Maritime junk bonds have taken a brief, bumpy voyage.
For most of this year observers have been agog at the record volume of high-yield issues by shipping lines, which historically have relied on bank debt for financing.
In recent weeks two shippers pulled planned junk bond issues from the market and a third saw its bonds priced well above target. Though July has been a tough month for the high-yield bond market overall, observers say the shipping sector has been unusually hard hit.
"That's primarily because it's still a relatively small pool of prospective investors and they've been overwhelmed with new issuance," said Kirk Ludtke, a shipping analyst with Chase Securities Inc.
Shippers have raised $3.9 billion with junk bonds since last July, and a staggering $2.6 billion this year alone, Mr. Ludtke said.
Credit ratings have been slipping. Before the spate of junk bonds this year, most shipping issuers were rated BB. That has dropped into the B range, with some going even lower.
For investors leery of the possible impact of the turmoil in Asian markets, those ratings are too low. They are demanding compensation for the extra risk.
During a road show in June for a planned $160 million issue by Sea Transport Ltd., a Norwegian shipping line, underwriters told investors they were hoping to price the bonds "somewhere south of 11%," according to someone familiar with the deal.
But investors demanded higher returns from the company, which is rated B2 by Moody's Investors Services and B by Standard & Poor's. Sea Transport scrapped the deal.
Good Faith Holdings Ltd. was the next to succumb to new market conditions.
The company, which planned to raise $280 million with junk bonds, said it also had a road show in June, looking to price its deal in the 9% range.
As junk prices escalated, Good Faith-rated Ba3 by Moody's and BB-minus by S&P-gave the underwriters permission to go as high as 10.25%.
But when it looked like they would have to offer investors closer to 11%, the company reversed course.
"We realized the company was not in any need to go with an expensive financing," said Angeliki Frangou, a senior vice president with Bermuda- based Good Faith.
Though a third issuer, Millennium Sea Carriers Inc., did not pull its deal, it wound up paying more on its bonds than it would have liked. The company, rated B3 by Moody's and B by S&P, sold $100 million of junk last week.
Though Millenium Investors had hoped to offer investors 11%, they were forced to pay a yield of 12.75%.
The deal also included warrants to purchase a 5% equity stake in the company.
There are four shipping junk bond deals still in the pipeline, Mr. Ludtke said.
But shippers that do not want to pay the high price for money that the bond market demands probably will fall back on bank financing.
Executives at Good Faith, which had planned on using $206 million of its junk bond proceeds to pay down bank debt, plan to let the debt stand.
"We have an excellent relationship with our banks," said Ms. Frangou.
The company pays its banks-Bank of New York, Royal Bank of Scotland, Societe Generale, Deutsche Schiff's Bank, First National Bank of Maryland, and National Bank of Greece-the London Interbank Rate plus 1.125% for financing, she said.
Another $65 million of the pulled issue was slated for the purchase of secondhand vessels. It is generally considered a good time to buy dry bulk vessels, as that segment of the shipping market is at an 11- or 12-year low.
Good Faith intends to tap the banks to fund its fleet expansion.
Recent events have also caused a decline of as much as 1% to 2% in the secondary market for some of the weak B-rated shipping junk bonds, Mr. Ludtke said. Bonds for better-rated issuers have not been affected.
Mr. Ludket said three things could help the secondary market: a clearer outlook for Asian economies, a decrease in the flow of new shipping issues, and the investment of much of the uninvested capital shippers have raised with junk bonds this year.
Donaldson, Lufkin & Jenrette and Goldman Sachs & Co. were each going to underwrite 45% of Good Faith's junk bond deal. The shipping company had given 10% of the deal to Bank of New York, with which it has a long- standing relationship.
DLJ was also slated to underwrite the Sea Transport deal. Credit Suisse First Boston and DLJ co-lead the Millennium issue, with First Boston running the books.