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Eagle Bulk Shipping (NASDAQ:EGLE)

Q2 2007 Earnings Call

August 8, 2007 8:30 AM ET

Executives

Sophocles Zoullas - Chairman and CEO

Alan Ginsberg - CFO

Analysts

Natasha Boyden - Cantor Fitzgerald

Scott Burk - Bear Stearns

Douglas Mavrinac - Jefferies & Co.

Urs Dur - Lazard Capital Markets

Jonathan Chappell - J.P. Morgan

Michael Sasprasky -

Presentation

Operator

Good day ladies and gentlemen, and welcome to the second quarter 2007, Eagle Bulk Shipping Incorporated earnings conference call. My name is Dane and I will be your operator for today.

At this time all participants are in listen only mode. We will conduct a Question-Answer session towards the end of this conference. If at any time during the call you require assistance please press *0 and an operator will be happy to assist you.

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. Sophocles Zoullas, Chairman and CEO. Please proceed.

Sophocles Zoullas - Chairman and CEO

Thank you and good morning.

I would like to welcome everyone to Eagle Bulk Shipping Second Quarter 2007 earnings call. It has been an eventful and very productive time since our first quarter update to the investment community, and there is a good deal to review today. So, I encourage participants to access a slide presentation that is available on our website at www.eagleships.com.

Please note that part of our discussions today will include forward looking statements. These statements are not guarantees of future performance and are inherently subject to risk and uncertainties. You should not place undue reliance on these forward looking statements.

We refer all of you to our filings with the Securities and Exchange Commission for a more detailed discussion on the risks and uncertainties that may have a direct bearing on our operating results, our performance, and our financial conditions.

Please note on Slide 2, the agenda for the call will follow our usual format. After my opening remarks, I will discuss the second quarter highlights, and then provide an updated review of our fleet and the industry. During this discussion, I will review our $1.1 billion fleet acquisition that we announced July 25th, which currently secures Eagle Bulk’s position as a leader in the Supramax market, which we believe is the best asset class to capitalize under growing demand from multiple commodities in multiple regions around the world today.

Our CFO, Alan Ginsberg will then discuss the company’s financial performance. I will then end the management discussion with some concluding remarks before taking questions.

Please turn to Slide 4 for the second quarter highlights.

During the quarter, our net income increased 27% quarter-on-quarter to $11.9 million or $0.29 per share. Our gross time charter revenues increased 18% during the same respective period to $31 million. EBITDA as defined in our credit agreement was also up 17% on quarter-on-quarter to $22.3 million and we recently paid a second quarter dividend of $0.47 to our shareholders.

To date, we have returned a $145 million equating to $4.10 a share to our shareholders in eight quarters. During the quarter, we continued our growth objectives, as we took delivery of three young Japanese built Supramaxes which we acquired in February of this year for $138.7 million, a highly favorable price relative to current values for second hand ships.

We also expanded our new building program from four to five sister ships at one of Japan’s pre-eminent shipyards, INI Marine United. Lastly, with a Supramax fleet acquisition announced on July 25th, and a minimum of $1.2 billion of revenue secure on Eagle Fleet, we are able to target a $0.50 quarterly dividend with aspirations to grow this over time.

Slide 5:

On July 25th, Eagle Bulk announced a fleet acquisition of 26 Supramax with sister vessels that increases our fleet size from 23 vessels to 49 vessels, and increases our cargo carrying capacity a 124% to 2.7 million deadweight tons. We believe this acquisition positions Eagle Bulk as a market leader in the dry-bulk industry and has several features that are very positive and rare in the dry-bulk market.

First, the fleet of 26 vessels has a large group of sister vessels. These new ships will be delivered to us beginning 2008 through 2012. We believe this fleet of sister ships will provide us with operating efficiencies and lower operating costs on the expense side as well as scheduling flexibility on the revenue side.

Second, 21 of the 26 ships are secured on very long charters, with a large portion of the fleet on charter until 2018. I believe this is the first time that a large dry-bulk order has secured contracted revenues for so many ships for this long a duration, which secures a minimum of approximately $1 billion of additional revenues for the company.

