Genco Shipping & Trading Limited — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Unaudited consolidated results include Genco and its controlled subsidiary Baltic Trading. Unless otherwise noted, financial amounts below are in U.S. dollars, millions.
Business context
Genco owns and operates drybulk vessels transporting cargo worldwide. On April 21, 2014, Genco and certain subsidiaries filed for Chapter 11 and operated as debtors-in-possession; Baltic Trading and its subsidiaries were excluded from the bankruptcy filing. The Bankruptcy Court confirmed the reorganization plan on July 2, and Genco emerged on July 9, after quarter-end. Accordingly, June 30 statements reflect the pre-emergence company and are not directly comparable with the post-emergence capital structure.
Financial highlights
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $52.4 | $45.8 | $116.4 | $86.2 |
| Operating loss | $(26.6) | $(27.1) | $(47.3) | $(57.6) |
| Net loss | $(65.6) | $(48.9) | $(107.8) | $(100.9) |
| Net loss attributable to Genco | $(60.5) | $(45.4) | $(99.6) | $(93.5) |
| Loss per share, basic and diluted | $(1.39) | $(1.05) | $(2.29) | $(2.17) |
| EBITDA, as defined by Genco | $(5.1) | $11.2 | $13.4 | $18.9 |
Q2 voyage revenue rose 14.7% and fleet-average TCE rose 12.3% to $8,452 per day. For the first half, voyage revenue increased 35.6% and average TCE increased 32.3% to $9,586 per day. Improved charter rates, particularly for Capesize vessels, and a larger fleet supported revenue. No dividends were declared.
- Costs and margins: Q2 operating expenses increased 8.3% to $78.9 million, less than revenue growth, but Genco remained loss-making. Vessel operating expenses increased 14.1% in Q2 and 14.6% for the first half; daily vessel operating expense rose 7.2% and 7.7%, respectively. G&A and management fees rose 16.2% in Q2 and 51.3% for the first half, principally reflecting bankruptcy-related pre-petition expenses. Depreciation and amortization also increased with fleet size and drydock amortization.
- Cash flow: First-half operating cash use was $23.1 million, versus $25.3 million in 2013; investing cash use was $30.3 million, mainly vessel deposits and purchases; financing cash use was $11.6 million. Cash and cash equivalents were $57.7 million at June 30, down from $122.7 million at year-end; restricted cash was another $10.3 million.
- Balance sheet and debt: Total assets were $2.829 billion, liabilities $1.653 billion, and equity $1.176 billion. Debt totaled approximately $1.471 billion before classification adjustments. Approximately $1.444 billion of pre-petition claims was classified as liabilities subject to compromise, including $1.305 billion of principal on Genco’s major credit facilities. This classification reflects Chapter 11 treatment, not an ordinary current-liability profile.
Material changes and restructuring
- Genco’s Q2 net loss included $20.1 million of reorganization costs, primarily professional fees and trustee fees. The filing reports that $18.9 million of those costs remained in accounts payable at June 30.
- The plan converted 2007 Credit Facility claims into 81.1% of New Genco common stock and 2010 Notes claims into 8.4%, subject to warrant dilution. The 2007 facility was terminated and the notes discharged upon emergence. Old Genco common stock was canceled; former shareholders received warrants exercisable for approximately 6% of New Genco, subject to dilution. A $100 million rights offering was also completed.
- The $100 million and $253 million term loan facilities were amended and restated at emergence, with maturities extended to August 31, 2019, interest increased to LIBOR plus 3.50%, and a financial covenant holiday through March 31, 2015. A minimum-liquidity covenant requires cash of $750 per Genco-owned vessel, excluding Baltic Trading vessels.
- Genco expects to adopt fresh-start accounting as of emergence. The new fair-value basis may materially change asset and liability carrying values and subsequent reported results; historical statements may not be reliable indicators of post-emergence performance.
Outlook, risks and unusual items
- Management cited excess drybulk vessel supply and soft market conditions during Q2, including weaker Brazilian iron ore fixtures, Chinese coking-coal destocking, fewer Argentine soybean exports and Indonesia’s mineral-ore ban. Charter rates, demand, vessel supply, operating costs and off-hire remain key risks.
- Management expected ongoing net cash use after reorganization and capital expenditures, while stating that cash available under the Cash Collateral Order plus operating cash flow should cover short-term minimum operating, capital and working-capital needs. It cautioned that available funds may not be sufficient. The filing gives no quantitative earnings or rate guidance.
- Future minimum time-charter revenue was estimated at $7.1 million for the remainder of 2014, based on contracts as of August 9; this excludes pool and spot-market exposure and is not a full-revenue forecast. Baltic Trading had four Ultramax newbuildings planned for delivery through 2015 at $28 million each; the contractual-obligations table shows $84 million of remaining purchase price after deposits.
- Vessel valuations as of July 9 were below June 30 carrying values for most vessels; the disclosed aggregate excess of carrying value over valuation was $1.075 billion, excluding four Baltic Trading vessels. The filing notes that valuations exclude the value of long-term charters and are not sale prices. This is an important impairment and fresh-start valuation consideration.
- Genco Reliance was off-hire during repairs after steering-gear damage; estimated total off-hire was approximately 104 days. Genco expected to seek recovery under its loss-of-hire insurance. Separately, a disputed charterer claim led to the Genco Auvergne’s arrest; the vessel was released against a $0.9 million cash-collateralized bank guarantee pending arbitration.
- Genco warned that OTC Bulletin Board trading and post-emergence ownership concentration could affect eligibility for the U.S. shipping-income tax exemption under Section 883. It also disclosed potential changes in control rights under its Baltic Trading management agreement.
Most important facts for investors to verify
- Post-emergence capitalization: actual New Genco shares issued, rights-offering proceeds, warrant and management-incentive dilution, and treatment of former shareholders.
- Fresh-start accounting valuations and resulting changes to vessel values, debt, equity and future depreciation or amortization.
- Cash available after emergence, compliance with new liquidity and other covenants, and the schedule and cost of debt service.
- Funding for the four Ultramax vessels and planned drydockings, given first-half operating cash use and continuing capital requirements.
- Charter coverage and realized rates as contracts expire, including exposure to spot markets and fleet utilization.
- Resolution and financial impact of the disputed charterer arbitration, insurance reimbursement for the Reliance off-hire, and the Section 883 tax position.