BlueMountain Capital Management — the US hedge fund that closed its flagship fund last week — will go down as the poster child of how private equity misjudged and mistimed its high stakes investments in shipping over the past decade.

BlueMountain's investments have been on a scale second only to distressed hedge fund specialist Oaktree Capital Management.

But bets on large newbuilding plays and companies with precarious corporate governance damaged BlueMountain’s returns in its stormy seven-year odyssey through shipping.

They were far from being the "smartest people in the room", as hedge fund managers love to characterise themselves.

Missed targets

BlueMountain announced last week that it had closed BlueMountain Credit Alternatives Master Fund (BMCA) after it had failed to meet its annual return target of 8% to 10% since 2012, and lost money in 2018.

The fund's closed just a week after BlueMountain was bought by bond insurer Assured Guaranty for $160m.

While the fund's demise is a wider issue, some of the causes clearly derived from the shipping sector.

The New York-based firm founded by Andrew Feldstein and Stephen Siderow launched equity stakes and other financing activities in at least nine owners over the period. Siderow will leave at the end of the year.

For the most part, the results from shipping were grim. The financier presided over an array of loss-making bets that were followed by the departure of at least three executives responsible for maritime investments.

BlueMountain had wins as well, but they were the exceptions, finance sources and public records suggest.

DryShips chief executive George Economou Photo: TradeWinds Events

The mistakes in many ways symbolise the wider experience of private equity’s rush into shipping: a bold push, only to get bogged down in loss-making stakes with few good escape routes amid a prolonged slump in hire rates across several sectors.

BlueMountain showed up randomly in a big way in the early 2010s, playing a lot of the distressed and eco-newbuilding opportunities

Equity analyst

“BlueMountain showed up randomly in a big way in the early 2010s, playing a lot of the distressed and eco-newbuilding opportunities,” one equity analyst said.

“They raised a lot of capital earmarked for distressed shipping investments, but got too involved in going after newbuildings.”

Large stakes in companies such as Scorpio Bulkers, DryShips, OceanRig, Gener8 and Navig8 Chemical Tankers did not go quite how BlueMountain’s shipping specialists had intended.

The firm resorted to selling off all or most of those positions in recent years and months, available filings indicate, in what has the look of capitulation amid significant losses in some cases.

Indeed, BlueMountain is mostly out of shipping just as some sense hope at last for long-suffering US-listed equities. This is especially so in the tanker sector, owing to factors including US sanctions and market dislocations related to the IMO 2020 sulphur cap.

“They got in a little early,” one equity analyst said this week.

Shipping exit

A BlueMountain spokesman said shipping exposure accounted for less than 1% of net asset value (NAV) of the BMCA.

“BMCA currently has no exposure to shipping. Cumulative losses since 2012 from shipping investments were less than 1.5% of BMCA’s NAV,” he said.

A review of public filings shows a particularly bad episode for BlueMountain came in the autumn of 2014, when the firm disclosed large stakes in two New York-listed dry bulk firms: Scorpio Bulkers and DryShips.

Rather than rewarding the investment, both owners were about to lose huge portions of their equity value.

Regarding the analyst’s point on newbuildings, the clearest example was BlueMountain’s belief in Scorpio Bulkers — a 2013 initial public offering (IPO) company that trumpeted a massive investment in 52 "eco" fuel-efficient newbuildings.

Scorpio Bulkers chief executive Emanuele Lauro won a large investment from BlueMountain Capital Management Photo: TradeWinds Events

BlueMountain held 8.5m shares (8.4%) in Scorpio Bulkers at its December 2013 IPO in New York, according to the prospectus. It was the third-largest shareholder.

In September 2014, BlueMountain revealed a stake of 9.9m shares (7.1%) in the Emanuele Lauro-led company.

Plummeting shares

Instead of delivering outsized returns through green ships, the fledgling company made investors green around the gills as shares plummeted.

The market was in crisis as Scorpio Bulkers took delivery of many newbuildings, but sold or cancelled others.

The next two years brought the lowest numbers in the history of the Baltic Dry Index.

While it is unclear when BlueMountain completely cleared its position, the shares it held then were worth about $92 each, giving effect to a one-for-12 reverse stock split in December 2015. Scorpio Bulkers' shares are trading just over $7 today, even after a recent rally.

The largest portion of BlueMountain’s Scorpio Bulkers holding was held by the BMCA.

As recently as October 2017, it still held 7.1m shares (4%).

In October 2014, just one month after disclosing the Scorpio Bulkers holding, a public filing revealed BlueMountain had bought a 10.4% stake in George Economou’s DryShips. The 71.4m shares were worth $106m at the time.

The acquisition helped DryShips refinance $700m in convertible notes that were approaching maturity.

But the solution proved to be temporary, as DryShips' shares would lose 99% of their value over the next two years.

Again, it is unclear when BlueMountain fully divested its position, but steep losses would have been inevitable.

$100m position

“They took a $100m position in DryShips after being sold on George Economou’s credentials and I think they wrote the whole position off — that was the straw that broke the camel’s back,” one veteran finance executive said.

Andrew Feldstein, co-founder of BlueMountain Capital Management Photo: Bloomberg
Stephen Siderow, co-founder of BlueMountain Capital Management Photo: Bloomberg

“They were also big losers in Scorpio Bulk, buying into the eco newbuilding flavour-of-the month spin — another big writedown.”

The executive said BlueMountain learned hard lessons in both cases.

