Here are two numbers to consider: 25% and -60%. These numbers
should be moving in tandem, so there's a really good chance the
positive number will be sucked back down by the negative number.
I'm talking about the stunning rally for dry-bulk shipping stocks
and the sharp plunge in daily lease rates for these ships. The
shipping rates have been plunging on concerns that too many
newly-built dry-bulk ships are about to enter service. And with the
supply of ships already overwhelming demand, the addition of new
supply has put a lot of pressure on lease pricing, as you can see
in the chart below.
Baltic Dry Index (BDI)
, which reflects daily bulk ship lease rates, should be crushing
the sector's stocks. Instead, a number of them are posting sharp
gains. Credit goes to the rising stock
, which is leading short sellers to cover their positions. Several
of these stocks have short positions that are equivalent to more
than five days' wor9.9th of trading
In effect, these stocks are up for the wrong reasons. And in coming
are likely to slide to fresh lows, since the prospects of a
rebounding BDI are quite dim and company-specific debt burdens are
coming home to roost.
Watch the balance sheets
Many companies in this niche are undergoing pretty severe financial
distress. They decided to ramp up spending by ordering new ships a
few years ago, when industry conditions were stronger. Now, they're
taking delivery of those ships, though they would prefer not to.
Let's take a look at
Genco Shipping (NYSE:
as an example. Roughly 20% of its stock was held by short sellers
as of the end of 2011. Look at what's happened to this stock as
short sellers have grown nervous about a
The fact that the BDI has been plunging in recent weeks actually
bolsters the case that short sellers were making. Low lease rates
imperil Genco because they limit the
generation that would be used to pay upcoming loans.
In December 2011, Genco was able to convince its lenders to hold
off foreclosing on loans, even though the company had begun to
breach debt covenants. The deal caused Genco to pay another $28
million ($0.78 a share) in annual interest, which has just created
"We believe Genco is less likely to be able to service its debt
of $131 million in 2012 and $215 million in 2013. As such, we view
the current amendment as only the next step in the path toward an
ultimate restructuring, which is unlikely to be accretive to GNK
holders," note analysts at Citigroup. This is a fancy way of saying
that either a lot of
, or outright bankruptcy likely looms.
With a fully-tapped out $1.2 billion credit line -- which will need
to be repaid or rolled over by July 2014 --
Eagle Bulk Shipping (Nasdaq:
can't afford to see cash flow drop, either. Yet the plunge in the
BDI in recent weeks means the company may garner less revenue and
income in 2012 than it had previously anticipated.
Just a month ago, analysts said Eagle Bulk would lose $0.17 a share
this year. That loss forecast has now doubled, and unless industry
conditions quickly improve, it's increasingly difficult to see how
the dry-bulk carrier will avoid the clutches of bankruptcy court.
The silver lining
There is one clear beneficiary from the industry's distress:
Diana Shipping (NYSE:
. While other shippers were on a spending spree a few years ago,
Diana decided to hoard its cash. That was a wise move: As of the
end of last year's third quarter, Diana had nearly $400 million in
gross cash. Management has expressed an interest in acquiring other
firms' ships if those other firms need to unload assets at
fire-sale prices. Diana Shipping reports 2011 fourth-quarter
results on Feb. 28, 2012, and it will be curious to see how
management is seeking to press the company's advantage while rivals
are on the ropes.
Risks to Consider:
This industry is quite fluid at the moment, seeing that share
prices surge even as the BDI slumps. Any target for short-selling
needs to be guarded against balance-sheet restructurings that
preserve the equity.
Action to Take -->
Diana Shipping is the proverbial "best house in a bad
neighborhood." The entire dry-bulk shipping group will need to
ration its fleet, probably with several players going into
bankruptcy, which could create a much more robust long-term
backdrop for Diana Shipping.
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-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.
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