Third, this fleet acquisition delivers on our promise to shareholders last year to find more profit sharing charters for our fleet, as 17 of the vessels have uncapped profit sharing charters. When this acquisition closes, we will increase our profit sharing charters from three to twenty vessels, which we believe can further enhance revenue generating potential. These charters allow Eagle Bulk and its shareholders to benefit from the security of fixed rate charters with the ability to participate in the upside movement of a strong market.

Fourth, on August 1st, after we announced the acquisition, we secured options for an additional nine upgraded 58,000 deadweight Supramax sister ships for $42.3 million per vessel, which we believe represents a very good value in today’s market and provides us with a great deal of flexibility to realize value.

On to the fleet: Slide 7 demonstrates the pre-acquisition profile of the Eagle Bulk fleet. You will notice that the young age and homogenous size of the vessels makes this fleet very desirable to our charters. To truly define the importance of the Supramax fleet acquisition we announced two weeks ago, we direct you to Slide 8 which lists the acquisition fleet.

All the characteristics of the current fleet are greatly enhanced with the new ships on this slide. First, the entire 26 ship fleet is comprised of two groups of sister vessels. Second, a significant portion of the fleet are larger, next generation 58,000 deadweight Supramaxes, which are highly desirable to charters. Third, many of the ships come with very long term charters that lock in floor rates and additionally have uncapped profit sharing charters that secures long term cash flow visibility and allows Eagle Bulk to participate in the continuing strength of the dry-bulk market.

Slide 9: The continued strength of the dry-bulk market gives Eagle Bulk the ability to opportunistically charter vessels for extended periods at improved rates. We recently chartered our third smallest and oldest Handymax, Sparrow, for two years at $34,500 per day. This represents a significant increase of approximately 40% from the Sparrow’s current one year charter. We are very pleased that with this Supramax acquisition we announced in July, Eagle Bulk will now have up to 15 more vessels to charter through 2008.

Excluding the open ships and the Supramax fleet acquisition, as well as any contribution from the 17 charters in the deal that have uncapped profit sharing component and three additional profit sharing charters of the current Eagle Bulk fleet, we will bring a minimum of approximately $1 billion in additional contracted revenues to the company, which nearly covers the entire acquisition cost of $1.1 billion. Moreover, our fleet wide contracted revenues now will increase from approximately $275 million to over $1.2 billion dollars.

Lastly, we are very pleased to announce on this call that Eagle Bulk has secured the charter revenue stream for three years up to July 2010 with a credit risk underwriter rated A by S&P and A2 by Moodys. Stability and Security of revenues will improve profit potential continue to be our strategic objectives.

Slide 10: This slide demonstrates the fleet acquisition, which brings tremendous value to the company and our shareholders. You will note that our owned days will triple from approximately 6200 days to approximately 18000 owned days. Eagle Bulk also has the largest and longest contracted revenue streams of any US listed dry-bulk company. The bar chart demonstrates the contracted revenues year-by-year to 2018. It is very important to note that on this slide, the bars only represent the contracted revenues and do not show any revenues from the unchartered ships or any contribution from the 20 ships that have profit sharing components.

On to the Industry, Slide 12: New sources of demand for major bulk and minor bulk cargo continues to highlight the continued strength of the dry-bulk market. Cement and steel exports out of China are expected to exceed 20% in 2007. Steel output is anticipated to hit the magic 500 million tons for the first time. As we have stated in prior calls, new mining capacity coming online between 2007 and 2009 is expected to increase demand for dry-bulk ships. Recently released figures show that the increase in the global iron ore output from these new mines is expected to reach 375 million tons per annum, which is significantly increased from earlier estimates of 70-80 million tons per annum earlier this year.

Additionally, we notice new trades developing in previously insignificant markets. Shipments of nickel ore, which were virtually untracked in 2005, are expected to reach 20 million tons this year. Supramaxes are prime movers of this commodity. The bar chart on the right of Slide 12 clearly shows the rapid increase of the sub-Panamax markets of minor bulks and nickel ore into China.

