GENCO SHIPPING & TRADING LTD quarterly report, Q2 FY2013

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Genco Shipping & Trading Limited — Q2 2013 Form 10-Q

Business context and reporting period. The unaudited filing covers the quarter and six months ended June 30, 2013. Genco owns and operates drybulk vessels; consolidated results include Baltic Trading, in which Genco held 78.61% of voting power but a 19.68% economic interest at quarter-end. Unless stated otherwise, dollar amounts below are in millions.

Financial results and key metrics

  • Q2 revenue: $45.8, down 27.3% year over year; voyage revenue was $44.9, down 27.6%.
  • Q2 results: operating loss of $27.1, net loss of $48.9, and net loss attributable to Genco of $45.4, or $1.05 per share. EBITDA, a non-GAAP measure, was $11.2 versus $26.8.
  • First-half results: revenue of $86.2, down 29.8%; operating loss of $57.6; net loss of $100.9; Genco-attributable net loss of $93.5, or $2.17 per share. EBITDA was $18.9 versus $52.0.
  • Rates and utilization: fleet-average TCE was $7,526 per day in Q2, down 32.0%, and $7,247 per day in the first half, down 32.7%. Fleet utilization remained high at 99.5% for Q2 and 99.4% for the first half.
  • Costs and margins: Q2 operating expenses totaled $72.8, nearly flat year over year despite lower revenue; operating loss widened. Q2 daily vessel operating expense declined 9.3% to $4,744. First-half daily vessel operating expense declined 5.5% to $4,802.
  • Cash flow: first-half operating cash flow was negative $25.3, compared with positive $0.6 in 2012. Investing used $0.2; financing provided $22.5. Cash and cash equivalents ended at $69.6, down from $72.6 at year-end 2012; restricted cash totaled $10.2.
  • Debt and balance sheet: total debt was approximately $1,414.4, including $1,312.2 of Genco facility debt and $102.3 of Baltic Trading debt. Genco also had $113.3 carrying value of convertible notes. Total liabilities were $1,582.7 and equity was $1,194.9. Approximately $1,312.2 of facility debt, the convertible notes, accrued interest and a swap liability were classified as current because of anticipated covenant noncompliance within twelve months, despite existing waivers.
  • Interest and liquidity: Q2 interest expense was $21.6; first-half interest expense was $42.8. The company reported a $39.8 minimum-cash covenant for the three Genco facilities, excluding Baltic Trading cash. Genco’s credit agreements also require cash sweeps above specified levels and had eliminated scheduled amortization through year-end 2013.

Material changes versus prior periods

  • Lower charter rates drove the revenue decline and substantially larger losses. Management attributed the weak freight environment to excess vessel supply and uncertain global growth; rates received support from increased Brazilian iron ore cargoes and firm coal and grain activity beginning in mid-June.
  • Q2 TCE fell across vessel classes, with the largest decline in Capesize rates. The decline in first-half revenue was partly offset by fewer planned drydock off-hire days than in the prior-year period.
  • Voyage expenses rose to $2.9 in Q2 and $4.1 for the first half, primarily due to bunker consumption and short-term charter costs. Vessel operating expenses declined, mainly from lower maintenance, crew-related costs and timing of stores and spare-parts purchases.
  • Genco’s facility debt was reclassified as current beginning in Q1 2013 because management considered future covenant noncompliance probable. The current classification continued at June 30; it does not itself cancel existing waivers.
  • Baltic Trading completed a May equity offering, receiving net proceeds of $21.6. Genco’s ownership percentage in Baltic Trading declined, while its voting control remained a majority.

Outlook, risks and unusual items

  • Financing and covenant risk: Management said it may be unable to make required payments beginning in the quarter ending March 31, 2014 and considered noncompliance with minimum-cash, leverage and interest-coverage covenants probable at or after that date; sustained weakness could cause earlier noncompliance. Certain leverage and interest-coverage waivers run through December 31, 2013, but the minimum-cash covenant was not waived.
  • Management was discussing further waivers or amendments with lenders and might seek refinancing, debt or equity capital, asset or vessel sales, lower or delayed capital spending, or restructuring. It cautioned that these actions may not be available or successful. A default could accelerate debt, trigger defaults under the convertible-note indenture and swaps, and expose pledged assets to lender enforcement.
  • Management reported vessel collateral valuations used for covenant purposes were below carrying values by $1.39 billion in aggregate at June 30. It also estimated limited collateral-value headroom under the $100 million and $253 million term loan facilities.
  • Future minimum time-charter revenue under qualifying noncancelable contracts was $10.6 for the remainder of 2013 and $3.9 in 2014; this excludes pool and spot-related revenue that cannot be estimated. Estimated Genco drydock costs were $1.4 for the rest of 2013 and $15.8 in 2014, with 420 estimated off-hire days in 2014.
  • After quarter-end, Baltic Trading agreed to acquire two Handysize vessels for $41.0, planned to use offering proceeds and approximately $20.0 of committed bank financing, subject to definitive documentation and closing conditions. The filing also reports Baltic Trading declared a $0.01-per-share dividend in July; Genco itself had declared no dividends, and its facility restrictions continued to prohibit them.
  • Other risks include volatile drybulk rates and vessel supply, charterer performance, operating and drydock costs, interest-rate exposure and the market value of the Jinhui investment. A 1% LIBOR increase was estimated to add $5.6 of first-half interest expense on unhedged debt. No material legal proceedings were identified; disclosure controls were reported effective.

Important facts for investors to verify

  • Whether lenders grant covenant waivers or amendments before existing waivers expire, and the timing and terms of any refinancing or restructuring.
  • Cash available to satisfy the $39.8 minimum-cash covenant, debt-service requirements, and the scheduled $55.2 aggregate principal payments in Q1 2014.
  • Whether weak drybulk rates persist and how quickly charter renewals affect revenue, TCE rates and operating cash flow.
  • Whether Baltic Trading completes the two vessel purchases and obtains definitive financing on the stated terms.
  • Near-term liquidity after accounting for restricted cash, planned drydocking, debt classification and any lender-required cash sweeps or collateral actions.