of the securities as set forth in the applicable prospectus supplement.” Thus nothing tangible yet, and this leaves ample room for speculations.
In its last quarterly report, the company stated:
"The Board has been actively looking for tonnage, which can contribute to the Company's future dividend payments.
Various vessel types within the second hand and resale market for bulk carriers and oil tankers have been explored. It has, however, been a challenge to find the optimal combination of asset price and time charter rate. The Board will, therefore, continue to monitor the sale and purchase and time charter market for vessels that will support the Company’s future dividend capacity. The recent developments in the sale and purchase market have created more attractive opportunities and the Board believes the possibility for acquisitions is enhanced."
It thus seems likely the company is now readying a war chest for a potential acquisition - of vessels or a company.
Looking at the diagram above, some moves could also happen inside the Fredriksen galaxy. One very real possibility could be Frontline exchanging its 82.5% stake in Independent Tankers (ITKSF.PK) for a stake in Knightsbridge. Despite a slow deleveraging process, ITCL still carries a rather high debt load that is burdening Frontline’s balance sheet. Nearly all of ITCL’s vessels are on fixed charters, which would fit nicely into Knightsbridge business model. A solution still needs to be found for ITCL’s two vagrant ships that have so far not found a buyer nor permanent employment. The price tag could also be affordable for Knightsbridge.
ITCL currently has net assets of about $75m, but its value to a potent buyer could easily reach $100m. If Frontline exchanges its ITCL stake for a stake in Knightsbridge, Frontline would be obtaining a stake in a much more marketable security (ITCL’s stock is totally illiquid) and also be able to receive a steady dividend stream. On the other hand, Knightsbridge would significantly grow its fleet at a very reasonable price. Frontline would retain the commercial management of the vessels, that Frontline Management provides to both companies anyway. Fredriksen’s Hemen Holding, which also owns a 7.4% stake in ITCL, would receive VLCCF stock as well and could increase its position to a more significant level by buying the 10% stake from Golden Ocean. Golden Ocean would be missing the dividend stream from VLCCF, but would on the other hand receive a pile of very welcome cash.
All this would only amount to a re-arranging of the fleet formations in anticipation of the battle. The scenario I pictured above is only one among numerous other possibilities and purely speculative. Knightsbridge may be looking to acquire ships from competitors in distress, or even buy out a rival. Until the fog of war lifts, we won’t know for sure. In this unclear and misty environment, maybe we can gain some wisdom from Admiral Nelson’s words before the battle of Trafalgar:
“ … in case signals can neither be seen or perfectly understood, no captain can do very wrong if he places his ship alongside that of the enemy.”
Let’s hope Admiral Fredriksen will emerge victorious and not mortally wounded from the upcoming oil tanker showdown.