Monday, May 27, 2013

Buy Baltic Trading: Dry Cargo Shipping Exposure At A Discount To NAV

Baltic Trading is a subsidiary of Genco Shipping & Trading, and is separately listed on NYSE. It owns a modern fleet of nine vessels with an aggregate DWT capacity of 672,000 MT and an average age of 3.4 years as of March 31st, 2013. GNK has a 24.8% ownership stake in the company, but through a dual class of shares it controls the majority of voting rights. GNK also exercises full managerial control.

But whereas GNK has been saddled with a massive debt load (its total debt outstanding at the parent level was $1,437 million as of March 31st, please also note I have examined GNK’s debt situation in my recent Seeking Alpha article), BALT had a relatively manageable $101.25 million in debt outstanding as of the same date. More importantly BALT is not required to make debt repayments before November 2015. 

What has attracted me to BALT is its value proposition. The stock has been trading at a discount to its Net Asset Value (NAV), as calculated based on fair market values and not accounting (book) values. Nobody knows when a cyclical recovery in the dry-cargo shipping industry will get under way, and the supply-demand fundamentals don’t exactly look rosy. Yet, if I want to execute a buy-and-hold strategy, I might as well acquire assets at bargain prices.

Monday, May 20, 2013

Diana Containerships Inc. - Earnings Preview 2013 Q1

How to Boost Your Bottom Line Out Of Thin Air

Let’s assume that SHIPCO, a fictional shipping company, purchases a new-building vessel with a three-year time charter attached. At the time of purchase, the fair value of similar vessels on a charter-free basis, i.e. without any time charters attached, was $30 million. But the company paid only $27 million for the vessel, a bargain price at the time. Why the $3 million discount you might ask. Well, at the time of purchase the three-year time charter attached was considered below the market rate for a vessel worth $30 million. US GAAP and the auditors step in and guide the company on how to record the transaction in the books. Here is the accounting entry.

Please note that the vessel is recorded in the books not at $27 million, the price SHIPCO actually paid, but at $30 million, the price SHIPCO should have paid if no time charter had been attached.
Please also note that SHIPCO has created a corresponding liability (Fair Value Below Contract Value of T/C Acquired) to balance the difference between what was actually paid and what should have been paid. 

Since we have established the book value of the vessel at $30 million, courtesy of US GAAP, let’s see how that cost is being depreciated over time. Vessels are typically depreciated over a period of 25 years. Since the book value was recorded at $3 million more that the actual acquisition price, that means SHIPCO has to take an additional depreciation expense of $120,000 every year for the next 25 years. Here is the annual accounting entry for the extra depreciation expense. Please note that SHIPCO will make the same entry for the next 25 years.

Now comes the juicy part. What about that little liability SHIPCO had recorded in the books, when it first acquired the vessel. Remember, the $3 million “Fair Value Below Contract Value of T/C Acquired”. No worries, US GAAP is here to guide us. The liability will be amortized over three years (the term of the charter). Since SHIPCO has to report a higher depreciation expense, it is entitled to report higher revenue to compensate for it. Here is the annual accounting entry for the revenue recognition. Please note that SHIPCO will only make this entry for the next three years, the duration of the time-charter.

Assuming you are still reading this and haven’t completely lost it, you will realize a small difference over the timing of revenue and expense recognition. Over time, well over the next 25 years assuming both SHIPCO and yours truly are still around, expense and revenue will cancel each other out, as it should. Remember the $3 million figure is purely fictional, an accounting gimmick really to try to assess the “true” vessel value at the time of acquisition. 

But, whereas depreciation expense will be recognized over 25 years, revenue will only be amortized over three years. In layman’s terms, SHIPCO will be able to boost its net income over the next three years to the tune of $880,000 per year. Not bad for a day’s work I suppose.

If SHIPCO wants to continue boosting its bottom line out of thin air, it would be foolish not to buy more vessels like the first one. The trick is out of the bag. The more vessels SHIPCO buys with lousy charters, the more money it makes in the short term, at least on paper.

This series of articles on ship finance is the intellectual property of Lambros Papaeconomou. It is a work in progress and is fictional. Any resemblance to real shipping companies or events is purely coincidental.

Safe Bulkers: A Success Story in an Otherwise Uninspiring Dry Bulk Shipping Market

Safe Bulkers Inc. (SB) is a rare gem among the doom and gloom surrounding high-profile dry-cargo shipping companies. SB owns a fleet of 26 dry-cargo vessels, plus eight vessels under construction. It is mainly a panamax owner, since 31 of its 34 vessels are panamax, kamsarmax or post-panamax type. Yet it is the two cape size vessels currently on the water, plus a new-building vessel scheduled for delivery in the first half of 2014, that hold the most promise for the company to stay above water in the near and medium term.

The key to the company’s success in the cape size sector has been to only acquire vessels with long-term charters attached. It has been very careful in securing fixed-rate contracts with first class charterers, and has spread these contracts among different parties. The result has been a diversified portfolio of long-term charters that combines strong cash flow visibility with minimal charter party risk.