Slide 13 is an update from our Q1 presentation that illustrates the mix of commodities that Eagle Bulk fleet carried during the first half of 2007. The message contained in this slide is the same as prior calls, and highlights some of the very desirable characteristics of Supramaxes as compared to cape size and Panamax vessels. Our fleet’s flexibility in switching from one commodity to another allows our vessels to carry all dry bulk cargo types and demonstrates their appeal in the shipping market. The slide also demonstrates the ability of the Eagle fleet to quickly move from one commodity to another as commodity demand and trading patterns change. We will continue to update this on a quarterly basis for our investors as we believe this provides unique insights into the dynamics of the market and the competitive advantages of the Supramax asset class.

Slide 14: Turning to supply, we have updated the analysis of the order book between the Handymax, Panamax and [cave] size markets. It is very important to note on the upper right chart that Eagle Bulk is a lead player in a small but highly desirable Supramax market where demand for these ships outpaces its supply. Supramax market is the smallest market in the dry-bulk industry with only 500 ships currently on the water. Turning to the lower left chart, we believe the Handymax market continues to demonstrate attractive long term fundamentals.

The order book and the aging Handymax fleet is about a parity as 33% of the fleet is over 20 years old and 38% of the fleet will enter the market through 2012. This parity signals that many new ships being built will be replacement ships for older Handymaxes and will not necessarily bring new supply to the market.

The Panamax market is in a similar parity, but may come under pressure as that asset class is being redefined with the widening of the Panama Canal and the emergence of the post-Panamax and many [Capemaxes]. A most noticeable change in the order book comes in the cape sized market where there is a 60% supply of ships being built and only 18% of the world’s fleet is over 20 years old. These factors are some of the reasons why we believe the Handymax market has the best long term outlook within the various asset classes in the dry-bulk market.

I would now like to pass the call to our CFO, Alan Ginsburg who will give callers a financial overview of the company.

Alan Ginsburg – Chief financial officer

Thank you Soph.

Slide 16: I would like to offer a brief recap on our quarterly results of operations. Net revenues increased by $4.2 million or 17% from $24.1 million dollars in second quarter of 2006, to $28.3 million for second quarter of 2007. The increase is primarily due to a 22% increase in available days.

Operating income increased by $2.5 million or 22% from $11.2 million for the second quarter of 2006, to $13.7 million for second quarter of 2007.

Finally, Net income adjusted for non-cash compensation expense increased by $0.7 million or 6% from $11.3 million for the second quarter of 2006, to $12 million for the second quarter of 2007.

Slide 17: Representing an update in cost structure for 2007. We are estimating our daily cash breakeven cost of $7,540 per vessel per day. Our cost structure is broken down as follows:

$4,112 in vessel expenses. As we stated before, the cost of crew in ships continues to increase globally. We are also seeing higher costs in oil based supplies including lubes and paints. Finally, Soph mentioned earlier in the presentation, we have the cost of credit insurance.

Next, we expect to pay our managers, annual fees of approximately $106,000 per vessel per year. This equates to $290 per vessel per day. We estimate our general administrative expenses for 2007, $1,000 per vessel per day.

Continuing on to our debt service, our estimated interest expense net of interest income for 2007 is $1,700 per vessel per day. Please note that we have swapped $238.7 million of bank debt against our on the water fleet at a weighted average interest rate of approximately 5.54% inclusive of our margin until September 2009.

Finally, we estimate our dry-dock costs at $400,000 once every 30 months, which equated to $438 dollars per vessel per day.

Slide 18: Our June 30th balance sheet. I just want to point out that the proforma column includes all payments and expenses associated with the acquisition through December 31 of this year. I also want to take this opportunity to remind everyone on this call that during construction, interest expense and amortization of deferred financing costs, as well as supervision costs are capitalized. For modeling purposes, $238.7 million of debt is against our on-the-water fleet and the balance of $63.7 million is against the new building program.

