If shipping company Eagle Bulk Shipping Inc. is not able to increase charter hire rates, the company may default on a loan.
The New York-based company owns, charters and operates dry-bulk vessels. As of Sept. 30, Eagle Bulk owned and operated 43 Supramax and two Handymax vessels, which transport iron ore, coal, grain, cement and fertilizers through worldwide shipping routes.
The company is one of several shipping groups to experience difficulties as a result of low charter and volatile rates after the recession. “The general decline in the dry bulk carrier charter market has resulted in lower charter rates for vessels in the dry bulk market,” Eagle Bulk says in a Nov. 14 filing with the U.S. Securities and Exchange Commission.
On June 20, 2012, Eagle Bulk amended its credit facility, converting about $1.13 billion that was outstanding under a revolving credit facility into a term loan that matures Dec. 31, 2015. The amendment also gave Eagle Bulk a $20 million loan to use to buy or sell vessels, which the company has not used.
Covenants on Eagle Bulk’s fourth amended credit facility are getting tighter each quarter, the company says. In order to make sure the company complies with the covenants, the Eagle Bulk needs to make sure that charter hire rates increase over time.
Despite the low rates, Eagle Bulk expects to meet the covenants for 2013. In order to make sure the company meets those covenants, Eagle Bulk has put in several cost cutting measures, including reductions in labor costs and equipment expenses. However, if charter rates don’t go up, the company may not be in compliance after March 31 or earlier, creating a default on the loan. Eagle Bulk says that it would try to obtain a waiver for the default, but there are not guarantees that creditors would agree.
If Eagle Bulk is not able to obtain a waiver, alternative financing or additional, the company may not be not be able to continue as a going concern, or without the threat of liquidation. “We are evaluating asset sales, equity and debt financing alternatives that could raise incremental cash,” the company says.
Eagle Bulk experienced a $37.6 million loss for the three months ended Sept. 30, an increase from the $29.8 million loss the company sustained in the three months ended Sept. 30, 2012. For the quarter ended Sept. 30, Eagle Bulk brought in $38.98 million in revenue, compared with $46.85 million in revenue that it brought in during the same quarter the previous year. The revenue decrease is due to lower charter rates, Adir Katzav, CFO, said on a third quarter earnings call published by Seeking Alpha.
“During the third quarter, the dry bulk market remained in a cyclical trough characterized by steady demand offset by excess tonnage capacity,” says CEO Sophocles Zoullas.
Decreases in grain exports out of South America and coal from Indonesia negatively affected shipping companies during the first half of the third quarter, but an increase in Chinese iron ore restocking in the second half of the third quarter helped push rates up, Zoullas said on the earnings call.
One of Eagle Bulk’s charterers, Korea Lines Corp., was operating under protective receivership, a type of bankruptcy, in South Korea. Because of the company’s reorganization, Eagle Bulk was not paid the full amount that it was owed. The company agreed to be paid with a $63.7 million non-interest bearing installment note, and Korea Lines common stock. Korea Lines emerged from bankruptcy in October 2013.
For more on distressed shipping companies, see “Floundering FreeSeas Negotiates with Lender,” “Finance Finesse: Marine Shippers Aim to Stay Afloat” and “Wilbur Ross Still Trolling for Shipping Deals.”
For more struggling companies, see Mergers & Acquisitions Distressed Company Watch List.