Breaking covenants

Forbes had an article last week regarding the dry bulk carriers.

Shippers Breaking Their Covenants
Ruthie Ackerman, 11.20.08, 07:45 PM EST
Falling prices for vessels creates technical defaults for battered dry-bulk industry.

Apparently the author has followed these stocks for some time. The article is worth reading.

At the end, this is how it wraps up.

Burk said that it appears that DryShips, Eagle Bulk Shipping (nasdaq: EGLE - news - people ), Excel Maritime Carriers (nyse: EXM - news - people ), and Genco Shipping & Trading (nyse: GNK - news - people )have technically breached their loan covenants.

Nonetheless Burk points out that all the companies have enough cash flow to cover their interest payments, which mean as long as their charters don’t default the companies themselves will be able to service their actual debt if their lenders aren't too insistent on the technicalities of the borrowing agreements.

The history of the shipping industry has been carriers must operate for some time not being able to cover their costs. This is why only those will very deep pockets survive, unless there are some sort of cartels or pools set up. That is probably no longer possible due to the change in regulations (although the Koreans are considering setting up a pool).

I particularly enjoyed one of the comments posted regarding this article. If anyone knows who "PoorandUnemployed" might be, give him or her my best.

Posted by PoorandUnemployed | 11/21/08 11:33 AM EST


Given the history of shipping finance, in times like these, owners make the interest payments but stop paying the crews, fuel suppliers, port costs and other suppliers. In it's uniqueness, all the debt is always incurred by the vessel regardless and the vessels can be arrested in different jurisdictions world-wide for a five dollar unpaid bill.

Expect banking style collapses, mergers, forced marriages and defaults. Given the past history, it is likely that the Publically held companies would not survive this storm. Once the market players have lost the interest in the sector, many will lose their NYSE or Nasdaq listings. Managements will purchase the stock at very low price (pennies) and eventually take them private in effect buying the underlying assets for pennies on a dollar. Same banks will refinance the assets to new owners at a discounted price with higher percentage ratio of private equity.

At this stage of the game, banks can neither foreclose on the ships and sell them at auction nor they can allow to companies to add on to debt to meet operating expenses. This calls for some ENRON type creative accounting!!!!!!!!!!!