Wednesday, November 30, 2011

Living on the Edge – Cash Management Lessons From Eagle Bulk Shipping

Eagle Bulk Shipping Inc. (NASDAQ:EGLE) ended the third quarter of 2011 in a very precarious financial condition. With the stock price closing at $1.57, its market capitalization stood at approximately $100 million. Yet its debt outstanding was over $1,100 million.

Its total cash reserves were just a nod above $29 million. With the imminent delivery of its last new-building vessel M/V SANDPIPER (the vessel was delivered on October 19th), the company would have to make the final installment payment of about $21 million and risk seeing its cash reserves falling below what would have been the minimum cash threshold of $22.5 million required by its lenders.

Except only a few days earlier, the management of EGLE had put in place a last-minute agreement with its lenders, that had temporarily suspended its minimum liquidity covenant until January 30th, 2012, and had further modified the minimum required amount until April 30th, 2012.

Now a seven-month reprieve to put your house in order may seem too little too late, but in the highly volatile world of shipping it may be the difference between living to see another day or going under.

In this brief, we will analyze the effects of the latest loan amendment on the company over the next five quarters. We will forecast the company’s cash position on a pro-forma basis under a base case scenario. We will evaluate the company’s ability to continue meeting its minimum liquidity covenant after April 30th, 2012. Finally we will examine alternative strategies for EGLE to boost its cash position and service its debt.

We built our base case scenario for the next five quarters on the following assumptions: First, we assume that EGLE will not raise any funds from investing or financing activities, i.e. it will not dispose of any assets or issue any securities. We made this assumption because we wanted to analyze the company’s ability to service its debt with cash generated from operations or from the existing credit revolving facility.

Second, we assume that EGLE will generate on average a quarterly operating cash flow of $12.5 million. This figure is in line with the average quarterly cash flow from operations for the first nine months of this year. But we must stress that EGLE operates more than 50% of its vessels in the spot market or on market-related time charters, and its operating cash flow is subject to freight market volatility.

We also took into consideration the company’s projected capital expenditures (namely the $21.9 million final installment for M/V SANDPIPER & the scheduled loan payment of $32 million in July 2012), and the company’s undrawn amount under the current credit facility of $21.9 million.

According to our base-case scenario, EGLE will comfortably meet its minimum liquidity requirements until the end of the second quarter of 2012, with cash generated from its operations. In July 2012 however, the company will have to make the first of four scheduled semi-annual credit facility reductions, for approximately $54 million. As a result, EGLE will have a projected liquidity shortfall of $22 million as of the end of the third quarter of 2012.

Given this projected shortfall, it becomes imperative for EGLE to raise capital during the first six months of next year. Issuing common shares will result in a significant dilution of existing shareholders in the order of almost 50%. Selling some of the older vessels will cannibalize its operating cash flow. In addition, none of these strategies will provide a long-term solution, but only a short-term fix.

The only other alternative, barring a spectacular turn-around in freight markets, is to negotiate a full restructuring of its current credit facility. This may be easier said than done, but EGLE perhaps could achieve a repayment holiday and/or extension of the current loan maturity, in exchange for warrants. Warrants will offer its lenders an upside potential with a more palatable dilution of existing shareholders.

Given the uncertainty in freight as well as capital markets, the next six months are shaping to be crucial for Eagle’s long-term survival & prosperity.

Saturday, November 19, 2011

Diana Shipping Inc. - Earnings Estimate For 2011 Q3

For the quarter ended September 30th, 2011, we estimate that Diana Shipping Inc. (NYSE: DSX) generated basic earnings per common share of $0.33 on net income of $26,400,000. We estimate that TCE Revenues for the quarter were $60,900,000.

As of September 30th, 2011, we estimate that book capitalization was $1.565 billion including shareholders’ equity of $1.188 billion, and debt outstanding of $377 million. We also estimate that its debt to capitalization ratio stood at 24.1%. In addition to its existing debt, DSX has entered into a loan agreement for an amount of $82.6 million, to finance the two new-building vessels that are scheduled for delivery in 2012.

The company presently owns a modern diversified fleet of 24 dry cargo vessels (consisting of 15 PANAMAX size vessels, one POST-PANAMAX vessel, and 8 CAPE SIZE vessels), with a total DWT carrying capacity of approximately 2,610,000 MT, and an average age per vessel of 6.70 years as of September 30th, 2011.

On November 18th, 2001 DSX announced the acquisition of a PANAMAX vessel (DWT capacity 81,297 MT, built in 2010) for a purchase price of $32,250,000. The company also has two specialized CAPE SIZE vessels on order, with a total DWT capacity of 412,000 MT, scheduled for delivery in 2012.

In addition, Diana Shipping has a 14.5% interest in Diana Containerships (NASDAQ: DCIX), a publicly traded company specializing in container ships.

Based on yesterday’s stock closing price of $8.09, we estimate that DSX has a market capitalization of $668 million and an enterprise value of $644 million.

Thursday, November 3, 2011

Just How Low Is General Maritime Corporation On Cash (Part II)?

On October 3rd, 2011 General Maritime Corporation (NYSE: GMR) entered into a waiver agreement with its lenders to suspend the minimum cash balance covenant through November 10th, 2011. (The minimum amount was $35,000,000 through the end of 2011, as of the latest amended credit agreements). In this brief review we analyze the likelihood that GMR will be able to meet this covenant once it is reinstated on November 11th.

As of June 30th, 2011 GMR had cash on hand of $58,591,000. Based on the company’s reported results yesterday, during the third quarter of 2011 GMR used a total of $20,698,000 in its operating, investing, and financing activities. Therefore GMR had cash and cash equivalents of $37,893,000 as of September 30th, 2011.

We assume that GMR applied the $7,045,000 scheduled amortization payment on September 30th, as a reduction of the 2010 Credit Facility. We also assume that GMR used the net proceeds of $8,100,000 from the sale of Genmar Revenge (The sale closed on October 26th) towards further repayment of the 2010 Credit Facility.

Given these two assumptions and the amount of cash on hand as of September 30th, we estimate that cash & cash equivalents plus revolver availability amounted to $53,388,000 on a proforma basis.

Based on the above analysis, we believe that there is a high likelihood that GMR will have enough cash and revolver availability to meet the amended covenant requirement once the current waiver expires on November 10th.