Heavy debt load could sink Genco Shipping

Only two years since it filed for bankruptcy protection, dry bulk carrier Genco Shipping is still deeply troubled, regardless of a recent agreement reached with its lenders that amended its existing debt obligations.

Genco recently incurred a covenants breach on its core debt facilities, which was hardly surprising given its overly stretched capital structure and problematic cash flows.

More broadly, shipping finance is in dire straits, as proved by recent news from the banking sector that Deutsche Bank is offloading $1bn of shipping loans from its books.

It is possible that Genco’s banks might be taking unnecessary risks, given their client’s core operating performance and persistent headwinds in the shipping industry, but bankers did not have many options, with Genco likely having to raise new equity by the end of the year. We will soon see how things pan out as the new refinancing gives it some breathing room only until September 30.

By then, the borrower will likely have to have sold several vessels, which is not ideal in a shipping market dominated by oversupply and where buyers are thin on the ground. As a side note, on June 29 the board also approved “the implementation of a reverse stock split and determined the appropriate reverse stock split ratio to be 1-for-10.”

The harsh reality bites in when its trailing quarterly results are being analysed. Revenues fell off a cliff in the first quarter, down to $20.9m for the three months ended March 31, from $34.4m in the prior year.

The group said the drop was primarily due “to lower spot market rates achieved by the majority of the vessels in our fleet during the first quarter of 2016 versus the same period last year marginally offset by the increase in the size of our fleet following the delivery of two Ultramax newbuilding vessels”.

Losses widened in the first quarter, when it was in the red to the tune of $54.5m, or $0.75 per share on a diluted basis. By comparison, one year earlier Genco reported losses of $38.4m, or $0.64 per share, but losses per share were calculated on a much lower share count.

Inevitably, Genco’s liquidity profile has become highly problematic, with net cash used in operating activities rising to $27.3m from $12.3m one year earlier.

At the end of the first quarter, its net debt position stood at about $460m, with negative EBITDA of $26m. Its equity value is about $40m, which represents 40% of its gross cash position at the end of the first quarter, but could be roughly in line with the gross cash position projected at the end of the second quarter, given its daily cash-burn rate in previous months.

Its stock is effectively trading around liquidation value, and that is reflected in its price-to-book value, which clearly signals distress. The next earnings release is due in early August.

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Source: Transport Intelligence, July 13, 2016

Author: Alessandro Pasetti