We Called It: General Maritme's Woes Revisited

NEW YORK (TheStreet) -- Last September, TheStreet sat down with General Maritime (GMR) Chief Financial Officer Jeff Pribor at his company's office in Midtown Manhattan, to discuss the very issues that have come home to roost for the oil tanker operator on Thursday, with its stock tanking by nearly 30%.

Namely, General Maritime, known to most by the foreshortened "Genmar," took a huge gamble last June when it acquired seven supertankers for $620 million -- at the time, a price higher than the company's market cap. Having levered up to acquire the ships, the deal looked like the equivalent of buying a call option on the future appreciation of crude tanker rates.

>>General Maritime Tanks on Refinance, Dilution Fears

As it happens, rates have been terrible for the class of ship Genmar acquired -- Very Large Crude Carriers -- and the company's stock has steadily declined as investors have bailed. The problems culminated after the closing bell Wednesday, when Genmar announced that it was meeting with its bankers in a bid to restructure its debt. It was also forced to delay the filing of its 10-K annual report.

Last September, these very problems were presciently discussed by TheStreet and Pribor in their candid conversation in New York. Because the content of much of that Q&A bears directly on the events of the last day, we present here the most relevant passages from that interview:

TheStreet: The company's share price has fallen sharply, and some investors have criticized the company for not buying back stock. What's your response to those concerns?

Jeff Pribor: There is a place for buying back stock. It's in the toolkit of every company. But in shipping, you have to be really sensitive to share price relative to NAV. That's one of the factors. You also have to look at the overall leverage. I'm not sure it makes sense to use our cash right now to begin a big buyback program. I wouldn't say that's the most likely near-term course of action for us.

TheStreet: Tell me more about share price relative to NAV and how that works in you calculations when it comes to buybacks.

Pribor: Typically, when shares are trading above NAV, you'd rather buy real ships than buying your shares. So share buybacks tend to happen more when share prices are at fairly significant discount to NAV.

TheStreet: What's the NAV now?

Pribor: It's not a number that's published -- because it's based on opinions. But most people would say we're trading sort of right around our NAV. Therefore, it's not compelling on an NAV basis for us to buy back shares. And, look, it's something we'll always look at. It's in the toolkit. We've done close to $400 million in share buybacks over the last five years as part of our campaign to return cash to shareholders. So we've certainly been willing to look at that as a tool to create shareholder value.

But NAV is just one factor in deciding whether to institute a buyback program. Here's the bigger, better way to answer your question: What we've said for the last 12 months, approximately, is that we have entered a period where the best use of cash is to buy cheap assets. We waited a long, long time to make such a deal. The reason we returned $1.4 billion dollars in cash to shareholders over the last five years is assets were expensive. The better way at that time to create shareholder value was a combination of regular dividends, special dividends and share buybacks, because assets were expensive. What we decided in the last 12 months is: we're in a period where asset prices are lower, so acquiring assets is the best way to create long-term shareholder value. That's why we did a $600 million acquisition in June. It's the better way to create value now than doing a moderate size share buyback program.

TheStreet: Explain the thesis behind the deal, since many consider it to be a pretty big gamble.

Pribor: We only did the deal because it penciled out as being accretive -- to EPS, NAV and cash-flow per share. The way this deal penciled out, even with the issuance of $200 million in equity, it was accretive on all three metrics. If it wasn't, we wouldn't have done the deal. The deal supports $200 million dollars in equity issuance -- that's the kind of deal you wait five years for.

TheStreet: You're comfortable with the debt levels that are now on your balance sheet?

Pribor: Our strategy is to have maximum prudent leverage. In a cyclical business like shipping, where cash flows and asset values change as much as they do, the best way to provide super gains for equity is to use leverage. But the trick, of course, is to not over-leverage the company. With the recent acquisition, because of the equity issuance, there was actually a bit of de-leveraging, which is kind of cool -- that we could grow accretively, but also at the same time take pressure off the balance sheet, or provide a little more cushion on the balance sheet.

But the broader concept is: At the bottom of the cycle, buy more assets using maximum prudent leverage. It provides the most pop for your equity on the upside. That's the game. Some analysts have written that a 20% increase in steel in values, or asset values, for General Maritime's fleet, would provide an 80% increase in net asset value per share, because of the leverage. So the benefits of an increase in asset value in a recovering market -- the potential benefits to our share price, assuming the stock trades in relation to asset value -- are manifest.

TheStreet: How has the company protected itself against the possibility that the tanker market will remain depressed?

Pribor: One of the things we did almost a year ago, at the end of 2009, was issue $300 million in unsecured bonds. Why? Since there wasn't an acquisition at the time, we didn't want to issue equity. That would have been just dilution for no growth. Instead, we issued bonds. It wasn't de-leveraging, obviously, since it was bonds raised to pay down bank debt. But because the bonds are unsecured, it allowed us to have what we have today, which is five of our 38 vessels completely mortgage free, approximately $200 million in value.

That's essentially a form of equity. It's a complete safety net for us. If one were to hypothesize that the market stays south for awhile, one of the arrows we have in our quiver is $200 million dollars of unencumbered vessels. You can borrow against them; you can sell them to generate cash.

I don't think we'll need to do that. Our models don't suggest that that will be necessary. Our models suggest that we'll be in compliance with our covenants going forward, that our dividend will remain intact, that we'll get into next year and enjoy the benefits of a gradually improving tanker market. But to those who want to know: "What would you do, Jeff, if things stayed really bad for a lot longer than anyone had anticipated?" One of my answers is: "Here's a very significant safety net."

-- Written by Scott Eden in New York


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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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