Friday, September 28, 2012

Assessing The Risk Exposure Of Safe Bulkers

In my previous articles, I had the opportunity to look into detail at two shipping companies I would consider adding in a diversified shipping portfolio: Safe Bulkers Inc. (SB), and Baltic Trading Limited (BALT). The two companies are executing different chartering strategies, in effect offering different risk / reward profiles.

Safe Bulkers operates the majority of its vessels on fixed-rate time charters, providing the company with earnings visibility. Baltic Trading on the other hand operates its vessels on index-related time charters, providing full exposure to the vagaries of the spot freight market.

Fixed-rate charters may appear the safer and more conservative way to go, but one unintended consequence is increased credit exposure. The risk of default gets bigger with longer durations, higher rates, but also lack of a diversified customer base.

Safe Bulkers has relied on two Japanese charterers for the majority of its revenues for the past four years as demonstrated on the table below. Its credit exposure to Daiichi Chuo Kisen Kaisha (Daiichi) is exceptionally high, and should be a cause of concern to investors, especially given Daiichi's gloomy outlook for its current fiscal year.

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Safe Refuge In A Shipping Portfolio

Investors in shipping stocks are well familiar with the current state of affairs. Plagued by a vicious over-supply of modern vessels, the industry is struggling to keep its head above water, just long enough to see the next recovery.

Companies that are best suited to sustain such prolonged period of depressed freight rates ideally must be well capitalized to meet their capital expenditure requirements, must provide earnings visibility, and must sport low running costs. In this article I look at two leading shipping companies, namely Diana Shipping Inc. (DSX) and Safe Bulkers Inc. (SB) and how they fare in these three categories. Both companies are run by first-class ship owners who have lived through (and survived) several shipping cycles. They both specialize in the dry-cargo segment of the bulk shipping industry.

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Baltic Trading Limited: Hidden Gem In Stormy Seas

The bulk shipping industry has been hit by stormy weather for quite some time now, as a result of massive deliveries of new-building vessels. The over supply of tonnage has resulted in a depressed freight market and valuations of publicly traded shipping companies have followed suit.

Low valuations have naturally attracted bargain-basement investors. Yet despite all-time low prices, I believe that the risk of owning many shipping companies still outweighs their potential reward. With mounting losses and dwindling cash reserves, most shipping companies are merely fighting to stay afloat, hoping many times against hope that they will live to see another day.

In this series of articles, I will review a group of shipping companies operating in the dry cargo segment of the industry, arguably among the worst hit and most endangered species. Amid this gloom, I have decided to start on a positive note, reviewing Baltic Trading Limited (BALT), a company I believe offers an attractive risk/reward profile at a dirt-cheap price.

Baltic Trading is a small shipping company that owns nine modern vessels ranging in size from 34,000 MT to 178,000 MT in DWT capacity. The average age per vessel was 2.7 years as of June 30, 2012. The company launched its IPO in March 2010, selling 16.3 million shares at $14 per share. The same share could be yours today for $3.14, off its all-time intra-day
low of $2.98. Baltic Trading has a market capitalization of approximately $71 million.

Seeking Value In The Bulk Shipping Industry

Value Investors seek opportunities in companies where the intrinsic value is less than their market capitalization. The bulk shipping industry should be no exception to this fundamental rule.

In this article, I compare the intrinsic value per share for three shipping companies, namely Baltic Trading Limited (BALT), Eagle Bulk Shipping (EGLE), and Genco Shipping & Trading Limited (GNK), relative to their stock price. All three companies specialize in the dry cargo segment of the industry.

Baltic Trading Limited owns a fleet of 9 vessels (with a total DWT capacity of 672,000 MT and average age per vessel of 2.7 years), and has a market capitalization of $69 million.

Eagle Bulk Shipping Inc. owns a fleet of 45 vessels (with a total DWT capacity 2,451,000 MT and average age per vessel of 5.3 years), and has a market capitalization of $52 million.

Genco Shipping & Trading Limited owns a fleet of 53 vessels (with a total DWT capacity of 3,812,000 MT and average age per vessel of 7.1 years), and has a market capitalization of $145 million. Genco is the parent company of Baltic Trading. It has a 25% interest in BALT, but due to a dual share structure, it exercises full ownership and managerial control.

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The Devil In The Details: Eagle Bulk Shipping's Debt Restructuring

In late June 2012 shareholders of Eagle Bulk Shipping Inc. (NASDAQ:EGLE) breathed a sigh of relief for their beleaguered shipping company. Saddled with a massive debt burden in excess of $1.1 billion, the company faced the prospect of violating its debt covenants - or simply running out of cash - by the end of the year.

But when Eagle announced an outline of its amended credit agreement on June 20th, 2012, it appeared as if it had escaped from financial ruin relatively unscathed. In exchange for a higher interest margin and stock warrants, its lenders had agreed to extend the term of the loan to the end of 2015, with no scheduled loan repayments prior to its maturity.

They had also agreed to a new set of covenants to be gradually phased-in, presumably when the company would be in a position to meet them.

With a young fleet of 45 supramax size vessels (average age per vessel of 5.3 years), a market capitalization of approximately $50 million, and no apparent threat of financial trouble in the medium term, investors might be tempted to look at Eagle as a low-cost, long-dated option on a shipping industry recovery, albeit out of the money. (The stock closed last Friday at $3.00 per share, off its all-time intra-day low of $2.51.)

I like to think differently. A close look into the company's amended credit agreement - full terms of which only became available with the company's filing of its quarterly report on August 9th - points to a renewed threat for a technical default and/or a cash crunch, as early as next year.

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