We were disappointed,” – that is how the Chairman of the Management Board of Latvian Shipping Company (LSC) Robert Kirkup says he feels after the shareholders’ meeting, which did not support the proposal to issue 200 million new shares. And he admits: Vitol (49%) and the state (10%) voted in favour of it. Therefore, purely arithmetically a conclusion follows: the idea was “buried” by the Italian investor Giovanni Fagioli. What now? About that – in the interview of NaudasLietas.lv with Robert Kirkup.


Did not count on the government

For minority shareholders, the LSC voting result (negative) was a surprise. Was it so for you too?

You mean, did I know about such outcome in advance?

Exactly.

No, I didn’t know. According to the rules, consent of owners of 75% of the capital was required to pass this resolution. For about 6 months before the meeting we tried to identify what percentage of shareholders will come and vote at all – but the practice in Latvia is such that it is not easy to make predictions. We hoped that owners of minimum 85-86% of the capital would come. And then the question was – how they would vote.

Yes, in the end I was surprised about how some people voted. In the course of the 6 months before the meeting we communicated with the largest shareholders regarding this matter. We talked to the Latvian government, the Estonian fund Fondo (the Italian investor Giovanni Fagioli stands behind it – SP), LHV, the Finnish fund KYK. Among other things, we asked what their votes were going to be. Some answered, others didn’t. As a result we assumed that we could get from 70 to 80% of the votes “for”.

Apart from that, it was necessary to understand, which of the shareholders who previously expressed their support were ready to invest their money in the emission. Because we understood that raising money not from our shareholders but from the side, on the capital market – in the current situation it would be difficult… If our scenario (emission) worked, in 2-3 years, with the possibility to repay part of the debt to the banks, with renewal of the fleet, the company’s positions would be much stronger.

Eventually – after the voting – we were disappointed… Although we were very close to the goal – we got about 72% of the votes. To make it clear right away — voting is anonymous. We do not know how the government voted, they just indicated they voted “for”. I supposed that a shareholder whose plans were unlikely to invest its funds into a new share issue – most likely it could vote against the capital increase. But, apparently, there were other shareholders who didn’t support us.

Two major shareholders – Ventspils Nafta and Mr. Fagioli…

It is clear that Ventspils Nafta voted “for”. We were not surprised here – we put this idea (share issue) forward together, and without them it couldn’t be implemented at all. And from that … Purely arithmetically, you can calculate that, possibly, Mr. Fagioli did not support us. But I’m not affirming anything here, what if I’m mistaken… (smiles).

What did Mr. Fagioli tell you before voting when you were communicating with him?

Well those were private conversations…

Do you hope that Mr. Fagioli might still change his mind regarding the capital increase?

You should ask him personally. From the management viewpoint, it would be wrong to continue insisting on the option if it doesn’t have necessary support. The decision was taken and we act according to that.

A hope to come out in pluses

What do you think about the business prospects of LSC this year? A couple of months ago you were cautious about this.

We remain cautious. Long-term vessel chartering rates have declined slightly. Last year was quite positive in terms of dynamics of freight rates in our shipping segment. But at the moment we are not expecting for this upward trend to continue.

Was the situation with rates in the first quarter the same as in 2015?

All-in-all – yes, and the overall situation in the market too. But we are not ready yet to report in detail on the results of the first quarter.

14 out of 16 of your vessels are in long-term charters, with the average term of 7 months…

Yes, usually only 2 out of 16 of our tankers are working on the spot market. Maybe this year we will transfer 2 more tankers to the spot market. We have a feeling that long-term charter rates are slightly declining, while the level of chartering rates on the spot market might remain slightly higher. Perhaps such balance will turn out to be more advantageous. But we have not made up our mind yet. Quite possibly, in the end we could get a good chartering offer and we would stay with that.

What are the financial plans for 2016?

We hope to work out in slight pluses.

Small pluses – from the core business in shipping, excluding revaluation of assets?

Exactly.

Well, investors of LSC are used to this – the main business gives profit, but that is continued by writing off the value of assets.

Of course, we have accounting rules, independent assessment of the fleet. The way in which we evaluate the physical assets – ships, or property – it does not depend on the will of the management.

About the revaluation of assets

At the end of last year the average value of one LSC tanker as a result of revaluations reduced to 19-20 million dollars. Are these market prices?

That is a big question. If you need to sell 16 ships at once within 2 months – you will possibly not get such price for them. You will probably need to drop 20% off the current value. But I will emphasize that we are not in a situation of selling. It remains to believe that the evaluation of the ships approved by KPMG is worth something after all.

As to real estate… If you would want to sell half of the LSC’s Riga real estate package in a couple of months – you probably will have to drop off even 50% of the current estimated value. If you are ready to sell slowly, to wait – you will possibly get the property’s evaluated price.

How much longer will asset write-downs last – is that a process for the years ahead?

Ships age every year. And, of course, they become cheaper in parallel to their remaining service life decreasing. It’s like with a car – it becomes cheaper every year, not more expensive.

Nevertheless, voluntary revaluation – it isn’t the same as depreciation in accounting. It’s one thing when in the course of depreciation you write off part of the value in equal amounts each year in the course of the entire service life. It is different when additional revaluation is taking place.

