Wednesday, January 26, 2011

Baltic Trading Limited – Earnings Estimate For 2010 Q4

For the quarter ended December 31st, 2010, we forecast that Baltic Trading Limited (NYSE: BALT) generated basic earnings per common share of $0.19 on net income of $4,300,000. Its net TCE revenues for the quarter were approximately $14,800,000. We also forecast that during the third quarter of 2010 BALT generated $5,200,000 in cash available for distribution to shareholders, or the equivalent cash dividend of $0.23 per share outstanding.

As of December 31st, 2010, the company had $101,250,000 in long-term debt and a total capitalization of approximately $391,000,000. Its debt to capitalization ratio stood at 25.9%.

BALT also had a remaining $48,750,000 under its amended 2010 credit facility, and cash on hand of approximately $9,000,000.

BALT operates a modern diversified fleet of 9 dry cargo vessels, consisting of 3 handy size vessels, 4 supramax size vessels and two cape size vessels, with a total DWT capacity of 670,000 MT.

Tuesday, January 25, 2011

Eagle Bulk Shipping Inc. - Not All Disclosures Are Created Equal!

Following persistent market rumors and a precipitous drop in its share price, Eagle Bulk Shipping (NASDAQ: EGLE) acknowledged today its credit exposure with Korea Line Corporation, which had earlier filed for protective receivership in Seoul (i.e. bankruptcy protection). But if the company was trying to calm the market’s negative sentiment, it probably achieved the exact opposite, since it did not disclose the nature and extent of its credit exposure with Korea Line.

Under the most recent quarterly report filed by the company (for the quarter that ended on Sep 30th, 2010), EGLE had disclosed three charterers, each accounting for more that 10% of its consolidated time charter revenue. Charterer B with 25% of revenue, and Charterers W & X with 13% and 10% respectively. Why the letters you may ask? EGLE does not disclose the names of its major Charterers. In fact it does not disclose the name of the Charterer for any medium or long-term charter it enters.

For comparison purposes, the three other publicly traded peers of EGLE that we cover, namely Baltic Trading Limited (NYSE: BALT), Genco Shipping & Trading (NYSE: GNK), and Diana Shipping (NYS: DSX), all provide full disclosure of the Charterer for every medium to long-term charter they enter.

Is it possible that Korea Line was one of the company’s three major charterers? Published reports today claim that Korea Line has chartered 13 of the EGLE’s vessels. EGLE is currently operating a fleet of 39 vessels and is scheduled to take delivery of an additional 7 vessels this year. If it is true that Korea Line has on charter 13 vessels, it will make Korea Line, not only one of the company’s three major Charterers, but the largest one!

Eagle did acknowledge that its exposure to current accounts receivable with Korea Line is modest. This should be expected since it is common practice in shipping for hire to be paid in advance every 15 days and Korea Line only filed for bankruptcy protection today. But the problem is not accounts receivable, typically not a major balance sheet account for a shipping company. The problem is the company’s credit exposure to its forward fixed revenue, which could be very substantial if Korea Line is among its largest customers.

The company also acknowledged that the vast majority of its charters with Korea Line are fixed at close to current market rates. Well we beg to differ! Very weak current market rates are precisely why Korea Line filed for bankruptcy protection. Today the spot rate for Supramax vessels (EGLE’s vessel class) was pegged at $14,333, for Panamax vessels at $12,084, and for Capesize vessels at a depression level of $8,002.

How do current spot market rates compare to the charters with Korea Line? While we cannot fully answer this question, given the lack of public disclosure, we know that during 2010 EGLE took delivery of 12 new-building vessels. Ten of those vessels have been fixed on long-term charters from 3 to 8.5 years at gross BASE RATES ranging from $17,650 to $18,500 PLUS profit sharing. If Korea Line were responsible for several of those charters, then the company’s credit exposure to its forward fixed revenue would indeed be very substantial.

In contrast Diana Shipping & Baltic Trading Limited presently have no vessels chartered to Korea Line, and Genco Shipping & Trading only has its vessel GENCO SUCCESS coming off charter at the end of this month.

In conclusion, adverse market conditions, coupled with a lack of adequate public disclosure will make for very turbulent seas in the coming days!

Tuesday, January 18, 2011

General Maritime Corporation - Analysis Of Recent Sale & Leaseback Deal

On January 18, 2011 General Maritime Corporation (NYSE:GMR) announced the sale and leaseback of three medium range product tankers for total net proceeds of $61.7 million. The three vessels have an average age of approximately 6.25 years. Under the terms of the deal General Maritime will lease back the vessels for a period of up to seven years with options to repurchase the vessels at the end of each year.

The sale & leaseback deal provides General Maritime with off-balance sheet financing to meet its short-term capital requirements. To determine the effective financing cost for GMR, we first analyzed the terms of the deal to estimate the projected internal rate of return for the new owners.

The projected IRR depends on the vessels’ residual value. In general, the higher the residual value, the higher the IRR, and the higher the financing cost. In this case however the annual purchase options set a ceiling on the IRR, and provide General Maritime with an opportunity to lower its financing cost.

For example, assume that the residual value per vessel at the end of year 7 is equal to $13 million. The new owners will achieve an IRR of 11.80%. If the residual value is $15 million (i.e. equal to the purchase option), the new owners will achieve an IRR of 12.80%. On the other hand if the residual value is $17 million (i.e. it exceeds the purchase option by $2 million), the new owners will achieve the same IRR of 12.80%, since the purchase option will be exercised by GMR.

In the first two cases above, the effective financing cost for General Maritime will be equal to the IRR (i.e. 11.80% if the residual value per vessel is $13 million and 12.80% if the residual value is $15 million). If however the residual value is $17 million, the company’s effective financing cost will then be 11.80%!

On average, assuming that the residual value of the vessels at the end of years 3 through 7 will equal the purchase option price, the internal rate of return to the new owners, and likewise the effective financing cost to General Maritime, will range between 13.90% for year 3 and 12.80% for year 7 respectively.

The range above is obviously a very steep price for General Maritime to pay. The company however will be able to meet its short-term capital requirements and will hold a valuable long-term option to repurchase the vessels and thus lower its effective financing cost.