Following a recovery in 2010, the first six months of 2011 have shown a sharp drop in the number and average size of primary equity offerings by shipping companies in the U.S. public market as compared to the same period in 2010. Primary equity offerings by shipping companies in the U.S. public market have totaled approximately $823 million to date in 2011 – a 51% decrease over the same period in 2010.
This survey reviews the registration documents filed with the U.S. Securities and Exchange Commission (SEC) in connection with capital-raising transactions in the first six months of 2011 and the principal terms of the related offerings.1
Highlights of the Survey
- In total, during the first six months of 2011, there were 10 primary equity offerings by nine issuers, including one IPO and nine follow-on offerings, compared to 14 offerings by 13 issuers, including three IPOs and 11 follow-on offerings, for the same period in 2010.2 This result also trails the pace for the entire year 2010 when there were 28 primary equity offerings by 20 issuers.
- Eight of the nine issuers were foreign private issuers organized outside the United States; one issuer was a foreign corporation with headquarters in the United States.
- Seven issuers were organized as corporations in the Marshall Islands; two were Marshall Islands limited partnerships.
- Eight issuers engaged in nine follow-on transactions: eight were firm-commitment underwritings and one was an at-the-market (ATM) offering.
- One issuer has come to market more than once so far this year, completing one follow-on underwritten transaction followed by an ATM offering.
- All the transactions were primary offerings3 exclusively. None included secondary sales by existing shareholders.
- All of the follow-on offerings except for one were shelf offerings registered with the SEC on Form S-3 or F-3.
Size of Offerings
Primary equity offerings by shipping companies in the U.S. public market (excluding green shoe options, discussed below) totaled approximately $823 million in the first six months of 2011 – a 51% decrease over the same period in 2010.4
The average size of the 10 offerings (excluding green shoe options) was $80 million and the median size was $71 million. In the first six months of 2010, the average size of the 14 offerings was $116 million and the median size was $90 million.
The size of the only IPO completed during the period (excluding the green shoe option) was $132 million.5 There were three IPOs completed during the same period in 2010.
The average size of the nine follow-on offerings (excluding green shoe options) was $77 million and the median size was $63 million. The largest follow-on offering (which was also the largest underwritten offering) was the $144 million offering by Teekay LNG Partners L.P. in April 2011. The smallest follow-on offering (which was also the smallest underwritten offering) was the $42 million offering by Safe Bulkers, Inc. in April 2011.
The average size of the eight underwritten follow-on offerings (excluding green shoe options) was $80 million and the median size was $71 million. The largest underwritten follow-on offering was the $144 million offering by Teekay LNG Partners L.P. in April 2011. The smallest underwritten follow-on offering was the $42 million offering by Safe Bulkers, Inc. in April 2011.
The size of the only ATM offering launched during the period is up to $50 million.
Jurisdiction of Organization and Principal Place of Business of Issuers
The preferred jurisdiction of organization for shipping companies accessing the U.S. public equity markets continues to be the Republic of the Marshall Islands. All nine issuers accessing U.S. markets through June 15 are organized in the Republic of the Marshall Islands. Of these issuers, seven are Marshall Islands corporations and two are Marshall Islands limited partnerships. Of these nine issuers, eight have executive offices outside the United States located in Greece, Bermuda, Monaco and the Channel Islands. One issuer, General Maritime Corporation, has its executive office in the United States.
In general, foreign issuers which access the U.S. public equity markets do not subject themselves to U.S. corporate income taxation. The disclosure documents typically state that: (i) so long as the issuer is incorporated outside the United States and its “shipping income”6 is attributable to transportation exclusively between non-U.S. ports, it will not, solely by reason of offering its securities in the United States, be subject to U.S. income taxation; (ii) under applicable U.S. tax laws, no U.S. tax is imposed on foreign issuers solely because their equity securities have been offered in the United States or because their shareholders may reside in the United States; and (iii) there is no restriction on non-U.S. companies filing registration statements to sell securities in the United States, and the conduct of an offering in, or even a listing on a securities exchange in the United States does not, alone, subject an issuer to U.S. taxation.