Slide 19: We are presently finalizing the terms of our new $1.6 billion 10-year revolving credit facility with our current lender, the World Bank of Scotland. This new facility will replace our existing revolving credit facility. We expect to have the new facility in place before the end of this month. Finally, those who did not see our previous presentation of this slide, we have scheduled out our obligations with this transaction through the completion of the new building program.

With that I would like to turn it back to Soph who will complete the presentation.

Sophocles Zoullas - Chairman and CEO

Thank you, Alan.

In conclusion on slide 21, Eagle Bulk continues to deliver on its successful growth strategy. This strategy has clear benefits to our shareholders as the greatly increased contracted revenues of approximately $1.2 billion secure the dividend over the long term. Furthermore, the accretion to our cash flow as the new ships deliver into our fleet allows us to pay down debt, look to grow our dividend in the future, and maintain the balance sheet strength we need to continue to opportunistically pursue growth opportunities. Eagle Bulk’s recent acquisition also affirms this management team’s ability to execute the types of transactions that affirm our status as a consolidator in the dry-bulk industry.

In the two years since our IPO, the Eagle Bulk fleet has grown from 11 ships to 49 ships excluding the nine options we secured on August 1. More over the fleet’s cargo carrying capacity stands at $2.7 million deadweight. Our average age stands at only 2 years old, and 41 sister vessels provide operating efficiencies. These fleet characteristics provide a distinct operating advantage in a market where charters are exercising more discretion than ever in selecting shipping partners. Management’s strong industry relationships and the company’s record of operational excellence further enhance our appeal among existing and potential charting partners.

Lastly, Eagle Bulk is well positioned to benefit from the healthy dry-bulk market fundamentals. We will now have 15 ships to take advantage of the strong dry-bulk market to charter through 2008 as well as 20 ships that have profit sharing arrangements in their contracts. We believe that our large and growing modern homogeneous fleet has the physical characteristics to meet not only the transportation requirements of multiple commodities in developed and developing regions around the world today, but the flexibility to continue to meet those changing needs in the future as well.

Thank you very much for your time this morning. I would now like to turn over the call to the operator for questions.

Question -and-Answer Session

Operator

Your first question comes from the line of Natasha Boyden. Please proceed.

Natasha Boyden - Cantor Fitzgerald

I would like to see if we can get a little more detail on these nine options you have out. How much did you manage to get these options, A, and B, get delivery beginning in 2010 given the shipyards are really full right now.

Sophocles Zoullas – Chairman and CEO

That’s a great question Natasha. In fact, in a market that is so tight where most ship yards don’t give any options today, we are very pleased with this outcome. How this came about is, after we announced the deal, I flew to Shanghai for 38 last week and had some very successful meetings with the Sino-Pacific ship building group, which is the parent company for the yard where we are building the 26 ships. We view, and I believe the Sino-Pacific group also views Eagle Bulk as a very good strategic partner for the ship yard. So, there are incredible synergies that are beneficial not only for us in having access to these ships but also the shipyard in having a very large important Supramax owner in their roster of clients. What I think we are particularly pleased about is that we secured these options at no cost to Eagle Bulk.

Natasha Boyden - Cantor Fitzgerald

Speaking of costs, are you able to actually give us some idea of what you got the options for?

Sophocles Zoullas – Chairman and CEO

Sure. Basically the structure is that the nine additional options are for 58,000 ton next generation sister ships that have approximately $2 million per ship of additional upgrades. Bigger engines, bigger generators, better cranes, stronger tank tops, and we got these at an option price of $42.3 million per vessel, which we believe is a very good value in today’s market. It is also of further interest for the callers today that these options are saleable and transferable although that is not our intention at this point of time.

Natasha Boyden - Cantor Fitzgerald

So, when you say they are saleable and transferable, you are saying that if in the next year, the value of these ships is $55 or $60 million dollars each; you could take advantage of that?

