Tuesday, March 8, 2011

Eagle Bulk Shipping Inc. - Korea Line Corporation Follow-Up

On March 2nd, 2010, Eagle Bulk Shipping Inc. (NASDAQ: EGLE) reported fourth quarter basic earnings per common share of $0.05, in line with our estimates. The company also provided an update on its exposure with Korea Line Corporation during its earnings conference call and in its annual 10-K report.

How bad is Eagle Bulk Shipping’s exposure to Korea Line? And what does it mean with regards to its chartering strategy and forward fixed revenue profile?

EGLE currently owns a fleet of 46 supramax-size dry cargo vessels, including seven new building units under construction, with a total DWT capacity of approximately 2,500,000 MT. EGLE acknowledged that Korea Line Corporation has on long-term period charter 13 vessels (i.e. approximately 28% of revenue days when all vessels will have been delivered), making Korea Line the company’s de-facto largest Charterer.

Korea Line had already taken delivery of nine vessels prior to its filing for bankruptcy protection. One new building vessel (Kittiwake), has subsequently been delivered to EGLE and three more units are scheduled for delivery during this year. Last but not least, Eagle acknowledged that its exposure to Korea Line as of March 4th was approximately $8,300,000.

With regards to its credit exposure, the good news is that Eagle Bulk Shipping has done a remarkable job mitigating its losses and reducing the growth of its hire due & owning. EGLE has reached a temporary agreement with Korea Line to assume commercial management of its vessels on short-term period, until the bankruptcy status of Korea Line is resolved.

The affected vessels currently earn on average $15,000 per day compared to an average $18,400 charter hire due from Korea Line. This means the company’s claim against Korea Line is currently only growing at a rate of about $34,000 per day. On this basis we project that the company’s claim will grow to approximately $9,500,000 by the end of March 30th. We also estimate that the claim will continue to grow at a rate of approximately $3,000,000 per quarter, assuming average short-term earnings remain at $15,000 per day.

Now a potential few million-dollar write-off may not look exactly as irreparable damage to a company with a total capitalization of $1.8 billion. But if we compare it to company’s net income of $3 million last quarter, it is hard to see how EGLE can avoid going into the red if it must make an allowance against doubtful accounts receivable.

But the really bad news is the big hole that Korea Line’s bankruptcy has opened in EGLE’s forward fixed cover. Including the Kittiwake, the company currently has a total of 15 vessels on long-term fixed period charters. Korea Line is responsible for 10 of these charters or two thirds of its long-term fixed cover! These charters not only provided long-term earnings visibility but also offered the potential of additional profit sharing in the future. They were in essence at the center of the company’s long-term chartering strategy, a strategy that now must quickly be reassessed.

It is certainly possible that Korea Line can emerge from its bankruptcy position and resume its charter hire payments in due course. But how prudent will be for Eagle Bulk Shipping to continue its over-reliance on a customer with such tainted background? Perhaps the company should consider retaking commercial control of most of its affected vessels on a permanent basis.