Here we depend on the market value. We don’t control the price of our assets on the market.

How are things going with looking for buyers of LASCO Investments property, is there any interest?

There seemed to be an interested client but eventually it didn’t work out. We hope that with time we will manage to find buyers. A lot depends on the overall complicated situation on the local real estate market. This market has become more “difficult” over the past 2 years. But we are looking for options in a broader scope – not only in Latvia but also in China, Kazakhstan, anywhere…

Will it still be necessary to lower the value of LSC property in the balance sheet in the future?

It depends on the situation in the real estate market. It is necessary for the evaluation to be fair. But opinions may greatly differ about this, and everyone will have their own interpretation of a fair price. Some investors, talking about the high-rise building Preses Nams, tell us: “It’s not worth anything”. Our reaction: “Come on, this is ridiculous!” Although maybe I’m wrong and they are right – after all, we have not sold the building yet.

Do you think that the final outcome of the year – taking into account all asset revaluations – will be in the minus?

What’s left here is to hope that the situation will stabilise after the revaluation carried out in 2015. I hope that big write-offs will not repeat year after year.

There will be no new ships

How do you plan to refinance debts to the banks?

Before the shareholders’ meeting we were simultaneously working on two scenarios: with increased capital and without it. Hence we didn’t stop negotiations with the banks on the subject of debt refinancing. At the moment I can’t comment on the course of these negotiations.

Do you think, if banks re-credit LSC, the new credit interest rate will be more favourable, or less?

I think it will be very close to the previous one.

And orders of new ships are not expected in such scenario.

Right, we won’t have such an opportunity. We currently own 16 ships. In addition to this, the number of ships under management of LSC will reach 7 in May.

The company’s cash deposit reaches 52 million dollars. What are the plans as to their usage?

As known, big part of this sum is a safety cushion that we had to keep on the account since 2011 in accordance with the agreement with syndicate banks that financed building of 14 ships. And I hope this matter will be a subject of negotiation with banks (at the time of re-crediting). Because from the management viewpoint it isn’t the most effective way of using money. Here we have time: we need to refinance a large sum of the debt in the middle of 2017.

Purely theoretical question

Note: The below conversation – about the book value, “actual” value and stock exchange value of LSC shares in case of a new issue – has kind of lost relevance. On the other hand, never say never: after all, nobody stands in the way of Mr. Fagioli changing his mind over time.

During the LSC presentation in March, investors were asking about decreasing the book value per share in case of a new issue. Back then you basically didn’t answer – it seems you didn’t understand the question.

There was a question about lowering the company’s value as a result of an issue.

Not the company but a single share, its book value.

Because the number of shares would double right?

Exactly. Double amount of shares, but not double amount of capital. In late 2015 the book value of one VN share was 71.5 euro cents. In case of an issue, considering the increase in the number of shares, it would decrease to 55.7 cents.

However, if you look at the total value of the company, plus also the raised new capital – and if you also take part in it (in the issue), there is absolutely no difference for you…

For those who would have participated – nothing changes. But for those who wouldn’t participate – they’re at loss. For example, I doubt that the government, which owns 10% of the capital, would decide to invest into a share issue.

We never asked the government about it. So we don’t know if they would invest money or not. And anyway, this issue didn’t happen eventually. Now it is just a theoretical question. And it’s worth mentioning here that absolutely each shareholder would have a possibility to invest into the new issue. Nobody should be excluded.

However, the ones who for some reason wouldn’t participate – they would end up at loss.

In what sense?

For example, if Ventspils Nafta would announce a buy-out of LSC shares after some time – the buyout price calculated according to the balance sheet after the issue would be lower.

I would still take into account how much more valuable the company’s shares would be when it becomes much stronger in case of a new issue, with a better financing structure, with higher flexibility in relations with banks, with lower credit interest rates. I believe, after a certain period of time the company would become more valuable and effective. I think that the share value would grow in the end.

In case of an issue, why couldn’t the shares be offered not for 40 cents but for the book value?

Because no one would buy them at the book value… The price of LSC shares on the stock exchange has not reached the book value level for many years.

If we are talking about LSC, the capital of which consists of 200 million shares, and which has low liquidity on the stock exchange – then the market does not reflect the real value of the shares.

I think that the stock exchange price simply includes risks. The book value – that’s one thing. But the share price, among other things, shows the bankruptcy risk of the company. Yes, the liquidity on the market that you mentioned is also a serious factor. It influences both those who would like to sell a serious stock of shares and those who would like to buy – in both cases it would mean a serious shift in prices. There are many nuances here.

What do you think, does Vitol have interest in buying minority shares of the LSC capital – for example the state-owned 10%?

That is rather a question to the Vitol Group, not to the management.

Of course, here I’m asking you as a person who is familiar with the attitude of Vitol shareholders.

Vitol already controls over 49% of LSC shares. If they increase their stock – they will face an obligation to announce a share buy-out to other shareholders, at the book value. From the perspective of Vitol shareholders, that would be a high price.

Background information

Regarding the prices on the stock exchange and outside it. When Vitol bought Ventspils Nafta shares owned by LNT in September last year – the parties agreed on a price of 1.77 euros per share. While their price on the stock exchange shortly before that was slightly over 1 euro – and even at that price, hardly anybody needed them.