Sophocles Zoullas – Chairman and CEO

We could. But, that is something that is a possibility right now, but that is not our intention.

Natasha Boyden - Cantor Fitzgerald

The credit facility that you just announced, does that also cover the new options or would you need to seek other financing needs for the options?

Sophocles Zoullas – Chairman and CEO

It is a global facility that gives us several hundred million dollars of headroom above the $1.1 billion acquisition.

Natasha Boyden - Cantor Fitzgerald

Thank you very much, gentlemen.

Operator

Your next question comes from the line of Scott Burk. Please proceed.

Scott Burk – Bear Stearns

I am interested in the insurance terms that you talked about for the long term charters that you have locked in on these vessels for these next 3 years. First of all, are you saying that the counterparties are A-Rated or did you actually go and purchase some insurance for those charters?

Sophocles Zoullas – Chairman and CEO

What we did and that to our knowledge is sort of an industry first, really. We have secured the entire fleet revenues until July 2010 under an umbrella policy with an underwriter that is A, A2 rated. It is a large credit risk underwriter that controls I think 32% of the global credit risk market. So, to answer your question specifically, it’s like an umbrella of the underwriter’s rating. Because, remember, many of the companies, many of the charters in the dry-bulk shipping world today are either private companies or S&P and Moody’s don’t rate them. So we view this as a trailblazing new kind of way to secure revenues that we are very pleased with.

Scott Burk – Bear Stearns

So, the insurance is triggered in, if the rating of the counterparty declines? How do you get payment and also what kind of costs do you have?

Sophocles Zoullas – Chairman and CEO

Very simple. If for any reason there is an interruption in the revenues, the insurance kicks in. Either voluntary or involuntary interruption.

Scott Burk – Bear Stearns

That seems terrific. How much does something like that cost?

Sophocles Zoullas – Chairman and CEO

We find the premium value relative to what we are getting as a tremendous value. It is roughly a day and a half of hire per ship per year. So, in other words, for a day and a half of hire, over the whole year, you ‘ve guaranteed your revenue streams for the entire year.

Scott Burk – Bear Stearns

And that is just on a ship to ship that you have charters on lasting through 2010?

Sophocles Zoullas – Chairman and CEO

Correct. This is really a sort of an unheard of type of thing that we are pleased to be the first company to announce to the market that this kind of a thing exists and we think that this could be an organic part of our sort of long term strategy going forward.

Scott Burk – Bear Stearns

OK

Operator

Your next question comes from the line of Mr. Doug Mavrinac. Please proceed

Douglas Mavrinac – Jefferies & Co.

Great. Thanks. Good Morning Soph and Allen.

Sophocles Zoullas – Chairman and CEO

Good Morning Doug.

Douglas Mavrinac – Jefferies & Co.

Hi. Just had a couple of follow up questions to the previous two:

One, on your new building options. Could you share with us what some of those declaration dates are, and how much time you have to decide on whether or not you would like to declare those and may be how that is to your advantage given what we expected the outlook for the market over the next several months?

Sophocles Zoullas – Chairman and CEO

Sure. What’s nice about the options is, again, in a market where options are almost never given today, the exercise dates are pretty far out. For the first four ships it is not until December 31st this year, and the next 5 ships, it goes to March 31, 2008. So, that gives us significant amount of time to watch the market, see the market developments, see this fall what we expect to be the traditional up-tick in the dry bulk market after what typically is the summer lull currently.

Douglas Mavrinac – Jefferies & Co.

OK. Great. Thank You. As you mentioned you just don’t see options given out these days. I would imagine that there is probably already some interest in this. Can you share some color on that whether or not you have already received indications of interest on the securing of these options?

Sophocles Zoullas – Chairman and CEO

Within half an hour of our release yesterday, we already had interest in the options.

Douglas Mavrinac – Jefferies & Co.

Wow. OK. Great. Thank you. And then following up on the insurance policy, I have never seen something like this where these things guarantee your revenue. Can you discuss whether or not there is any deductibles or premiums or other similar types of costs that go along with other insurance policies on insuring your revenue stream?

