Monday, May 20, 2013

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.

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