GNK

Business Context and Reporting Period

Company: Genco Shipping & Trading Limited (GS&T)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2007
Business Overview: GS&T is a Marshall Islands corporation engaged in the ocean transportation of drybulk cargoes worldwide. As of June 30, 2007, the fleet consisted of 19 vessels (7 Panamax, 7 Handymax, 5 Handysize) with an aggregate capacity of approximately 988,000 dwt. All vessels were employed under time charters.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 14.2% year-over-year, driven primarily by fleet expansion (average of 19.3 vessels in 2007 vs. 17.0 in 2006) and higher Time Charter Equivalent (TCE) rates for Panamax and Handymax vessels.
• Net Income Decline: Despite higher operating income, Net Income decreased slightly (1.6%) due to a significant increase in "Other (expense) income" losses, specifically a $1.6 million loss from derivative instruments (currency swaps) compared to a $2.2 million gain in the prior year.
• Operating Expenses: Vessel operating expenses rose 38.5% due to fleet growth and increased crewing/lube costs. Daily vessel operating expenses increased to $3,677 from $3,011.
• Asset Disposition: The company sold the vessel Genco Glory in February 2007, recording a gain of $3.575 million.
• Investment Activity: The company invested $103.1 million in short-term investments (Jinhui Shipping stock), funded largely by a new Short-Term Line of credit.

Guidance, Outlook, and Subsequent Events

• Major Acquisition: On July 18, 2007, the company agreed to acquire nine Capesize vessels for approximately $1.111 billion. Upon completion, the fleet will expand to 28 vessels with a capacity of ~2.56 million dwt.
• Refinancing: On July 20, 2007, the company entered into a new $1.377 billion credit facility (2007 Credit Facility) to fund the Capesize acquisition and refinance existing debt. This resulted in a write-off of $3.568 million in unamortized deferred financing costs in Q3 2007.
• Dividends: The Board declared a quarterly dividend of $0.66 per share, payable August 31, 2007. The company maintains a policy of distributing available cash from operations.
• Market Risks: The company utilizes interest rate swaps to hedge floating rate debt and currency swaps to hedge exposure to the Norwegian Kroner related to its Jinhui investment. A 1% increase in LIBOR would increase interest expense by approximately $0.3 million for the six-month period.
• Tax Status: The company is exempt from U.S. federal income tax under Section 883, provided it meets publicly traded requirements. Management believes it qualified for 2006 but notes that shifts in 5% shareholder ownership could jeopardize this status in future years.

Investor Verification Checklist

• Acquisition Closing: Verify the successful closing and delivery schedule of the nine Capesize vessels agreed to in July 2007.
• Debt Covenants: Monitor compliance with the new 2007 Credit Facility covenants, specifically the Net Debt to EBITDA ratio (max 5.5:1) and minimum cash per vessel requirements.
• Derivative Exposure: Review the impact of currency swap settlements and interest rate fluctuations on future earnings, given the recent unrealized losses.
• Tax Qualification: Confirm continued compliance with Section 883 publicly traded requirements to maintain tax-exempt status.
• Charter Renewals: Track the renewal of time charters for the five Handysize vessels, which were set to expire in September 2007 at lower rates ($13,500/day) before renewing at higher rates ($19,500/day).