Facing a $32 million amortization payment in July and an amendment that expires this Monday, Eagle Bulk Shipping Inc continues to remain quiet on its plans to address its $1.1 billion debt load. The shipping company will need to depend on the cooperation of its banks to stay afloat as Eagle Bulk management navigates through a steep decline in shipping rates on chartered vessels. The company has few liquidity options aside from $25 million of balance sheet cash and potential equity issuance off a stock price trading near five-year lows.
As part of the most recent amendment agreed upon last September, Eagle Bulk engaged a restructuring advisor, Alvarez & Marsal, to help develop financial forecasts and a business plan for lender review. The lenders, led by RBS, retained KPMG to assist in further due diligence. The company has already announced that it would not be able to meet covenants beginning in 2013 and was seeking "to achieve a long-term restructuring solution," according to public statements from company management.
"Banks recognize that shipping is very cyclical and prefer to keep things in house to work out problems," said Ben Nolan, head of shipping research at Knight Capital. "What could change this dynamic is if a borrower runs into difficult enough conditions that it is unable to meet interest obligations."
Industry Overcapacity
Recent operating conditions have indeed been difficult as the industry confronts an onslaught of new ship deliveries.
Eagle Bulk focuses on hauling dry bulk goods, including coal, iron ore and agricultural products, on its fleet of 45 mostly supramax-class vessels. Supramax ships typically have a carrying capacity spanning 50,000 to 60,000 dead weight tons. The size of these ships relative to larger dry bulk vessel classes enables greater cargo and docking flexibility.
The versatility of these vessels and their role in facilitating trade to fast growing emerging markets such as India and China persuaded ship owners to order too many ships in recent years. According to Clarksons, supply grew by 14 percent in 2011 and is forecasted to increase by 15 percent this year before moderating to 8 percent growth.
The imbalance between vessel demand and capacity has depressed the Baltic Dry Index, which reflects dry bulk shipping prices across a range of vessel classes and routes. The index closed at 1,137 yesterday compared to 647 reached in February but off its 52-week high of 2,173 and all time high of 11,793 reached in May 2008, according to Reuters data. Given the multi-year lead times to deliver a new dry bulk vessel, ship owners placed orders when the index was high and before the credit crunch, leading to industry overcapacity.
Besides depressing the Baltic Dry Index, individual day rates for chartering vessels have plummeted as well. Supramax day rates averaged $8,728 per day in the first quarter which is down 39 percent from year ago levels, though day rates have recently risen above $10,000 per day, according to Deutsche Bank.
The company estimated daily cash costs per vessel at $9,464, which implies that current day rates are barely covering Eagle Bulk's operating expenses unless a seasonal upturn materializes later into the summer.
Fleet valuation
The tough rate environment has contributed to falling ship values. Although the company records its fleet value at $1.8 billion in the latest public filings, buyers are bidding for the revolver loan at around 70 cents on the dollar.
This recorded value includes contracts signed at rates above those currently realized in the spot market. Excluding the value of these contracts attached to the fleet, Eagle Bulk revises its fleet value estimate to $1.1 billion or $25.1 million per ship. Last week, a 5 year old Supramax with 55,000 dead weight ton capacity, named Ocean Spirit, was sold for $20 million, according to Drewry Shipping Consultants. The average age of Eagle Bulk's fleet is about five years.
The revolver is secured by mortgages on the fleet's vessels. There was $1.1 billion drawn under the revolver at the end of last year, suggesting that potential loan buyers assign marginal value to the contracts along with discounting the company's recorded fleet value.
Eagle Bulk has minimal investment requirements for new vessels, as the company took delivery of its last vessel to complete its new ship construction program last year. This should help lower the company's cash burn and demands for additional capital.
Despite these issues, the bank lending group has so far demonstrated willingness to support the company through multiple waivers and amendments. The most recent amendment relaxes minimum adjusted net worth and liquidity covenants through this Monday. However the company remains in dispute with RBS, the agent bank, over covenant issues from a prior amendment executed in August 2009. RBS contends that the company met certain covenants during 2010 which would have then triggered a 2011 default due to Eagle Bulk's declining earnings.
If RBS prevails, this would compel the company and lenders to undergo another round of amendment negotiations to waive a potential default.
Calls to Eagle Bulk were not returned by press time.
Other lenders signing onto the most recent amendment include: Lloyds TSB, WestLB, Bank of China, Sumitomo Mitsui, Santander, and Credit Industriel et Commercial. Sources say that the loan has not yet traded outside the current bank group given bids in the low 70s, suggesting that lenders are willing to keep matters "in-house" for now.
Source: Reuters