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February 11, 2009

Golden Ocean eyes newbuilding cancellations

John Fredriksen's dry bulk specialist Golden Ocean Group Limited (OSL: GOGL) may need a further injection of risk capital and is looking to renegotiate some loan agreements and to cancel some newbuilding contracts.

The company said today that it has tendered delivery notice in connection with the sale of its panamax vessel M/V Bellflower. The agreed sales price is $76 million. Golden Ocean has at the same time declared the purchase option on the vessel at a strike price of $21.3 million. The buyer has informed Golden Ocean that it does not have the financial resources to take delivery of the vessel. The Board of Golden Ocean has considered the available options including pursuing the claim through legal recovery, but says "the timing and financial backing for a potential award made such a route uncertain."

In this process the counterparty has come back with a proposal to buy the vessel for a reduced price of $50 million. The new agreement includes a $10 million second priority financing with 7 years maturity to rank after a first priority mortgage maximized to $18 million. This price is estimated to reflect a significant contribution from the buyer above the current market value of the vessel. The new sales agreement is based on the new ultimate owners bringing new equity to the buyer. The Golden Ocean board agreed in this difficult situation to accept the new contract and the vessel is expected to be delivered to the new owners in March 2009. If the sale fails Golden Ocean will seek recovery under the original contract.

Due to financial constraints and risk of bankruptcy for one of the Golden Ocean's counterparts (Spanish cement producer), it has been agreed that the Panamax vessels M/V Mulberry Paris and M/V Mulberry Wilton (both 76.500 dwt) be redelivered from their existing charter. A cash compensation of approximately $25 million has been agreed upon and both vessels will be trading in the spot market until further notice. The loss for Golden Ocean compared to the present forward market is approximately $32.0 million with the potential for some further recovery based on a positive financial development of the charterer. The loss is sensitive to the spot earnings for the two vessels going forward.

Due to non-compliance with the terms and conditions for the sale/leaseback agreements of two Capesize vessels to be delivered from Daehan Shipbuilding, Ship Finance International Limited and Golden Ocean have agreed to terminate the agreement. Golden Ocean is in discussions with banks to replace these two financing arrangements as well as seeking financing for the 10 ships the Company presently have unfinanced.

The two breaches of contract put constraints on the company's liquidity position and might force it to seek further risk capital. Golden Ocean's major shareholder [Mr. Fredriksen, through his Hemen Holdings] has under certain conditions indicated a positive willingness to contribute to such a solution. The major condition is that the company can agree acceptable changes in the loan documentation with its banks as well as the holders of the company's convertible bonds.

A significant part of Golden Ocean's value is linked to the value of its charter portfolio. Golden Ocean considers the counterparty risk to be its biggest challenge.

Golden Ocean says it will enter into discussions with the banks to discuss potential changes to its loan agreements, among others the interpretation of the loan agreements related to the value of charter parties into the net worth calculation. The company anticipates that similar discussions will take place with its convertible bond holders. The changes might be needed so that the company stays in compliance with existing lending facilities.

Golden Ocean has also started discussions with the shipyards and other specific creditors in order to achieve reliefs in its contracts and agreements. This includes, among other items, cancellations of newbuilding contracts, but as of today no agreements have been made.

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