Eagle Bulk Shipping (EGLE), a dry-cargo shipping company that owns 45 supramax vessels with an average age of 6.0 years as of March 31, 2013, reported earnings for the first quarter on May 15th that caught many investors by surprise, managing to snap an eight-quarter losing streak. For the first quarter of 2013, EGLE generated net income of $1.4 million or $0.08 per share. The stock yesterday bounced with gusto, rising intra-day almost 67% to $5.93 per share amid very heavy trading.
What prompted this explosive reaction was more details about the company's settlement with troubled charterer Korea Line Corporation (KLC). Under the latest terms of the settlement, EGLE received a combination of cash, long-term note receivable, shares in KLC, and a release from a $3.5 million accrued bunker liability. Based on my analysis, the total cash value of the settlement with KLC is approximately $40.2 million or $2.32 per share.
Please note that the above figure includes only the value of cash-related items. It excludes $13.7 million of non-cash items recognized during the quarter (related to deferred revenue and amortization of former KLC charters). But it also includes the current fair market value of shares in KLC. Investors in Eagle Bulk Shipping should look forward to more positive news during the next quarterly earnings report, as EGLE will mark to market its equity investment in KLC.
But before popping open the champagne bottle, investors should view this favorable settlement in a broader context and with more than just a grain of salt.
To begin, the company's equity investment in Korea Line represents approximately two-thirds of the settlement value. The newly issued 620,357 of KLC shares (that represent a little over 5% of total shares outstanding) have a lock-up period until November 11, 2013. The value of Eagle's investment in KLC is therefore subject to a holding restriction, in addition to price and currency volatility risk.
Second, the company has continued to perform very poorly in its commercial operations. During the first quarter of the year, EGLE generated a meager $1.25 million cash flow from operations, despite the one-time $10.3 million cash payment from KLC. Approximately 80% of the company's vessels operate in the spot market, and despite a resilient supramax freight market vis-à-vis larger vessels, they are still expected to earn less than the company's cash break-even rate.
Third, the company's long-term debt has continued to climb with the $7.1 million addition of payment-in-kind interest during the first quarter. As of March 31, 2013, total debt outstanding stood at $1,152 million. The current fair market value of the company's fleet is not sufficient to pay off the debt outstanding. Based on regulatory filings with the SEC, the company's fleet as of December 31, 2012 was valued at only $882 million, i.e., a shortfall of approximately $368 million.
Last but not least, the company will again have to be in compliance with its debt covenants starting at the end of the second quarter. I will analyze the company's compliance prospects with debt covenants in a separate article. But I must admit that based on previous experience, lenders will be willing to work with owners on debt covenant compliance, as long as owners have the means, i.e., cash on hand, to pay interest on the loan. EGLE currently has $19.5 million cash on hand and was lucky to avoid an operating cash outflow in the first quarter, aided by the one-time $10.3 million payment from KLC. Such generosity will not be available a second time around.
To summarize, there is no denying that Sophocles Zoullas-led Eagle Bulk Shipping had a very good day yesterday, squeezing $40 million in value from troubled Korea Line Corporation. But EGLE does not have any more tricks like this to dig itself from under its $368 million debt shortfall. Investors that were lucky enough to realize oversized short-term gains may want to tread very carefully and seriously consider cashing in their chips.