Business of Issuers
Of the nine issuers, five primarily operate tanker fleets transporting oil, gas and petroleum products, two were primarily operators of dry bulk vessels and two were container ship operators. By comparison, in the first half of 2010, nine of the 13 issuers primarily owned and operated fleets transporting oil, gas and petroleum products while the remaining four issuers were primarily operators of dry bulk vessels.
The six offerings by tanker operators total approximately $488 million. The two offerings by container ship operators raised approximately $225 million in net proceeds, while the offerings by dry bulk operators raised approximately $116 million.
Use of Proceeds
The most common use of proceeds from equity offerings in 2011 to date was to acquire new vessels and, to a lesser extent, repay indebtedness. In 2010, the most common use of proceeds from equity offerings was to acquire new vessels.
Of the nine issuers, eight list their shares on the New York Stock Exchange (NYSE) and one lists its shares on the NASDAQ Global Market.
Type of Registration Forms
The one issuer that completed an IPO filed a long-form registration statement on SEC Form F-1. Of the nine follow-on offerings, one was filed on a long-form registration statement on SEC Form F-1. The remaining follow-on offerings were done pursuant to short-form shelf registration statements, six of which were on SEC Form F-3 while the other two were on SEC Form S-3.
Forms S-1 and S-3 are registration statements that must be used in U.S. offerings by U.S. issuers and issuers not incorporated in the United States that do not qualify as so-called “foreign private issuers.”7
Forms F-1 and F-3 are only available to be used by foreign private issuers. Foreign private issuers are subject to certain reduced disclosure requirements, including, specifically, with respect to individual executive compensation and transactions between the company and its directors and other management. In addition, foreign private issuers, inter alia, are not subject to all aspects of Sarbanes-Oxley compliance, are not subject to the short-swing profit prohibition of Section 16 of the Securities Exchange Act of 1934, and are entitled to less onerous accounting and periodic reporting requirements. On the other hand, these issuers are required to make certain additional disclosures regarding home country issues.
Forms S-1 and F-1, or so-called “long-form” registration statements, are the basic registration forms used in U.S. offerings for which no other more specialized form is authorized or prescribed. These forms call for the highest level of disclosure.
Both Forms S-3 and F-3 are “short-form” or abbreviated registration forms used in U.S. offerings by certain seasoned issuers. Issuers may satisfy the disclosure requirements of these forms by incorporating certain information by reference to their periodic reports filed with the SEC. The series “-3” forms may also be used for shelf registrations. A shelf registration permits a corporation to register multiple types of securities with one single registration document up to two years in advance of the actual public offering. By using a shelf registration, the firm can fulfill all SEC registration-related procedures beforehand and go to market quickly when market conditions become favorable.
Type of Securities
All 10 transactions were offerings of common equity securities. Of the nine issuers, seven sold common stock or shares of a corporation and two offered “common units” of limited partnerships.
Type of Offerings
One of the offerings was an IPO and was a primary offering only – meaning that a public market for the issuer’s shares did not exist prior to the offering and also that the shares sold were newly-issued shares of the issuer and not previously issued shares offered by existing shareholders.8
The remaining nine offerings were primary follow-on offerings, of which only one was done on a long-form registration statement. All of the other eight follow-on offerings were completed pursuant to shelf registration statements. None of the follow-on offerings included secondary offerings by selling shareholders.
Plans of Distribution
All the transactions in the survey were structured as underwritings, except for one ATM offering.
Nine offerings by nine issuers were executed pursuant to firm-commitment underwriting agreements.9 In a firm-commitment underwriting agreement, the underwriters agree to purchase all of the shares offered by the issuer (except for shares subject to the green shoe option) if they purchase any shares and then resell them to the public. In these underwritings the issuer takes no risk that the shares may not be sold.
