United States: Survey of Shipping Primary Equity Offerings in the 2009 U.S. Public Market

Frode Jensen, partner and Francois Janson, senior counsel, and are based in our New York office.

2009 was a challenging year for many shipping companies throughout the world. Despite a difficult environment, 14 companies completed 21 primary equity offerings in the U.S. public market.¹

This survey reviews the registration documents filed with the U.S. Securities and Exchange Commission (SEC) in connection with these transactions and the principal terms of the related offerings.²

Highlights of the Survey

Jurisdiction of Organization and Principal Place of Business of Issuers

The predominant jurisdiction of organization was the Marshall Islands.

Of the 14 issuers accessing U.S. markets, only one issuer, K-Sea Transportation Partners L.P. (KSP), was organized in the United States. KSP is a U.S. domestic Jones Act carrier and is therefore required by U.S. law to be organized in the U.S.³ Of the remaining 13 issuers, 11 were organized in the Marshall Islands, one in Bermuda and one in Liberia. All but one of these 13 issuers, Eagle Bulk Shipping Inc., have executive offices outside the U.S. The executive offices of these issuers were located in Bermuda, Greece and the Channel Islands (Jersey).

The disclosure documents typically state that: (i) so long as the issuer is incorporated outside the U.S. and its "shipping income"⁴ is attributable to transportation exclusively between non-U.S. ports, it will not, solely by reason of offering its securities in the U.S., 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 U.S. or because their shareholders may reside in the U.S.; and (iii) there is no restriction on non-U.S. companies filing registration statements to sell securities in the U.S., and the conduct of an offering in, or even a listing on a securities exchange in the U.S. does not, alone, subject an issuer to U.S. taxation.

Business of Issuers

Nine of the 14 issuers were primarily operators of dry bulk vessels. The other five issuers primarily own and operate fleets transporting oil, gas and petroleum products.

Use of Proceeds

The most common uses of proceeds from equity offerings in 2009 were to repay indebtedness, strengthen the balance sheet in order to remedy or avoid breach of loan covenants, fund external growth and fund newbuilding programs.

Exchange Listings

Of the 14 issuers, nine were listed on the New York Stock Exchange (NYSE), three were listed on the NASDAQ Global Market and two were listed on the NASDAQ Global Select Market. One issuer, Paragon Shipping Inc., moved from the NASDAQ Global Market to the NYSE in March 2010.

Type of Registration Forms

Of the 14 issuers, 12 filed registration statements on SEC Form F-3 and two filed registration statements on Form S-3.

Form F-3 is only available to be used by so-called "foreign private issuers."⁵ 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.

Both Forms S-3 and F-3 are 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.

Type of Securities

All 21 offerings were offerings of common equity securities.⁶ Of the 14 issuers, 10 sold common stock or shares of a corporation and four offered "common units" of limited partnerships.

Type of Offerings

All of the offerings were primary⁷ follow-on offerings pursuant to shelf registration statements.⁸ None of the offerings was an IPO and none included secondary offerings by selling shareholders.⁹

Plans of Distribution

The transactions in the survey were structured as (i) ATM offerings, (ii) SEDA offerings and (iii) traditional underwritings.

1. Three issuers completed five at-the-market (ATM) offerings.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 determine such amounts together with the broker-dealer. The agreement may also provide that the broker-dealer may purchase and resell shares as principal. Unlike in the case of a firm-commitment underwriting, the issuer bears the risk of how many shares are ultimately sold.

2. One issuer, OceanFreight Inc., sold shares in two separate transactions pursuant to standby equity distribution agreements (SEDAs). Under a SEDA, the issuer has the right (but not the obligation) to sell up to the agreed upon number of shares at any time, and from time to time, to a purchaser which is obligated as principal to purchase such shares upon request by the issuer. The purchase price is based upon a daily dollar volume weighted average price for the common stock, less a discount. As in an ATM, the purchaser may resell the shares 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 purchaser is an "underwriter" within the meaning of the Securities Act of 1933, as amended, and the compensation to the purchaser may be deemed to be underwriting commission or discount. The prospectus covers both the issuance and resale of the shares.

