Business context and reporting period
Genco Shipping & Trading Limited’s unaudited Form 10-Q covers the quarter and nine months ended September 30, 2016. The company owns and operates a global drybulk fleet; it reported 66 vessels and approximately 4.98 million dwt after the subsequent sale of the Genco Leader. Results are compared with 2015, when the Baltic Trading merger was completed in July, affecting comparability.
Financial performance and liquidity
Amounts below are in U.S. dollars; financial statement amounts are shown in millions unless stated otherwise.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $38.9 | $50.0 | $91.7 | $119.0 |
| Operating loss | $(20.1) | $(35.3) | $(167.8) | $(155.3) |
| Net loss attributable to Genco | $(27.5) | $(66.6) | $(192.7) | $(145.4) |
| Net loss per share | $(3.80) | $(9.54) | $(26.65) | $(22.86) |
| EBITDA, non-GAAP | $(1.9) | $(41.4) | $(112.7) | $(71.1) |
- Voyage revenue fell 23.0% in Q3 and 23.2% year to date. Fleet-average TCE was $5,779/day in Q3, down 17.5%, and $4,341/day for nine months, down 23.8%.
- Q3 operating loss improved year over year despite lower revenue, with lower operating expenses and no vessel impairment charge in the quarter. Approximate operating margin was negative 51.7% versus negative 70.6% in Q3 2015. Nine-month operating margin weakened to approximately negative 183.0% from negative 130.5%, reflecting higher vessel impairment charges.
- Nine-month vessel impairment expense was $69.3 million, including $67.6 million for nine vessels considered likely to be scrapped. The 2015 comparable period included $35.4 million of impairment.
- Operating cash flow was negative $45.9 million for nine months, versus negative $39.4 million. Investing activities provided $5.1 million; financing activities used $40.3 million. Cash and cash equivalents declined $81.0 million to $40.0 million. Restricted cash was $19.8 million.
- At September 30, total debt principal was $548.3 million; net of issuance costs, $540.5 million was classified as current. All outstanding debt was classified current because of covenant risks and cross-default provisions. Current assets were $87.8 million and current liabilities $563.6 million, a working-capital deficit of approximately $475.8 million. Total equity was $928.1 million.
- Interest expense was $21.2 million for nine months, up from $13.9 million; the effective debt interest rate was 4.40% versus 3.54%. Management estimated a 1 percentage-point LIBOR increase would add $4.3 million to nine-month interest expense.
Changes, outlook and material risks
- Management cited persistently weak drybulk rates and vessel values as causes of losses, negative operating cash flow, liquidity pressure and covenant risk. It stated that recurring losses and negative working capital raise substantial doubt about the company’s ability to continue as a going concern.
- Covenant waivers and extensions were in place through November 15, 2016, subject to conditions. Management said it was probable that covenant compliance would not be maintained after that date without a refinancing or other solution; cross-defaults could accelerate debt and lenders could foreclose on collateral.
- A proposed senior secured facility of up to $400 million was intended to refinance several existing facilities, but remained subject to definitive documentation and conditions, including at least $125 million of equity financing and amendments to other facilities.
- After quarter-end, Genco entered agreements for up to $125 million of Series A convertible preferred stock financing, including investor commitments and a backstop; a further $38.6 million purchase agreement was signed October 27. Conversion requires shareholder approval. The filing does not establish that the financing or refinancing had closed.
- After quarter-end, Genco sold the Genco Sugar, Genco Pioneer and Genco Leader; net proceeds were applied or expected to be applied to debt repayment. It also received $0.8 million from Samsun as final settlement of a claim.
- Most fleet employment contracts were due to expire between November 2016 and July 2017, absent charterer options. Minimum contracted time-charter revenue was reported as $8.1 million for the rest of 2016 and $2.6 million for 2017; this excludes pool and spot-linked revenue. No earnings or rate guidance was provided.
- Management noted the IMO’s October 2016 decision to require sulfur emissions reductions by 2020, potentially requiring scrubbers costing $3–$10 million per vessel or more expensive low-sulfur fuel. The contemplated ownership changes from the equity financing could also affect eligibility for the U.S. Section 883 tax exemption.
- The appeal of the dismissed Baltic Trading merger shareholder litigation remained pending. Peter Georgiopoulos resigned as chairman and director in October; his separation terms included $0.5 million severance and accelerated vesting of equity awards. Management reported disclosure controls were effective and no material internal-control changes during the quarter.
Investor verification priorities
- Confirm whether the preferred-stock financing, shareholder approval, and up-to-$400 million refinancing closed, and review final terms, dilution and conditions.
- Check the status of covenant waivers after November 15, 2016, compliance calculations, lender remedies and any cross-default exposure.
- Assess cash burn, minimum liquidity needs, restricted cash availability, debt maturities and the company’s going-concern assumptions.
- Verify vessel sale proceeds, debt paydowns, planned scrapping and the effect of fleet reductions on earnings capacity and collateral.
- Track drybulk charter rates, expiring contracts, fleet TCE performance and the extent of exposure to spot markets.
- Evaluate potential ballast-water and sulfur-compliance capital costs, and whether ownership changes affect Section 883 tax treatment.