Business context and reporting period
Genco Shipping & Trading Limited’s unaudited Form 10-Q covers the three months ended March 31, 2015. The company owns and operates drybulk vessels and consolidates Baltic Trading Limited, which it controlled through majority voting power. Genco emerged from Chapter 11 on July 9, 2014 and adopted fresh-start accounting; accordingly, first-quarter 2015 successor results and first-quarter 2014 predecessor results are not fully comparable.
Financial and operating performance
Amounts are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Total revenue | $34.4 | $64.0 |
| Operating loss | $(73.8) | $(20.8) |
| Consolidated net loss | $(79.1) | $(42.2) |
| Net loss attributable to Genco | $(38.4) | $(39.1) |
| Basic and diluted loss per share | $(0.64) | $(0.90) |
| Net cash used in operating activities | $(12.3) | $(2.6) |
| EBITDA, as defined by the company | $(14.2) | $18.5 |
- Voyage revenue fell 46.8% to $33.6 million. Average fleet TCE rate declined 53.7% to $4,977 per day from $10,753; fleet utilization eased to 99.0% from 99.4%.
- Vessel operating expenses declined 8.2% to $28.7 million, and daily vessel operating expenses declined 10.8% to $4,686. General, administrative and management fees rose 32.2% to $20.3 million, mainly reflecting higher noncash compensation and legal costs.
- Operating results included a $35.4 million vessel impairment charge for the Baltic Lion and Baltic Tiger. Depreciation and amortization fell to $19.4 million from $36.2 million, in part because of fresh-start asset values and a higher estimated vessel scrap value.
- Interest expense was $4.3 million, down from $21.0 million, primarily following the restructuring-related discharge of the 2010 notes and termination of the former credit facility and swaps. Reorganization costs were $0.5 million.
- At March 31, cash and cash equivalents were $68.8 million, restricted cash was $10.1 million, and total debt was $434.6 million, including $44.6 million current debt. Total assets were $1.695 billion and total equity was $1.228 billion. Cash declined $14.6 million from year-end.
Material changes, outlook and risks
- Management attributed weaker revenue and TCE rates to excess vessel supply and weak drybulk demand, including Chinese iron-ore and coal inventory destocking, reduced Brazilian iron-ore exports, lower steel output and weaker coal demand. Industry scrapping reached a record pace, but management said oversupply remained a pressure.
- Management stated that cash on hand and internally generated cash flow should fund operations for the next 12 months, subject to resolving credit-facility issues. It also warned that, absent available remedial measures, the company might not meet minimum cash covenants during 2015. The filing cites a minimum liquidity requirement of $41.3 million, with permitted undrawn working-capital lines able to satisfy part of it.
- Vessel collateral valuations were below carrying values and management anticipated possible shortfalls at upcoming tests. A February 2015 test showed 122.4% collateral coverage against the $100 million facility’s 130% requirement, a reported shortfall of about $5.2 million; Genco added the Genco Sugar as collateral on April 24. The $253 million facility had a slight shortfall at year-end; Genco prepaid $0.2 million and made a scheduled payment in early April.
- After quarter-end, April 30 amendments replaced a net-debt-to-EBITDA covenant with a debt-to-value-adjusted-assets test below 70%, waived interest-coverage testing through 2016, modified liquidity-covenant treatment and added collateral for the $253 million facility.
- After quarter-end, Genco agreed to acquire Baltic Trading in a stock-for-stock merger, subject to shareholder approval. It also acquired the entities owning the Baltic Lion and Baltic Tiger for an aggregate $68.5 million, subject to adjustments and assumption/guarantee of approximately $40.6 million of related debt. Six shareholder lawsuits challenge the proposed merger; Genco said it did not believe their resolution would have a material financial reporting consequence.
- Genco entered a $59.5 million revolving credit facility after quarter-end, with an uncommitted accordion up to $150 million, and drew $25 million on April 8. The remaining two Baltic Trading Ultramax newbuildings were expected in Q2 and Q3 2015; their aggregate purchase price was $56 million, and financing remained a risk. Contracted minimum time-charter revenue for the remainder of 2015 was $4.5 million, excluding spot-market and pool revenue.
- The company reported no dividends and did not plan to resume them; credit agreements also restrict dividends. Other identified risks include volatile charter rates and vessel values, covenant compliance, floating-rate debt, operating and drydocking costs, and regulatory requirements. Management reported disclosure controls were effective and no material quarterly change in internal control.
Important facts for investors to verify
- Whether the company maintains required cash and collateral coverage, and complies with amended credit covenants at subsequent testing dates.
- Whether weak charter rates persist, and how vessel values, fleet utilization and operating cash flow evolve.
- Completion and financing of the Baltic Trading merger and remaining newbuildings, including the outcome of merger-related litigation.
- The effect of the $35.4 million impairment and fresh-start accounting on vessel carrying values and future depreciation; historical periods are not fully comparable.
- Cash requirements for debt service, drydockings and environmental upgrades, and whether liquidity remains adequate without further financing or asset sales.