Genco Shipping & Trading Limited — 2015 Q2 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Genco transports drybulk cargo worldwide through owned and operated vessels. The statements consolidate Baltic Trading, which Genco controlled before completing its stock-for-stock merger on July 17, 2015. The merger is a subsequent event, not reflected as completed in the June 30 balance sheet.
Comparability: Genco adopted fresh-start reporting upon emergence from Chapter 11 on July 9, 2014. Accordingly, 2015 Successor and 2014 Predecessor results are not fully comparable; the filing cautions that historical results may not be reliable indicators of subsequent results.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $34.6m | $52.4m | $69.0m | $116.4m |
| Operating loss | $(46.2)m | $(26.6)m | $(120.0)m | $(47.3)m |
| Net loss | $(52.0)m | $(65.6)m | $(131.1)m | $(107.8)m |
| Net loss attributable to Genco | $(40.3)m | $(60.5)m | $(78.8)m | $(99.6)m |
| Net loss per share, basic and diluted | $(0.67) | $(1.39) | $(1.30) | $(2.29) |
| Fleet average TCE rate per day | $5,065 | $8,452 | $5,021 | $9,586 |
Amounts are in U.S. dollars; financial statement values are rounded to millions. Revenue declined 33.9% in Q2 and 40.7% for the first half. Management attributed the declines chiefly to weaker charter rates. Fleet-average TCE fell 40.1% in Q2 and 47.6% for the first half. Q2 operating loss widened despite lower vessel operating costs and depreciation. For the first half, Genco reported a $35.4m vessel impairment and $1.2m loss on vessel sales. Lower interest and reorganization costs helped reduce the loss attributable to Genco versus the prior-year periods; fresh-start accounting limits comparisons.
- Margins and operating measures: The filing reports continued operating losses; it does not present a headline gross or operating margin. Fleet utilization was 98.2% in Q2 and 98.6% for the first half, versus 97.4% and 98.4%, respectively. Average daily vessel operating expense declined to $4,836 in Q2 and $4,762 for the first half.
- Cash flow: For the six months, cash used in operations was $29.8m, cash used in investing was $5.4m, and cash provided by financing was $13.5m. Cash and cash equivalents declined by $21.8m to $61.6m.
- Liquidity: At June 30, cash was $61.6m and restricted cash totaled $10.1m; current assets were $108.5m and current liabilities $79.3m. Management said liquidity sufficiency for the next 12 months was conditional on resolving credit-facility issues and warned that, without available remedial actions, minimum-cash covenant compliance could be at risk during 2015.
- Debt and equity: Long-term debt, including its current portion, totaled $448.6m, compared with $430.1m at December 31, 2014. Total liabilities were $483.9m; total equity was $1,185.7m. Debt facilities are primarily floating-rate and secured by vessels. A 1% LIBOR increase was estimated to raise interest expense by $2.1m for the six months ended June 30.
Material changes and notable events
- Drybulk market weakness and vessel oversupply weighed on rates. Management cited Chinese iron ore and coal inventory destocking and seasonally lower Brazilian iron ore exports; it noted that Capesize rates rose from mid-June and the Baltic Dry Index reached 1,131 by the end of July.
- Genco recorded a $35.4m first-quarter impairment on Baltic Lion and Baltic Tiger after determining their sale was probable and their estimated undiscounted cash flows did not support their carrying values. The vessels were transferred from Baltic Trading to Genco on April 8; the transaction also produced a $1.2m disposal loss.
- On July 17, Genco completed its merger with Baltic Trading. Former outside Baltic Trading shareholders received 0.216 Genco shares per share and held approximately 15.5% of the combined company; Genco shareholders held approximately 84.5%. Genco stock began NYSE trading as GNK on July 20.
- Post-merger, Genco guaranteed Baltic Trading facility obligations and obtained amendments, consents and covenant changes. Genco also entered into a $59.5m revolving facility in April, with an uncommitted accordion to $150m; $25m was drawn by June 30 and a further $10m was drawn July 10.
- Genco took delivery of Baltic Scorpion on August 6, 2015, using cash and a $16.5m draw under the Baltic Trading $148m facility. Baltic Mantis was expected in Q3 2015.
Outlook, risks and contingencies
- Management cited weak charter rates, operating cash use, debt service and falling vessel values as pressure on liquidity and covenant compliance. Minimum cash requirements after the merger were stated as $51.8m, with certain portions potentially met by undrawn working-capital lines. Genco identified waivers or amendments, refinancing, additional capital, vessel sales, and reduced or delayed capital spending as possible responses.
- Collateral tests were under pressure: the $253m facility measured 129.2% against a 135% requirement at June 30, and the Baltic Trading $148m facility measured 132.0% against a then-applicable 140% test. Subsequent collateral additions, covenant amendments and a $1.65m July prepayment addressed or mitigated certain shortfalls. Genco warned that declining vessel values could create further shortfalls.
- Committed noncancelable time-charter revenue was estimated at $3.5m for the remainder of 2015 as of August 3; this excludes pool and spot-related employment whose rates could not be estimated. No specific earnings or rate guidance was provided.
- Genco did not plan to resume dividends and was prohibited from paying them under certain facilities, with the longest restriction stated to run through March 31, 2017.
- Six state-court shareholder actions challenging the merger were consolidated; a motion to dismiss was pending. A request to enjoin the merger vote was denied and the merger proceeded. A related federal action also alleged disclosure and fiduciary-duty claims. The company could not reasonably estimate any potential loss, but did not believe a material financial reporting consequence was probable.
- Genco disclosed that MEP, a related party controlled by its chairman, was approximately $1.9m in arrears on management fees in the MD&A; the company had demanded payment and referred the matter to an independent board committee. The balance-sheet note separately reported $1.311m due from MEP at June 30.
- Planned drydocking costs were estimated at $10.3m for the second half of 2015 and $9.4m for 2016. Ballast-water treatment systems could add estimated costs of $0.7m–$1.0m per vessel.
Most important facts for investors to verify
- Whether operating cash use, the $51.8m minimum-cash requirement and subsequent liquidity actions leave adequate covenant headroom.
- Current vessel valuations and collateral-test compliance across each facility, including the effect of collateral pledges, repayments and amendments.
- Post-merger debt, share count and ownership dilution; the filing reports 61.6m shares outstanding at June 30 and 72.9m at August 10.
- Realized charter rates and employment as contracts roll over, given the sharp TCE decline and limited committed minimum revenue.
- Collection of the MEP related-party receivable and developments in the merger-related litigation.