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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