Tuesday, May 24, 2011

Eagle Bulk Shipping Inc. - A Stress Test Assessment

The shares of Eagle Bulk Shipping Inc. (NASDAQ: EGLE) have been trading at an all time low, having closed at $2.56 on May 23rd, 2011. At the above closing price the street was valuing the company’s equity at a paltry $160 million, for a total market capitalization of just over $1.3 billion.
Given the company’s low valuation levels we have performed stress tests to answer two fundamental questions.

With regards to liquidity, will the company generate enough cash from operations to meet its capital expenditure requirements over the next three years?

With regards to solvency, will the company meet its loan covenant requirements, and will the company have the capacity to refinance its debt when it matures in July 2014?

EGLE currently has a fleet of 46 SUPRAMAX vessels (including 6 vessels currently under construction, all scheduled for delivery this year). We estimate that as of December 31st, 2011, the company’s fleet will have an average age of 4.9 years.

As of March 31st, 2011, EGLE had approximately $98 million cash on hand (excluding any restricted cash), and had a total debt of $1.150 billion, or an average debt per vessel of $25 million.

EGLE has the following capital expenditures for years 2011 to 2013: For year 2011 it has to pay $126 million to complete the construction of the six new-building vessels but has no scheduled loan repayments. For year 2012 it has one scheduled loan repayment for $54 million. Finally for year 2013 it has two scheduled loan repayments totaling $108 million.

For the remainder of year 2011, taking into consideration the $98 million cash on hand, EGLE would need to generate at least $28 million cash from operations or an average TCE of $13,000 per vessel per day to meet its CAPEX requirements.

For years 2012 and 2013, without taking into consideration any cash on hand, the company would need to generate at least $54 million and $108 million cash from operations, or an average TCE of $14,000 and $17,000 per vessel per day respectively, to meet its CAPEX requirements.

We must underline that all break-even TCE rates are subject to interest rate risk exposure since the company carries approximately two-thirds of its long-term debt on a floating rate basis.

Based on the above figures, the company’s fleet employment profile, and the current freight market, and subject to interest rate risk exposure, we believe that EGLE should be able to meet its CAPEX requirements for this year.

With regards to its long-term debt, EGLE must continue to meet its loan covenants in addition to making its scheduled loan repayments. EGLE currently meets its debt covenants with the exception of the minimum-security covenant, which it has been granted a waiver from its lenders. Under the original terms of the minimum-security covenant, the company’s fleet should have a valuation that exceeds 130% of debt outstanding. In other words, the average value per vessel should be in excess of $32.5 million at the current level of long-term debt of $1.150 billion.

Given that the current valuation for a 5-year old SUPRAMAX vessel is approximately $28 million, we believe that EGLE would not meet its minimum-security covenant if that were to be applied. Since the 130% minimum-security covenant is a rather typical term in shipping commercial loans, EGLE currently does not have the capacity to refinance the entire amount of debt outstanding. Therefore, it must aggressively pay down its debt, using any excess cash from operations, disposal of older assets, and/or raising fresh equity.

The current freight market environment and corresponding equity valuations pose a challenge for Eagle Bulk Shipping to raise capital through asset sales or secondary equity offerings. But the good news is that the company is in a comfortable position to meet its cash obligations in the short to medium-term, has very little liquidity risk, and its long-term debt only matures in July 2014.