3. The balance of 14 transactions by 10 issuers were executed pursuant to traditional firm-commitment underwriting agreements.¹¹ In a traditional 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.

Size of Offerings

The average size of the 21 offerings (excluding the green shoe options, discussed below), was $128 million and the median size was $70 million.

The average size of the five ATM offerings was $233 million and the median size was $100 million. The largest ATM offering in 2009 (which was also the largest equity transaction in our survey) was the $500 million offering by DryShips Inc. in April 2009. The smallest ATM offering was the $37 million¹² offering by Paragon Shipping Inc. in April 2009.

The average size of the two SEDA offerings conducted by OceanFreight Inc. was $299 million.

The average size of the 14 firm-commitment underwritten offerings (excluding the green shoe options, discussed below), was $67 million and the median size was $64 million. The largest firm-commitment underwriting in 2009 was the $128 million offering by Nordic American Tanker Shipping Limited in May 2009. The smallest firm-commitment underwriting was the $16 million offering by FreeSeas Inc. in July 2009.

Discounts and Compensation¹³

The average compensation to the broker-dealer, as agent of the issuer, for sales of shares under the five ATM offerings by three issuers was 2.63% of the gross sales price of shares sold. The highest ATM fee was 3.0% and the lowest fee was 2.13%.

The compensation to the purchaser for sales of shares under the two SEDA offerings was 1.5% of the daily dollar volume weighted average price on the defined pricing date.

The average underwriting discount (or commission) for the 14 firm commitment underwritings by 10 issuers was 4.46% of the total purchase price to the public. The highest underwriting discount was 5.9% and the lowest underwriting discount was 2.2%.

Green Shoe

A common feature of U.S. equity offerings is the so-called "green shoe" (or over-allotment) option.¹⁴ All of the 14 firm commitment underwritings included a green shoe option. None of the ATM or SEDA offerings included a green shoe option. In eight of the 14 offerings, the underwriters exercised the option in full or in part.

Lock-Ups

Another common feature of U.S. equity offerings is the so-called shareholder "lock-up."¹⁵ All of the 14 firm commitment underwritings and two of the ATM offerings included a lock-up provision. The other three ATM offerings and both of the SEDA offerings did not contain a lock-up. Of the 16 offerings which included lock-ups, seven had a lock-up period of 90 days, two had a lock-up period of 75 days and seven 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, other than underwriting discount. The average estimated costs and expenses disclosed was $332,979.¹⁶ The average estimated costs and expenses disclosed in the ATM transactions was $203,000. The average estimated costs and expenses disclosed in the SEDA transactions was $260,000. The average estimated costs and expenses disclosed in the firm-commitment underwritten transactions was $389,826. The highest amount of estimated costs and expenses disclosed was $600,000 and the lowest amount was $100,000.

The average estimated legal fees and expenses of the 20 offerings for which those fees and expenses were disclosed was $178,000. The average estimated accounting fees and expenses of those offerings was $65,250.

The average estimated legal costs and expenses disclosed in the ATM transactions was $112,000. The average estimated legal costs and expenses disclosed in the SEDA transactions was $75,000. The average estimated legal costs and expenses disclosed in the firm-commitment underwritten transactions was $203,571.

The average estimated accounting costs and expenses disclosed in the ATM transactions was $60,000. The average estimated accounting costs and expenses disclosed in the SEDA transactions was $85,000. The average estimated accounting costs and expenses disclosed in the firm-commitment underwritten transactions was $59,643.

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. From March 2009 until December 2009, the registration fee was computed at the rate of $55.80 per million dollars of securities registered based on the estimated maximum offering price. Since December 2009, the registration fee has been computed at the rate of $71.30 per million dollars, but will increase to $116.10 effective on October 1, 2010, or five days after the date on which the SEC receives its fiscal year 2011 regular appropriation, whichever date comes later.

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.

Conclusion

Many shipping companies faced a challenging year in 2009. However, despite generally adverse market conditions, a substantial number of companies were able to raise much needed equity through follow-on offerings.

