Performance Shipping Inc. annual report, Q4 FY2016

Business context and reporting period

The supplied filing is Diana Containerships Inc.’s annual report on Form 20-F for the fiscal year ended December 31, 2016—not a quarterly report. It does not provide a clear standalone fourth-quarter 2016 financial result. The filing does not identify Performance Shipping Inc. as the registrant; investors should verify the company and filing match.

Diana Containerships owned and operated containerships. At year-end it reported 12 vessels, with 61,517 TEU of capacity and a weighted average age of 10.6 years. Financial statements are prepared under U.S. GAAP; figures below are in U.S. dollars.

Key financial and operating metrics

Year-end working capital was a deficit of $107.0 million, versus a $10.2 million surplus in 2015. The filing reports $174.3 million of total principal debt outstanding at December 31, 2016. The $9.0 million of restricted cash was reclassified as current and is not the same as freely available cash.

Material changes versus 2015

• Net charter revenue fell 47%, despite ownership days increasing 4%; management attributed the decline to lower charter rates and reduced employment opportunities.
• Fleet utilization dropped from 92.0% to 69.8%, and the daily TCE rate more than halved.
• The $149.0 million net loss included $118.9 million of non-cash vessel impairment charges for seven vessels and $2.9 million of losses and costs on vessel sales. Vessel operating expenses declined to $30.2 million from $35.8 million, partly reflecting reduced vessel operations.
• Operating cash flow shifted from $17.4 million provided to $12.0 million used. Cash and cash equivalents declined by $21.1 million during 2016.
• The company sold Hanjin Malta and Angeles during 2016. Four vessels were reported in lay-up in the filing’s fleet discussion.
• Cash dividends were suspended effective with the quarter ended June 30, 2016. The company paid $0.4 million in dividends during 2016, relating to earlier declared distributions.

Outlook, risks and unusual items

• Going concern and covenant risk: The auditor’s report expresses substantial doubt about the company’s ability to continue as a going concern. The company was in breach of RBS financial and minimum security-cover covenants; the bank debt was consequently classified as current. The lender indicated an $18.9 million repayment or additional security would be needed to remedy a security-cover shortfall. Management said it expected lenders not to demand early repayment, but there is no assurance of this.
• Liquidity plans: Management was seeking more favorable charters, potential equity or debt financing subject to lender consent, and vessel sales. A January 2017 shelf registration could permit offerings of up to $250 million if declared effective; it is not evidence that financing was obtained.
• Debt restrictions: The amended RBS facility deferred principal repayments until September 2017 and restricted additional debt and vessel acquisitions until September 2018. It also restricted dividends until the specified conditions, including repayment of the deferred tranche, are met. Related-party loan repayments were also deferred.
• Operating outlook: Management planned to favor short-term charters in the near term, while the filing notes that most existing charters could expire in the first half of 2017. Management gave no company-specific quantitative earnings or cash-flow guidance. Industry sources cited in the filing projected global container trade growth of 4.3% in 2017; this is an industry estimate, not company guidance.
• Other material exposures: Charter-market weakness, vessel-value declines, customer concentration, counterparty defaults, refinancing access, variable LIBOR rates, foreign-currency expenses, and environmental compliance costs could affect results. Three charterers accounted for 67% of 2016 revenue.
• Unusual disclosure: Section 13(r) disclosure concerns port calls by vessels of Diana Shipping Inc., an affiliate/shareholder, not Diana Containerships’ own vessel operations. The filing states Diana Containerships’ vessels did not call at U.S.-sanctioned-country ports during 2016.

Most important facts for investors to verify

• Confirm the registrant: this filing is for Diana Containerships Inc., although the request names Performance Shipping Inc.
• Check the current status of RBS covenant breaches, waivers or amendments, required collateral or repayment, and whether lenders can accelerate the debt.
• Reconcile unrestricted cash, restricted cash, near-term obligations, and the company’s ability to fund operations over the going-concern assessment period.
• Review subsequent charter renewals, vessel lay-up or sale decisions, utilization, and realized rates against the weak 2016 baseline.
• Assess whether any proposed capital raising was completed, its terms and dilution, and whether lender consent or dividend restrictions apply.
• Verify the impairment assumptions and vessel valuations: the $118.9 million charge relied on management estimates and Level 3 fair-value inputs.