Business Context and Reporting Period
Company: Star Bulk Carriers Corp.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Date Filed: July 18, 2011
Reporting Period: This filing supersedes a previous Form 6-K and includes Management's Discussion and Analysis (MD&A) and unaudited interim condensed consolidated financial statements for the three months ended March 31, 2011. The report also details significant operational and financial developments occurring between April 1, 2011, and July 15, 2011.
Business Overview: Star Bulk is an international drybulk carrier providing transportation for commodities such as coal, iron ore, and grains. As of July 15, 2011, the operating fleet consisted of 11 vessels (3 Capesize, 8 Supramax) with a combined capacity of approximately 0.9 million dwt. The company is in the process of expanding its fleet through two newbuildings and two secondhand acquisitions.
Key Financial Metrics (Three Months Ended March 31, 2011)
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Voyage Revenues | $29.5 million | $29.3 million |
| Net Income | $1.7 million | $(33.0) million (Loss) |
| Earnings Per Share (Diluted) | $0.03 | $(0.54) |
| Time Charter Equivalent (TCE) Rate | $23,252/day | $25,919/day |
| Operating Cash Flow | $9.5 million | $13.1 million |
| Investing Cash Flow | $(19.0) million | $(5.9) million |
| Financing Cash Flow | $9.0 million | $(19.5) million |
| Total Debt (Outstanding Borrowings) | $217.7 million (as of Mar 31, 2011) | N/A |
| Cash and Cash Equivalents | $12.4 million | $12.8 million (Dec 31, 2010) |
| Working Capital | $(18.2) million (Deficit) | $(19.3) million (Deficit, Dec 31, 2010) |
Material Changes vs. Prior Period
- Profitability Turnaround: The company reported a net income of $1.7 million in Q1 2011, a significant improvement from a net loss of $33.0 million in Q1 2010. The prior year loss was heavily impacted by a $33.7 million vessel impairment loss related to the "Star Beta" and a $2.4 million loss on Forward Freight Agreements (FFAs), neither of which occurred in Q1 2011.
- Revenue Stability vs. Rate Decline: Voyage revenues remained relatively flat ($29.5M vs $29.3M), despite a 10% decrease in the average TCE rate ($23,252 vs $25,919). This was offset by higher voyage expenses ($6.6M vs $3.9M) due to increased charter-in days for a third-party vessel to fulfill a Contract of Affreightment (COA) with Vale.
- Operating Efficiency: Vessel operating expenses decreased by 9% ($5.1M vs $5.6M) due to the transition to in-house management for most of the fleet, reducing reliance on third-party managers.
- Capital Expenditures: Net cash used in investing activities increased significantly to $19.0 million, primarily driven by $22.0 million in installments paid for two newbuilding Capesize vessels.
Guidance, Outlook, and Recent Developments
Fleet Expansion and Acquisitions
- Newbuildings: Two Capesize vessels (Star Borealis and Star Polaris) are under construction with scheduled deliveries in September and November 2011. As of July 15, 2011, $74.9 million of the $106.9 million total cost has been paid.
- Acquisitions: The company agreed to acquire two secondhand Capesize vessels, the Megalodon and Big Fish, for an aggregate price of $51.5 million. A $5.15 million deposit was paid in May 2011. These vessels are expected to be delivered by August 31, 2011, and are already under long-term time charters with a multinational mining group.
- Capacity Growth: Upon completion of these acquisitions, the fleet's cargo carrying capacity is expected to increase by 75% to 1.6 million dwt.
Financing and Liquidity
- New Credit Facility: On July 7, 2011, the company entered into a commitment letter for a new $31.0 million senior secured credit facility with ABN AMRO Bank N.V. to partially finance the acquisition of the secondhand vessels.
- Covenant Compliance: The company experienced a temporary breach of a collateral covenant with Commerzbank AG (market value of pledged vessels fell below 135% of borrowings) as of March 31, 2011. This was remedied in May 2011 through prepayments totaling $3.3 million.
- Liquidity Outlook: Management believes current cash balances, operating cash flows, and undrawn credit facilities ($37.9 million available) are sufficient to meet liquidity needs for the next 12 months, including vessel acquisitions.
Management Changes
- Resignations: Mr. George Syllantavos announced his resignation as CFO and Board Director effective August 31, 2011.
- Appointments: Mr. Simos Spyrou joined as Deputy CFO in May 2011. Mr. Zenon Kleopas joined as Chief Operating Officer in June 2011.
Risks and Contingencies
- Market Conditions: The drybulk charter market has remained at depressed levels since late 2008. Prolonged depressed conditions could adversely affect results of operations.
- Working Capital Deficit: The company maintains a working capital deficit ($18.2 million as of March 31, 2011). Continued deficits could impact the ability to secure future financing or increase borrowing costs.
- Related Party Transactions: Several significant transactions involve entities affiliated with the Chairman, including the acquisition of the Megalodon and Big Fish, and office lease agreements.
Investor Verification Checklist
- Debt Covenants: Verify continued compliance with the 135% collateral ratio covenant with Commerzbank and the new financial covenants (70% debt-to-value, 3.0x EBITDA/Interest) associated with the ABN AMRO facility.
- Acquisition Closing: Confirm the successful delivery and financing of the Megalodon and Big Fish by the August 31, 2011 deadline.
- Charter Rates: Monitor the impact of the 10% decline in TCE rates on future profitability, particularly as new vessels enter the fleet.
- Working Capital: Assess the sustainability of the working capital deficit and the company's ability to fund operations without additional equity issuance.
- Management Transition: Evaluate the impact of the CFO resignation and the integration of new executive leadership.