Saturday, July 25, 2015

Why is Diana Shipping Issuing High-Yield Securities?

I recently had the opportunity to analyze two types of securities issued by Diana Shipping Inc. (DSX), namely the 8.875% series B perpetual preferred shares (DSXPRB), and its 8.5% senior notes due on May 20th, 2020 (DSXN). There has been a broad consensus among shipping analysts that these securities offer an attractive low-risk, high-yield profile. Both have consistently traded at or above par.

This should not come as a surprise: Diana Shipping has long been considered the safest play among publicly traded dry-cargo shipping companies. It has high levels of cash reserves & low levels of debt among its peers and vis-à-vis its market capitalization. Such conservatism has allowed the company to sail through a prolonged bear market dating back to 2011.

Which brings the question: If Diana Shipping is in solid financial footing why did it elect to raise $128 million in high yield debt and preferred equity? As of the end of 2014, Diana Shipping had $210 million outstanding in a revolving credit facility with an interest rate of 0.95%. It also had $276 million of bank term loans with a weighted average interest rate of 2.68%. Why issue high-yield securities at an average cost of more than 8.50%?

During the past five years Diana Shipping has nearly doubled its operating fleet by growing organically. To achieve this milestone, it has relied on cash generated from operations and proceeds from long-term debt. However during the same period DSX has experienced a dramatic downward trend in daily revenue per vessel as measured in TCE (time charter equivalent) rate per day.

This has resulted to an equally dramatic reduction of operating cash flow, especially when measured on an ownership day. The reduction in cash provided from operating activities is what has forced the company to seek alternative sources of funds.

Given that operating cash flow is not currently expected to contribute more than $15-$20 million on an annualized basis, the company might have to tap capital markets again to supplement its funding requirements. When this happens, it will be interesting to see whether DSX will issue common equity or rely again on high-yield securities.

Continue reading the article published on Seeking Alpha Pro


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