Business context and reporting period
Genco Shipping & Trading Limited filed this Form 10-K for the fiscal year ended December 31, 2015. The company transports drybulk cargo worldwide. At year-end it operated 70 vessels with approximately 5.16 million deadweight tons and an average age of 9.4 years. The July 2015 merger made Baltic Trading a wholly owned subsidiary; Genco’s shares began trading on the NYSE under GNK.
As of March 2016, 39 vessels were employed on spot market-related time charters, 21 in spot-market vessel pools, and 10 on fixed-rate time charters, leaving most of the fleet exposed to volatile market rates.
Financial performance and position
| Metric | FY 2015 | Prior-period comparison |
|---|---|---|
| Total revenue | $154.0 million | $220.9 million combined 2014; down 30.3% |
| Operating loss | $192.9 million | $258.9 million combined 2014 |
| Net loss attributable to Genco | $194.9 million | $1,133.4 million combined 2014 |
| EBITDA (non-GAAP) | $(93.6) million | $(970.4) million combined 2014 |
| Operating cash flow | $(56.1) million | $(60.2) million combined 2014 |
| Investing cash flow | $(56.8) million | |
| Financing cash flow | $150.5 million |
The 2014 comparison combines separate predecessor and successor reporting periods and is not fully comparable because Genco emerged from bankruptcy in July 2014 and adopted fresh-start accounting. The filing’s combined-year comparison is a non-GAAP presentation.
- Average fleet time charter equivalent (TCE) fell 38.0% to $5,445 per day from $8,785; fleet utilization was 98.6%, versus 98.5%.
- Vessel operating expenses were $122.0 million; average daily vessel operating expense declined 3.3% to $4,870.
- Genco recorded $39.9 million of vessel impairments, including $35.4 million related to the Baltic Lion and Baltic Tiger and $4.5 million for the Genco Marine. It also recorded a $37.9 million impairment of its Jinhui investment.
- At December 31, cash and cash equivalents were $121.1 million, plus $19.8 million of restricted cash. Total assets were $1.72 billion and equity was $1.11 billion.
- Total debt was $588.4 million. All debt was classified as current because of covenant noncompliance and the expectation of future noncompliance; current liabilities exceeded current assets by approximately $444.4 million.
Material changes and unusual items
Voyage revenue fell 30.7% to $150.8 million as lower charter rates outweighed the contribution from four Ultramax deliveries. The BDI averaged 718 in 2015, compared with a ten-year average of 2,721 cited in the filing, and reached a then-record low of 471 in December. Lower rates and weak demand were compounded by continued vessel supply growth.
Genco’s $83.9 million of general, administrative and management costs included $17.4 million more noncash compensation expense and $13.5 million of merger-related expense than in the prior-year comparison; these increases were partly offset by lower restructuring and cash compensation costs. Net interest expense declined to $19.9 million, largely reflecting lower debt after the 2014 restructuring, while new facilities added interest expense.
The annual loss includes material noncash impairments. In contrast, 2014 included a $166.1 million goodwill impairment and substantial one-time bankruptcy and fresh-start accounting items. The filing also reports prior-period restatements related to fresh-start accounting and allocation of goodwill impairment; investors should use the restated figures presented in this filing.
For the fourth quarter of 2015, revenue was $34.2 million, operating loss was $37.6 million, net loss was $49.5 million, and loss per share was $0.69.
Liquidity, outlook, risks and contingencies
Management and the auditor stated that recurring operating losses, negative working capital and covenant issues raise substantial doubt about Genco’s ability to continue as a going concern. The company required a minimum cash balance of $52.5 million and warned it might not maintain that level or meet leverage and collateral requirements in 2016. Several facilities were below collateral-maintenance thresholds; cross-default provisions could accelerate debt repayment. Substantially all assets were pledged to lenders.
Genco said it may seek lender waivers or amendments, refinance debt, sell assets including vessels, reduce or delay capital spending, or raise debt or equity. Success was not assured. On March 11, 2016, after year-end, lenders waived the $253 million facility’s collateral covenant through April 11 in exchange for prepayment of a $5.075 million amortization payment. The company also reported discussions with lenders over other shortfalls, including subsequent shortfalls under the $100 million and $148 million facilities.
- Management expected weak drybulk rates to adversely affect first-quarter 2016 revenue and results. No specific revenue or earnings guidance was provided.
- Management budgeted 2016 average daily vessel operating costs of $4,820 and estimated 2016 drydocking costs of $10.4 million with 315 off-hire days. Minimum fixed charter revenue for 2016 was estimated at $6.2 million, excluding pool and spot-linked vessels.
- Charterer concentration is significant: the ten largest charterers generated approximately 80% of 2015 revenue; Swissmarine, Clipper and Pioneer Navigation represented 56.49% combined. Loss or default of a major charterer could materially affect results.
- Genco had not paid a dividend since 2008, did not plan to resume dividends, and faced contractual dividend restrictions extending at least until May 1, 2017.
- The NYSE notified Genco in February 2016 that its average share price had fallen below $1 for 30 consecutive trading days; it had six months to regain compliance. Delisting could affect liquidity, access to capital and debt covenants.
- Six state merger-related shareholder actions were consolidated; the motion to dismiss was pending. A related federal case was dismissed without prejudice for failure to prosecute. The company could not estimate any loss but did not consider a material financial reporting consequence probable.
- Risks also include further rate and vessel-value declines, environmental compliance costs, fuel and interest-rate exposure, operational incidents, and impairment risk. A 1% rise in LIBOR was estimated to increase 2015 interest expense by $4.7 million.
The financial statement audit opinion was unqualified but included an explanatory paragraph on going concern. Management and the auditor reported effective internal control over financial reporting at year-end 2015.
Key facts for investors to verify
- Current lender waivers, cure requirements, collateral valuations, minimum-liquidity compliance and any cross-default or acceleration risk.
- Cash available for operations after restricted cash, debt service, drydocking and other required payments.
- Realized charter rates and the pace of repricing as spot-linked and pool contracts renew; confirm whether the weak-rate outlook persisted.
- Whether management can restore positive operating cash flow and execute refinancing, asset-sale or capital-raising plans.
- NYSE minimum-price compliance, merger-litigation developments, and the assumptions behind vessel and Jinhui investment valuations.