Star Bulk Carriers Corp. annual report, Q4 FY2016

Business context and reporting period

Star Bulk Carriers Corp. filed this Form 20-F for the fiscal year ended December 31, 2016. It is an annual report, not a standalone fourth-quarter filing; the text does not provide a clear set of Q4-only financial results. The company owns and operates dry-bulk vessels carrying commodities including ore, coal, grain and fertilizers. Financial statements are prepared under U.S. GAAP.

Key financial metrics

Net voyage revenue after voyage expenses was $156.2 million, versus $161.2 million. The company’s non-GAAP time-charter-equivalent (TCE) rate was $6,260 per available day, down from $7,052. Average daily vessel operating expense declined 13.5% to $3,871. Fleet utilization was 97%, compared with 96%.

Operating loss was $109.3 million, including a $29.2 million impairment loss and $15.2 million loss on vessel sales. The net loss also included $2.1 million of derivative losses and $2.4 million of debt-extinguishment costs. EBITDA and operating margin are not clearly provided as reported metrics.

Liquidity, debt and capital resources

At December 31, 2016, total assets were $2.012 billion, total liabilities $974.5 million and stockholders’ equity $1.037 billion. Current assets of $228.5 million exceeded current liabilities of $28.1 million; the company reported working capital of $200.3 million. Cash included $14.0 million of legally restricted cash; $47.6 million was the stated minimum unrestricted-liquidity requirement.

Outstanding borrowings at year-end were reported as $951.3 million, net of unamortized financing fees, including $50 million of 8% senior notes due 2019 and capital lease obligations. The company’s debt agreements are primarily floating-rate, LIBOR-based. Interest and finance costs increased year over year, reflecting higher average debt and LIBOR, partly offset by lower capitalized interest.

Under its 2016 restructuring, lenders deferred scheduled principal payments due June 2016 through June 2018 to facility balloon dates and waived or substantially relaxed financial covenants through at least December 2019. The arrangement includes a consolidated excess-cash sweep, an additional 25-basis-point margin on deferred amounts, restrictions on additional borrowing and a prohibition on dividends until deferred amounts are repaid. The company stated that it was compliant with applicable covenants at year-end and expected cash and operating cash flows to meet liquidity needs over the following 12 months.

Material changes versus the prior comparable period

• Revenue declined to $222.0 million from $234.0 million, while TCE fell to $6,260 from $7,052 per day amid weak dry-bulk rates.
• Net loss narrowed substantially from $458.2 million, largely because impairment charges fell from $322.0 million in 2015 to $29.2 million in 2016. The company still recorded substantial losses.
• Operating cash outflow worsened to $33.4 million from $14.6 million. Cash declined by $26.3 million during 2016.
• Vessel operating and dry-docking costs decreased; interest and finance costs rose to $41.2 million.
• Vessel sales generated $380.2 million in proceeds, with a $15.2 million aggregate loss on sales. Sales and newbuilding cancellations formed part of the company’s liquidity-preservation measures.
• The September 2016 equity offering raised approximately $50.3 million net. After year-end, a February 2017 private placement raised approximately $50.6 million net.

Outlook, management commentary, risks and unusual items

Management described the dry-bulk market as recovering from its February 2016 all-time low, while emphasizing continued volatility and no assurance of further improvement. It cited vessel scrapping, low newbuilding orders and fleet conversions as potential supports for future rates, and planned to keep much of the fleet exposed to spot, short-term time-charter and voyage markets. No quantified earnings or rate guidance is provided.

Major risks include volatile charter rates and vessel values, substantial leverage and refinancing needs, covenant and liquidity exposure if restructuring arrangements are not fully implemented, and dependence on market recovery. As of year-end, the company estimated that 62 operating vessels and five newbuildings had market values below carrying values; the aggregate estimated gap was $657.2 million. This is an estimate of potential loss if sold at the stated market values, not a recognized impairment charge. Environmental compliance, fuel and interest-rate costs, construction delays, customer and counterparty risks, and related-party conflicts are also disclosed.

At March 9, 2017, the company reported $258.4 million of cash, four remaining newbuilding vessels with expected payments of $148.0 million (of which $49.9 million had been paid), and plans to acquire two Kamsarmax vessels for approximately $30.3 million. Financing for some of these commitments was still being negotiated or expected. Dividends were prohibited under the restructuring until deferred amounts are repaid; none were paid in 2016.

Unusual and contingent items include a pending appeal in a shareholder lawsuit dismissed at trial, and pending arbitration to quantify repair costs for the Star Polaris engine-failure claim; the revenue-loss claim was dismissed. The company recorded a $267,000 U.S. shipping-income tax expense for 2016, saying it did not qualify for the relevant exemption that year. Management reported effective disclosure controls and internal control over financial reporting; the auditor gave unqualified opinions on the financial statements and internal controls.

Most important facts for investors to verify

• Whether the lender restructuring and remaining supplemental agreements were finalized, and how the cash sweep, deferred principal and covenant relief affect future liquidity and debt maturities.
• Cash availability after restricted balances, ongoing operating cash burn, and funding for newbuildings and vessel acquisitions.
• Actual charter-rate and TCE performance after year-end, given the fleet’s substantial spot-market exposure and the absence of quantified guidance.
• The assumptions and sensitivity behind the $657.2 million estimated vessel-value shortfall, and whether further impairments or sale losses arise.
• Delivery timing, financing and remaining payment obligations for newbuildings and the two Kamsarmax acquisitions.
• Progress and financial exposure in the pending legal matters, U.S. shipping-income tax exemption, and related-party arrangements, including Interchart brokerage fees.