“In the first instance, it goes back to the importance of corporate governance. DryShips has consistently been the worst-rated company in Michael Webber’s governance scorecards,” he said, referring to a ratings system established by the former Wells Fargo Securities equity analyst in 2016.

DryShips repeatedly finished last of more than 50 rated owners.

“In the second instance, newbuilding-only companies have always failed to deliver good returns for investors, as evidenced recently by Scorpio Bulkers, Scorpio Tankers, the Navig8 companies and others,” he said.

Whatever the reasons, BlueMountain appeared to react to the wayward investments.

As TradeWinds reported in March 2016, the New York firm parted ways with shipping analyst Timothy Valz, who was responsible for many of its shipping positions.

One veteran shipfinance man assessed BlueMountain’s performance at the time: “They made a lot of money trading in and out of their positions in securities, but they held onto positions much too long. They got fooled multiple times.”

About a year later, in May 2017, TradeWinds reported that two more BlueMountain executives with some hand in shipping investments had followed Valz out of the door.

Departing executives

Earlier in the year, portfolio manager Ethan Auerbach, who had been placed on the board of tanker owner Gener8 Maritime by BlueMountain, left the firm after eight years for another financial company.

Another portfolio manager, Chad Valerio, had left BlueMountain a few months earlier while retaining his seat on the board of Overseas Shipholding Group (OSG), another BlueMountain investment.

International Seaways chief executive Lois Zabrocky says BlueMountain is now fully out of its five-year position in the company Photo: Capital Link

Finance sources said at the time that BlueMountain appeared to have lost interest in shipping investment and would likely be in the process of winding up its positions.

Some obvious selldowns followed in OSG and International Seaways, the foreign-flag entity spun off from the original OSG in December 2016. BlueMountain had established an initial stake in OSG at the time of its Chapter 11 bankruptcy reorganisation from 2012 to 2014.

International Seaways chief executive Lois Zabrocky told TradeWinds this week that BlueMountain, which had once held 14% of the company, was now fully out of the position.

Public filings show that BlueMountain sold its remaining shares in OSG in February and March, including a block sale of 7.5m shares in March at $1.90 each — closer to the stock’s 52-week low of $1.42 than its high of $3.48.

TradeWinds also reported in June that BlueMountain explored selling its stake in Oslo over-the-counter traded Navig8 Chemical Tankers earlier this year, but there are no indications a sale transpired.

Timeline of BlueMountain's shipping experience

November 2011: General Maritime files for Chapter 11 bankruptcy reorganisation.

November 2012: OSG files for Chapter 11 bankruptcy reorganisation.

November 2012: BlueMountain believed to have bought bank debt of OSG prior to Chapter 11 bankruptcy filing.

December 2013: BlueMountain holds 8.5m shares (8.4%) in Scorpio Bulkers at it initial public offering, ranking as third-largest holder.

December 2013: BlueMountain is one of the private equity firms to switch from backing General Maritime to Euronav in the purchase of the Maersk Tankers VLCC fleet for $980m.

March 2014: BlueMountain takes 7.8m shares in private General Maritime equity issue to help finance seven VLCC newbuilding resales from Scorpio Tankers for $735m. Also buys $131.6m in unsecured notes from General Maritime with 11% payment-in-kind interest rate but no cash requirement until 2020.

October 2014: BlueMountain takes 10.4% of George Economou’s DryShips, worth $106m, through an equity raise used to refinance convertible notes. DryShips shares lose 99% of their value over next two years.

September 2014: BlueMountain reveals stake of 9.9m shares (7.1%) in Scorpio Bulkers. Shares are worth about $92, giving effect to reverse stock splits since. They are trading around $7.25 today.

January 2015: BlueMountain reports 7.7m shares (20.85%) in Tanker Investments Ltd, the Teekay group’s Oslo-traded play on distressed vessels.

February 2015: BlueMountain reports 12.1m shares (6.7%) in Scorpio Bulkers.

March 2015: General Maritime's all-stock merger with Navig8 Crude, creating Gener8 Maritime, features BlueMountain as a significant shareholder on both sides.

April 2015: BlueMountain reports 33.4m shares (5%) in DryShips, down from 71.4m shares (worth $106m, or 10.4%) at 24 October 2014. Sells 2.71m shares in nine days. DryShips' shares sit at $0.78 after hitting all-time low $0.72 in March.

May 2015: BlueMountain reports 8.9m shares (4.9%) in Scorpio Bulkers, with 6.1m held by Credit Alternatives Master Fund.

June 2015: Gener8 goes public with BlueMountain holding large stake.

March 2016: TradeWinds reports BlueMountain has parted ways with Timothy Valz, an analyst closely involved with multiple shipping investments.

September 2016: Portfolio manager Chad Valerio departs BlueMountain. Has been OSG director since 2015.

January 2017: Portfolio manager Ethan Auerbach leaves BlueMountain. Continues as director at Gener8.

October 2017: BlueMountain holds 7.1m shares (4%) in Scorpio Bulkers.

June 2018: Euronav prepays $205.7m Gener8 notes due in 2020 from BlueMountain, with pre-payment premium of 1%. Results in significant profit for BlueMountain.

June 2018: Closing of Euronav’s acquisition sees BlueMountain trade 7.8m shares of Gener8 for 5.7m shares of Euronav.

August 2018: OSG shares down to 7.8m (9.3%) after BlueMountain sells 2.7m shares.

March 2019: BlueMountain reports no further holding in OSG. Sells entire remaining stake within 30 days, including 7.5m shares at $1.90.