One issuer is offering common stock pursuant to an ATM offering.10 In an ATM offering, the issuer enters into an equity distribution agreement with a broker-dealer pursuant to which the broker-dealer, as sales agent for the issuer, agrees to use commercially reasonable efforts to sell shares of the issuer through ordinary brokers’ transactions on an exchange or otherwise at market prices prevailing at the time of sale, at prices related to the prevailing market prices or at negotiated prices. The agreement generally provides that shares will be offered on a daily basis or otherwise, as shall be agreed to by the issuer and the broker-dealer. The issuer designates the maximum amount and minimum price of shares to be sold on a daily basis or otherwise determines such amounts together with the broker-dealer. Unlike in the case of a firm-commitment underwriting, the issuer bears the risk of how many shares are ultimately sold. The agreement may also provide that the broker-dealer may purchase and resell shares as principal.
Discounts and Compensation
The total compensation to the underwriters for the one IPO transaction was 6.75% of the gross sales price of shares sold.
The average underwriting discount (or commission) for the eight underwritten follow-on offerings by eight issuers was 4.77% of the total purchase price to the public. The highest underwriting discount was 5.5% and the lowest underwriting discount was 4.0%.
The compensation to the broker-dealer, as agent of the issuer, for sales of shares in the ATM offering was 2.5% of the gross sales price of shares sold.
A common feature of U.S. equity offerings is the so-called “green shoe” (or over-allotment) option.11
The one IPO included a green shoe option which was not exercised.
Of the eight underwritten follow-on offerings, all included a green shoe option. The underwriters exercised the option in full or in part in all but three of the offerings.12 ATM offerings generally do not contemplate or include a green shoe option.
Another common feature of U.S. equity offerings is the so-called shareholder “lock-up.”13 Seven of the underwritten follow-on offerings and the IPO included a lock-up provision. The one ATM offering did not contain a lock-up.
The lock-up period for the IPO was 180 days. Of the seven underwritten follow-on offerings that included lock-ups, five had a lock-up period of 90 days and two had a lock-up period of 60 days.
Expenses of Offering
SEC rules require issuers to disclose the estimated costs and expenses of public offerings, in addition to the underwriting discount. The average estimated costs and expenses disclosed in the eight offerings for which those fees and expenses were disclosed was $547,329.14 The costs and expenses disclosed in the IPO was $1.4 million. The average estimated costs and expenses disclosed in the underwritten follow-on offerings was $425,519. The highest amount of estimated costs and expenses disclosed was $1.4 million in the IPO of Box Ships, Inc., and the lowest amount was $250,000 in the underwritten follow-on offering by Safe Bulkers, Inc.
The average estimated accounting fees and expenses of the eight offerings for which those fees and expenses were disclosed was $128,125. The estimated accounting costs and expenses disclosed in the IPO was $400,000. The average estimated accounting costs and expenses disclosed in the underwritten follow-on offerings was $89,286.
The average estimated legal fees and expenses of the eight offerings for which those fees and expenses were disclosed was $237,500. The estimated legal costs and expenses disclosed in the IPO was $500,000. The average estimated legal costs and expenses disclosed in the underwritten follow-on offerings was $200,000.
Registration fees charged by the SEC are based on the value of securities proposed to be sold. The registration fee rate is frequently adjusted by the SEC. Since December 2010, the registration fee has been computed at the rate of $116.10 per million dollars of securities registered based on the estimated maximum offering price.
Additional fees are required to be paid to the Financial Industry Regulatory Authority (FINRA) in connection with an evaluation of the fairness of the underwriting compensation and to the stock exchange for listing fees.
Morgan Stanley was book-running or lead manager in four offerings; J.P. Morgan, BofA Merrill Lynch and UBS were each book-running manager in three offerings; and Citigroup, Jefferies and Wells Fargo in two. UBS, Barclays Capital and J.P. Morgan served as joint book-running managers on the largest offering, the $144 million underwritten follow-on transaction by Teekay LNG Partners L.P. in April 2011. UBS and Morgan Stanley were joint book-running managers on the next largest offering, the $132 million initial public offering by Box Ships, Inc. in April 2011.