Sophocles Zoullas – Chairman and CEO

I tell you, this policy, we are really thrilled about it. Not only because it gives just an unheard of level of comfort to our shareholders, but also it is an unprecedented type of a strategy within in the dry bulk market. This policy is what is commonly referred to as a “First dollar indemnity policy”. There is no deductible. So, unlike for example, a loss of hire insurance, which insures against mechanical failure, casualty, which typically has deductibles of 14 or 21 days, there is no deductible on this revenue stream insurance policy.

Douglas Mavrinac – Jefferies & Co.

OK. Great. Thank you, and the finally, just looking as a reminder, what a wide variety of cargos you guys transport, what do you see today in terms of what do you think that most people are overlooking in terms of demand for a particular type of dry-cargo?

Sophocles Zoullas – Chairman and CEO

What is really interesting is, I always say, the biggest change not only from first quarter call to the second quarter call, I would say, the second quarter call relative to every call we have had is that every quarter we have been telling the market, demand is up, we are seeing these ships in trade patterns, increasing this cargo might be shifting around a bit, this is the first time where we can report to the market that it is not just that demand is up, but there are new markets and commodities being created. This phenomenon of nickel-ore that we mentioned on this call, literally, in the last 4 months, all of a sudden we have had a lot of chartering activity, the movement of nickel-ore, which is a very high cost commodity that is used partly in the production of stainless steel. So, that to us is a new yet additional phenomenon on the back of general increases in major and minor bulks. There are new minor bulk commodities that are coming out of nowhere and having an impact on the market, and as everyone on the call might recognize, the minor bulk market is the protected domain of the sub-panama ships where Supramaxes are really the prime movers and beneficiaries of these new market trends.

Douglas Mavrinac – Jefferies & Co.

OK. Great. Thank you very much.

Operator

Next question comes from the line of Urs Dur, please proceed:

Urs Dur – Lazard Capital Markets

Hi Guys

Sophocles Zoullas – Chairman and CEO

Hi Urs, how are you?

Urs Dur – Lazard Capital Markets

Very Good. Very Good. On the road at the moment. Congratulations and nice on the 9 options and thanks for the information on the insurance. I think those are the key questions I guess what we have seen recently and from this report. I was wondering if you could walk us through because I really like what you did in regards to the change in the dividend policy and walk us through what the advantages are of that, and secondly, can you give us some indication of a level of operating cash flow that you might be looking at or maintaining as you go forward and your fleet grows in terms of distribution?

Sophocles Zoullas – Chairman and CEO

I think it’s an acquisition like this 20-ship acquisition which brings in this billion dollars of additional minimum contracted revenue into the company which gives us the kind of cash flow accretion over the long term year after year that allows us as a company to have this tremendous new flexibility that allows us to put in $.50 target per quarter. I think the point that I think is really the key here is, we don’t want to give specific guidance on what the cash flow accretion per share is, but it is pretty easy for people to figure out. It gives us the ability to pay the $.50, pay down the debt, and look to grow that dividend, all at the same time which is something that up to now we hadn’t really been able to do, and I might add also, really take a lot of the volatility out of the dividend. In fact, the $.50 target is a nice improvement off of the $.47 we declared for Q2. With regards to the second part of your question, with regards to cash flow, we tried to tend away from giving too much guidance, but we feel that we have given the market enough raw data where it’s reasonable that they can put it together.

Urs Dur – Lazard Capital Markets

OK. That’s sufficient for me. Thanks a lot and good luck.

Operator

Your next question comes from the line of Mr. John Chappell. Please proceed.

Johnathan Chappell – J.P. Morgan

A question about the industry. Everyone seems to focus on China as a major importer, and that is really having a beneficial impact on demand, but China has also been exporting a lot of the minor bulks that you guys carry. As China’s demand remains robust and the economy continues to exceed expectations, they can potentially keep more of those products in their domestic borders to fuel their own growth. Do you see any slow down in Chinese exports and that are having any kind of impact on the Supramax market?

