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!