Assuming a cash break-even rate of $8,500 per day (the figure includes vessel operating expenses, dry-dock maintenance, G&A expenses, and cash interest expense), the three charters alone can generate an operating cash flow of approximately $22 million per year. To put this figure in perspective, the current portion of the company’s long-term debt as of March 31st, 2013 was $22.576 million. This means SB uses approximately $22.5 million every year to pay down its debt. The operating cash flow generated from the three cape size charters alone is sufficient to make all current scheduled debt payments for the entire fleet.

The company has never disclosed the charterers of its three cape size vessels. But during last Thursday’s conference call to discuss the earnings results for the first quarter of 2013, CEO Polys Hajioannou shed enough light to assuage investors of the credit risk involved.

The CEO stated that one of the vessels has been fixed with the biggest steel mill company in the world. The second vessel has been fixed with the biggest coal power producer in India. Finally the third vessel, presumably the one under construction, has been fixed with a first class shipping company based in France.

Based on my analysis of the company’s counterparties, as disclosed in its latest earnings presentation, I believe that the charterers of the three cape size vessels are most probably Arcelor Mittal, Tata, and Louis Dreyfous Armateurs respectively, all of which are arguably first-class signatures.

Safe Bulkers is a success story in a rather uninspiring stock market for dry-cargo shipping companies. It is a low-cost premier service provider in a cutthroat industry. It can rely on long-term fixed-rate charters to pay its bills during the downturn. The interests of management are perfectly aligned with those of the shareholders. It may not be as high profile as other shipping companies that have sizable free floats, but this fact alone makes it an ideal candidate for a value-seeking investor.

Friday, May 17, 2013

Eagle Bulk Shipping: Enjoy The Good News For Now But Tread Very Carefully

Eagle Bulk Shipping (EGLE), a dry-cargo shipping company that owns 45 supramax vessels with an average age of 6.0 years as of March 31st, 2013, reported earnings for the first quarter on May 15th, that caught many investors by surprise, managing to snap an eight-quarter losing streak. For the first quarter of 2013, EGLE generated net income of $1.4 million or $0.08 per share. The stock yesterday bounced with gusto rising intra-day almost 67% to $5.93 per share, amid very heavy trading. 

What prompted this explosive reaction were more details about the company’s settlement with troubled charterer Korea Line Corporation (KLC). Under the latest terms of the settlement, EGLE received a combination of cash, long-term note receivable, shares in KLC, and a release from a $3.5 million accrued bunker liability. Based on my analysis, the total cash value of the settlement with KLC is approximately $40.2 million or $2.32 per share.

However, the company’s long-term debt has continued to climb with the $7.1 million addition of payment-in-kind interest during the first quarter. As of March 31st, 2013 total debt outstanding stood at $1,152 million. The current fair market value of the company’s fleet is not sufficient to pay-off the debt outstanding. Based on regulatory filings with the SEC, the company’s fleet as of December 31st, 2012 was valued at only $882 million, i.e. a shortfall of approximately $368 million.

There is no denying that Sophocles Zoullas-led Eagle Bulk Shipping had a very good day yesterday, squeezing $40 million in value from troubled Korea Line Corporation. But EGLE does not have any more tricks like this to dig itself from under its $368 million debt shortfall. Investors that were lucky enough to realize over-sized short-term gains may want to tread very carefully and seriously consider caching-in their chips.

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Thursday, May 9, 2013

Genco Shipping & Trading Could Use Some Extra Cash

How the mighty have fallen. Genco Shipping & Trading Limited (GNK), the one-time jewel in Peter Georgiopoulos’ shipping empire, may very well be the next shoe to drop among high-profile shipping companies heading for bankruptcy court.

Today Genco, a dry-cargo shipping company that owns a fleet of 53 vessels, is a shell of its former self. Its stock price has fallen from an all-time high of $84 per share in May 2008 to Tuesday’s all-time intra-day low of $1.12 per share. Its market capitalization has shrunk from approximately $2.4 billion to just above $60 million.

What caused Tuesday’s sell-off amid very heavy trading volume, (the stock did manage to close at $1.44 per share, down only 18.64% for the day) were renewed concerns about the company’s ability to serve its debt beginning in 2014, including rumors that it may have hired bankruptcy specialists to guide it through restructuring talks with its lenders.

Because of the uncertainty in meeting its covenants and servicing its debt, GNK had to reclassify its total debt outstanding as current liabilities, which has a lot to do with the recent sell-off in the stock.
I believe that GNK will hit the wall well before the first quarter of 2014, and possibly as early as this summer. As always the devil is hiding in the details. GNK appears to have enough cash to sustain the current market environment for a few more quarters. Its total cash on hand as of March 31st, 2013 was $65.2 million. But, after adjusting for $39.75 million (or $750,000 per vessel) that the company must maintain to meet its minimum cash covenant, and another $1 million that belongs to its subsidiary Baltic Trading Limited (BALT), that leaves GNK with just about $25 million in breathing room, before it has to go hat-in-hand back to its lenders.

To put this in perspective, during the first quarter of 2013, GNK actually burned through $17.7 million in cash to fund its operating shortfall!