Sophocles Zoullas – Chairman and CEO

The short answer is no. In fact, what is interesting is that the import of the nickel ore that we talked about on the call today which comes out of place like Indonesia is going into China and that new market is stimulated by the increased demand for exports out of China. Not of steel products because that is something we have all been focusing on, but the sub-steel market of stainless steel. Super high grade steel. So, almost 0-20 million tons is actually specifically addressing your question which is exports of minor bulks out of China.

Johnathan Chappell – J.P. Morgan

My follow up question is, can you give me an update on off hire dates for second half of this year, and for 2008?

Alan Ginsburg – Chief Financial Officer

Less than 5 for the quarter. We do not know what our offhire will be for 2008, but John, we have had about a 99.8% utilization rate over the last year and a half. So, for modeling purposes, that is what we would use.

Johnathan Chappell – J.P. Morgan

And scheduled dry-docking?

Alan Ginsburg – Chief Financial Officer

We have the dry-docking in the press release by quarter for the next four quarters.

Johnathan Chappell – J.P. Morgan

Thanks Alan.

Operator

Your next question comes from the line of Michael Sasprasky. Please proceed.

Michael Sasprasky

Good Morning

Sophocles Zoullas – Chairman and CEO

Good Morning

Michael Sasprasky

I want to talk about this credit insurance again. So, you are the first ones every to do this. Is this a new product or something that has been in the market for a while?

Sophocles Zoullas – Chairman and CEO

We believe that we are the first ones to ever do it because we have never heard of it done before. It is really a new product with its underwriter.

Michael Sasprasky

Are you able to disclose the Underwriter?

Sophocles Zoullas – Chairman and CEO

I can tell you the insurance was placed through a top UK based insurance agent called Securus, and they are actually managing the entire insurance of this facility. So, basically Securus are the people you should turn to, because they can get into the whole sort of esoteric side of the insurance market on how this works.

Michael Sasprasky

And this is is factored into your break even cost of close of the $7000 per ship per day?

Sophocles Zoullas – Chairman and CEO

Yes

Michael Sasprasky

OK. Now just on to the debt. A lot has been made in the recent weeks about the different risks to credit. Do you see the Royal Bank of Scotland sort of trying to add or raise the rates on the $1.6 billion credit facility that hasn’t been finalized yet, and looking forward on a more industry wide view, is it going to be harder to secure financing for new ship builds?

Sophocles Zoullas – Chairman and CEO

Actually, what is very interesting is, we had a recent talk with Royal Bank a couple of days ago. I gave them a call, and their intent is to actually improve. Their current indication to us is that although they were initially looking to syndicate right out of the block. Their current intent is actually to underwrite the entire facility themselves. And then to look to sell down later. Also, since we announced the deal, we have received calls from quite a few banks asking to join the facility. We just pushed that inquiry over to Royal Bank, as the lead arranger. So if anything, this situation since we announced the deal has improved with Royal bank because they have indicated they want to direct the whole thing initially.

Michael Sasprasky

So, this panic on Monday was basically much ado about nothing when all the shipping companies went down for perceived credit risk. That was really an irrational situation, I am guessing.

Sophocles Zoullas – Chairman and CEO

I think so because there is a huge difference between the sort of domestic sub-prime market, the LBO financing and the foreign banks lending into foreign shipping companies which are asset backed with huge degree of contracted revenues. They are really sort of de-coupled markets but I think there was a bit of irrational linkage there.

Operator

Your next question comes from the line of Mr. Scott Burk. Please proceed.

Scott Burk – Bear Stearns

I wanted to get the details on the mine expansions that you discussed during the call. Where are the expansions occurring? They are mostly in Brazil or can you give us more details?

Sophocles Zoullas – Chairman and CEO

That, which is not a surprise to people on the call today I am sure, that expansion is primarily coming out of Australia, but even more so out of Brazil.

Scott Burk – Bear Stearns

OK. That is similar to what we have been seeing.