The authors gratefully acknowledge the assistance of Fredrik Eidem of the Oslo bar and Camilla Appelgren of the Stockholm bar, in the preparation of this survey.

Footnotes

^{1 In addition, three issuers, Euroseas Ltd., Top Ships Inc. and Tsakos Energy Navigation Limited, filed registration statements but, to our knowledge, did not report selling any material amount of common shares under these registration statements in 2009. These transactions are not included in this survey, nor are equity-linked offerings, offerings of shares as dividends or offerings under incentive plans.}

^{2 This survey reviews offerings made pursuant to prospectuses filed with the SEC during the calendar year 2009 by issuers that have been assigned Standard Industrial Classification Codes 4400 (Water Transportation) and 4412 (Deep Sea Foreign Transportation of Freight). All information provided in this survey is derived from public filings available on the SEC Edgar database. Amounts in this survey expressed as "$" refer to United States dollars.}

^{3 Under the Jones Act, trade between United States ports ("coastwise trade") is, subject to limitations, reserved for U.S.-owned and organized companies operating U.S.-built, operated and flagged vessels manned by U.S. citizen crews.}

^{4 Shipping income generally is defined as income attributable from the use of a vessel, or the hiring or leasing of a vessel for use on a time or voyage charter basis, or from the performance of services directly related to the use of a vessel.}

^{5 Any issuer that is incorporated in a jurisdiction other than the U.S. qualifies as a foreign private issuer unless (i) it has more than 50% of its shareholders resident in the U.S. and (ii) it is deemed to be based in the U.S. (which will be the case if any of the following is true: (1) a majority of the executive officers or directors of the issuer are U.S. citizens or residents; (2) more than 50% of the assets of the issuer are located in the U.S.; or (3) the business of the issuer is administered principally in the U.S.).}

^{6 One issuer, DryShips Inc., sold $460 million of convertible bonds in a separate offering, in addition to the two public common stock offerings. As part of this offering, DryShips Inc. delivered to the underwriter 26.1 million shares of its common stock in settlement of certain hedging transactions relating to the sale of the convertible bonds. This offering is not included in the 21 transactions covered by this survey.}

^{7 A primary offering is an original sale of a company's securities, in which the proceeds from the sale are received directly by the company.}

^{8 A shelf registration statement allows a company to register securities for future public offerings. The shelf registration is effective for up to three years before doing the actual public offering. By using shelf registration, an issuer can fulfill all registration-related procedures beforehand and go to market quickly when conditions become favorable.}

^{9 Two issuers, Danaos Corporation and Tsakos Energy Navigation Limited, filed separate prospectuses covering sales of shares by selling shareholders under their respective universal shelf registration statement. These transactions are not included in this survey.}

^{10 DryShips Inc. and Paragon Shipping Inc. each completed two deals and Eagle Bulk Shipping Inc. completed one deal.}

^{11 These issuers were DHT Holdings Inc. (formerly DHT Maritime Inc.); Diana Shipping Inc.; Excel Maritime Carriers Ltd.; FreeSeas Inc.; K-Sea Transportation Partners L.P.; Navios Maritime Partners L.P.; Nordic American Tanker Shipping Limited; Teekay LNG Partners L.P.; Teekay Offshore Partners L.P.; and Teekay Tankers Ltd.}

^{12 Based on the last reported share price disclosed in the prospectus regarding this offering.}

^{13 The figures provided in this paragraph do not take into account changes in commissions or discounts for negotiated transactions.}

^{14 The "green shoe" option refers to a clause contained in the underwriting agreement. The option, which is also often referred to as an over-allotment provision, allows the underwriting syndicate to buy up to an additional 15% of the shares at the offering price if public demand for the shares exceeds expectations.}

^{15 A lock-up agreement restricts certain shareholders, generally insiders, from liquidating positions for a specified period of time following the offering date.}

^{16 The estimated amount of offering expenses disclosed in registration statements is frequently underestimated by substantial amounts.}

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