Business context and reporting period
Genco Shipping & Trading Limited’s Form 10-K covers the fiscal year ended December 31, 2016; it is an annual report, not a standalone fourth-quarter filing. The company owns and operates drybulk carriers transporting commodities worldwide. At year-end it operated 65 vessels; after announced disposals, its fleet was 61 vessels with approximately 4.735 million dwt and a 9.2-year average age. The company reports one operating segment.
Financial performance and position
| Metric | 2016 | 2015 |
|---|---|---|
| Total revenue | $135.6 million | $154.0 million |
| Operating loss | $(186.5) million | $(192.9) million |
| Net loss attributable to Genco | $(217.8) million | $(194.9) million |
| EBITDA (non-GAAP) | $(112.5) million | $(93.6) million |
| Operating cash flow | $(50.0) million | $(56.1) million |
| Cash and restricted cash at year-end | $169.1 million | $140.9 million |
| Total debt, including current and long-term | $513.0 million, net of deferred financing costs | $579.0 million, net of deferred financing costs |
| Total equity | $1,029.7 million | $1,106.0 million |
Unrestricted cash was $133.4 million and restricted cash was $35.7 million at December 31, 2016. The company reported $4.6 million of current debt and $508.4 million of long-term debt. The 2015 debt was classified as current because of covenant noncompliance and refinancing uncertainty. The filing does not provide a clear standalone annual gross-profit figure; the business is asset- and operating-cost intensive. As a rough indicator, the fleet-average time charter equivalent (TCE) rate was $4,907 per available day, versus daily vessel operating expenses of $4,514 per ownership day.
Material changes versus the prior comparable period
- Revenue fell 11.9%, primarily because of lower charter rates; average TCE declined 9.9% to $4,907 per day. Fleet utilization edged up to 98.8% from 98.6%.
- Operating loss narrowed by $6.4 million, but Genco-attributable net loss increased by $22.9 million. The 2015 comparison included $59.5 million of losses allocated to noncontrolling interests before the Baltic Trading merger; therefore, improvement in consolidated net loss did not translate into lower loss attributable to Genco.
- Vessel operating costs declined 6.9%, and average daily operating expense fell 7.3%. General and administrative expense declined 39.7%, mainly due to lower noncash stock compensation and fewer Baltic Trading merger-related legal costs.
- Vessel impairment charges increased to $69.3 million from $39.9 million, largely reflecting nine older vessels slated for sale or scrapping under the refinancing plan. Investment impairment fell to $2.7 million from $37.9 million; remaining Jinhui and Korea Line shares were sold in 2016.
- The company refinanced six prior facilities with a $400 million secured term loan and completed a $125 million preferred-stock financing. The new facility and associated amendments allowed the company to report covenant compliance at year-end.
Cash flow, financing and unusual items
Investing activities provided $6.9 million, including proceeds from vessel disposals and investment sales; financing activities provided $55.4 million. Operating cash outflow remained substantial. The $400 million facility was fully drawn, with no further availability at year-end; debt also included $95.3 million under the Restated $98 Million Credit Facility and $28.3 million under the 2014 Term Loan Facilities. The $400 million loan bears interest at three-month LIBOR plus 3.75%; Genco elected to pay 1.50% of interest in kind through 2018. A 1 percentage-point LIBOR increase was estimated to add $5.7 million to annual interest expense.
2016 included $69.3 million of vessel impairment, a $3.6 million gain on vessel sales, $1.0 million of other operating income from a Samsun settlement, and $2.7 million of investment impairment. Cash interest paid was $25.6 million. The 2016 net loss per share was $30.03 after the one-for-ten reverse stock split.
Outlook, risks and contingencies
- Management said the refinancing and capital raise were expected to address liquidity and covenant issues for at least the next 12 months under then-current market conditions. It warned that prolonged weak freight rates could again constrain liquidity, impair covenant compliance, or threaten the company’s ability to continue as a going concern.
- The Baltic Dry Index averaged 673 in 2016, far below its cited ten-year average of 2,437. Management expected weak early-2017 rates to reduce first-quarter revenue and results compared with the last two months of 2016. No formal earnings guidance was provided.
- At March 27, 2017, 15 vessels were on spot-market-related charters and 19 in spot-trading pools; together, about 56% of the 61-vessel fleet was exposed to spot-market fluctuations. Most charters were short-term, with many due to expire during 2017.
- Ten charterers generated approximately 80% of 2016 revenue; Swissmarine represented 25.3%, Clipper 23.0%, and Pioneer Navigation 11.1%. Charterer creditworthiness and pool performance are material risks.
- The $400 million facility has a November 2021 maturity and a substantial balloon payment; cash sweeps and restrictive covenants limit financial flexibility. Dividends are prohibited under certain facilities through December 31, 2020, and the company said it did not plan to resume dividends.
- Management estimated 2017 average daily vessel operating expense of $4,440, drydocking costs of $11.7 million and 280 scheduled off-hire days. Ballast-water treatment and the IMO’s 2020 sulfur-fuel limits could require significant additional costs; system estimates ranged from $0.7 million to $1.0 million per vessel.
- Genco did not expect to qualify for the Section 883 U.S. shipping-income tax exemption in 2017 absent ownership changes; it estimated approximately $0.2 million of tax under an assumption that U.S.-source shipping income matched 2016.
- The appeal of the dismissal with prejudice of merger-related shareholder claims remained pending. The company stated it could not reasonably estimate any loss but did not believe resolution would have a material financial reporting consequence. The financial statements received an unqualified audit opinion.
Most important facts for investors to verify
- Whether operating cash burn, charter rates and unrestricted cash support debt service and covenant compliance as refinancing relief and covenant tests phase in.
- The terms, timing and realized proceeds of vessel sales, and the resulting fleet capacity and earnings potential.
- Actual charter renewals and spot/pool exposure, including the impact of customer concentration and counterparty credit risk.
- The debt repayment, cash-sweep, collateral and minimum-liquidity requirements, including the large 2021 maturity exposure.
- The dilution and ownership consequences of the January 2017 conversion of 27,061,856 preferred shares into common stock; the filing reported 34,416,305 common shares outstanding on March 28, 2017.
- Actual drydocking, ballast-water compliance and low-sulfur-fuel costs, and the company’s 2017 U.S. tax position.