DSX

Business Context and Reporting Period

Company: Diana Shipping Inc.
Filing Type: Form 20-F (Annual Report)
Period Ended: December 31, 2009
Jurisdiction: Republic of The Marshall Islands
Business Overview: Diana Shipping Inc. is a global provider of shipping transportation services specializing in dry bulk cargoes (iron ore, coal, grain). As of December 31, 2009, the fleet consisted of 20 vessels (13 Panamax and 7 Capesize) with a combined capacity of approximately 2.2 million deadweight tons (dwt). The company operates primarily under time charters.

Key Financial Metrics (Year Ended Dec 31, 2009)

Material Changes vs. Prior Period

• Revenue Decline: Revenue decreased by 29% ($98.1 million) compared to 2008. This was primarily driven by a 30% decrease in average charter rates due to deteriorating global shipping market conditions following the 2008 financial crisis, partially offset by a 1% increase in ownership days from the acquisition of the vessel Houston.
• Profitability: Net income decreased by 45% to $121.5 million. Operating income fell from $225.8 million to $124.3 million.
• Liquidity Improvement: Cash and cash equivalents increased significantly from $62.0 million to $282.4 million. This was driven by a $98.4 million secondary public offering in May 2009, net proceeds from financing activities, and the suspension of cash dividends.
• Debt Levels: Total indebtedness increased to $281.5 million (from $238.1 million) to fund vessel acquisitions (including the Melite and Houston) and construction advances.
• Dividend Policy: The Board of Directors suspended cash dividends starting in the fourth quarter of 2008. No dividends were paid in 2009, compared to $3.31 per share in 2008.

Guidance, Outlook, and Risks

Management Commentary & Outlook: Management expects 2010 revenues to increase due to the addition of the Houston (delivered Oct 2009) and Melite (delivered Jan 2010), which will increase ownership days. The company maintains a strategy of balancing short-term and long-term charters; 13 vessels were fixed on long-term time charters (17 to 62 months) to ensure stable cash flow. Management anticipates internally generated cash flow will be sufficient to fund operations and working capital.

Key Risks and Contingencies:

• Market Volatility: The dry bulk shipping industry is highly cyclical. Charter rates and vessel values remain volatile and sensitive to global economic conditions, particularly in the Asia Pacific region (China).
• Debt Covenants: The company's credit facilities contain covenants requiring the aggregate market value of vessels to exceed 120% (or 125% for Deutsche Bank) of the outstanding debt. A further decline in vessel values could trigger a breach of these covenants.
• Counterparty Risk: Approximately 69% of 2009 revenue was derived from four charterers. Failure of a major charterer to perform could materially impact results.
• Regulatory & Environmental: Compliance with IMO regulations (MARPOL, ISM Code) and potential new emissions controls (sulfur caps) may require significant capital expenditures.
• Interest Rate Risk: The company has variable rate debt. A 1% increase in interest rates would have increased 2009 interest costs by 58%.

Investor Verification Checklist

• Dividend Status: Confirm the continued suspension of dividends and the Board's criteria for reinstatement.
• Debt Covenants: Verify current vessel valuations against the 120%/125% loan-to-value covenants to assess default risk.
• Charter Expirations: Review the schedule for the 7 vessels with charters expiring within six months of the report date to assess re-chartering risk at current market rates.
• Customer Concentration: Monitor the financial health of the top four charterers (Cargill, BHP Billiton, Hanjin, Corus) which accounted for 69% of 2009 revenue.
• Subsequent Events: Note the delivery of the Melite (Jan 2010) and New York (Mar 2010) and the associated debt drawdowns that occurred after the balance sheet date.