Aegean Marine: An Outright Disaster
Jun. 7, 2018 1:14 PM ET
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About: Aegean Marine Petroleum Network Inc. (ANW), Includes: MIC, RDS.A, XOM
Michael Boyd
Michael Boyd
Long/short equity, contrarian, medium-term horizon, mid-cap
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Industrial Insights
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Summary
Aegean Marine announces a write-down of $200mm of its accounts receivable balance.
That writedown pushes the company into violation of a number of its financial covenants. Refinancing the $95mm convertible bond in November looks unlikely, at least on favorable terms.
Lenders likely will want to firesale these assets. I don't see a way out other than a hedge fund lifeline from RBM Holdings and other involved parties.
Even if the company survives this, changing sulfur regulations in 2020 drive the need for more money. This could be an endless moneypit for hedge funds involved.
This idea was discussed in more depth with members of my private investing community, Industrial Insights.
Having started preliminary research on Aegean Petroleum (ANW) recently, I was able to throw most of that straight into the trash yesterday. Even before recent bombshells, I saw a multitude of problems as it stood: prior crony management, a late 20-F filing, thin covenant coverage, and a business model built upon providing easy credit to customers. Heading into a convertible bond refinance later this year and the 2020 sulfur cap regulation, the company was already on thin ice. Working directly with shipping guru J Mintzmyer at Value Investor’s Edge, I was able to get a clearer picture on how the company runs it operations, including vessel values, counterparties, and granularity on how it extends credit to customers. J's stance was that this was always a highly speculative play, and coupled with my own research, helped guide me away from this one as someone that is risk averse in this market area.
The key takeaway for anyone interested in this company was that it needs capital markets access to run its business – something that has eroded. Hopes rested on RBM Holdings, as well as hedge funds Towle & Company and Shah Capital Management, to turn around corporate governance here. With nearly 15% ownership, this consortium was heavily invested in leading a revitalization. Many investors followed, putting their money behind the so-called “smart money” in the room.
The news after hours yesterday that the company was going to write off $200mm in accounts receivable was not too surprising by itself. I expected some sort of bad news embedded in those hundreds of millions of dollars in receivables on the balance sheet. This was incredibly important, as the full recovery of which management used to craft a story that the company was not running a stressed balance sheet. What made this worse in my eyes was that this was not just sloppy extended credit. Aegean stated that “the transactions that gave rise to the accounts receivable may have been, in full or in part, without economic substance and improperly accounted for in contravention of the Company’s normal policies and procedures.” While it is too early to call this "fraud", this looks mighty sketchy to many observes. Investors should note prior shareholder-unfriendly policies, such as the attempt by founder Dimitris Melisanidis to get Aegean to buy a company he also owned (HEC Group). That proposal actually included the assignment of $200mm in receivables within the deal framework. Coincidence?