Friday, September 28, 2012

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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