Sophocles Zoullas – Chairman and CEO

The fact that a lot of it is coming out of Brazil really factors in to the whole ton-mile point, which is not just increased capacity, but increased capacity moving over longer distances which has a bigger impact on demand.

Scott Burk – Bear Stearns

One of the interesting things going on in the summer with the day rates, the Handymax or the Supramax sectors kind of out performed in terms of the day rates continuing to pick up. Would you attribute that more to these new minor bulk markets that you have talked about or is it more of the fact that China social trade starts to absorb more of the smaller ships’ supply.

Sophocles Zoullas – Chairman and CEO

I think it is all of the above. I think basically the Supramax market is coming into its own. It was a couple of years ago a nascent market. These were the new ships that charters and the shipping market in general would kind of figure out what do we do with these big crane flexible ships and it is now just a byproduct of these ships finding their utility in the market their utility and the demand for the minor and major bulks.

I think it is incredibly interesting on the slide where we have the chart with all the cargos we carried to note the increase of how much our Supramaxes are carrying major bulks. That to us is very surprising. The first half of 2007, and it is like 13. 45% of our cargos were major bulk which are traditionally Cape and Panamax cargos. So, we full participated in that, in fact that figure is up from 34%. So, we have gone from34% to 45% in the major bulks, but then in the minor bulks, we are noticing as I discussed earlier, not just increase in minor bulks, cargos like cement, steel, but the emergence of new cargo commodities like nickel Ore, stainless steel, which are also being moved on Supramaxes and that coupled with as Scott you have rightly mentioned, the rapid explosive growth of Chinese coastal trade which predominantly moves in the Sub-Panamax ships. So, I think it is all of those items above.

Scott Burk – Bear Stearns

OK. And one other thing I wanted to ask about the charters of profit sharing. You have started about six months ago and an increasing number of your charters come with profit sharing. In general, how much do you give up on the base charter rate to be able to get the profit sharing on top of that?

Sophocles Zoullas – Chairman and CEO

The truth is we don’t think we give up that much at all because if you look at the charter rates on the acquired Supramax fleet, to have a floor rate in the sort of $18,500 range you have to factor it into the fact that these are eight, nine, ten year charters. So, again talk about precedence setting, there has never been to our knowledge a fleet of Supramaxes chartered in the market for this duration. So, there is no barometer for this. You can’t look at some industry report and say for the last 10 year charter of Supramax has done at X, so this charter is above or below. I believe this is sort of Eagle Bulk more trailblazing and creating new markets.

Scott Burk – Bear Stearns

To follow up on that question, maybe if we look at the three year charters, what would you give up on a three year charter?

Sophocles Zoullas – Chairman and CEO

Three Year charter I believe is in the $30,000 range. I think $34,500 on the two year charter on the Sparrow is about market.

I would say that is what it is. Also, the other point to mention is with the fleet acquisition, we have secured the cash flow for the ships yet to be delivered to us. So that is another important factor to bring out.

Operator

Your next question comes from the line of Mr. Michael Sasprasky. Please proceed.

Michael Sasprasky

I was trying to figure out if you have a range on the debt on the interest rate.

Sophocles Zoullas – Chairman and CEO

Sorry, the interest?

Michael Sasprasky

An idea of what you are going to be paying on the facility.

Sophocles Zoullas – Chairman and CEO

That we will give out at a later date. Probably, we will lock down the facility later this month and we will give it to the market later.

Michael Sasprasky

But those assumptions are in your per day cost, I guess.

Sophocles Zoullas – Chairman and CEO

I would say, to give you some guidance, as much as we can, similar to what we currently have. Not a huge difference from what we currently have on the existing facilty.

Michael Sasprasky

Sounds like you guys are almost bullet proof in here. Realistically speaking, are there any risks? You have everything locked in for three years and insured. Are there risks on the expense side or is everything just really as good as it can be?

Sophocles Zoullas – Chairman and CEO

I actually gave an interview recently for a shipping magazine where I was asked exactly that same question. In other words, what is the risk? It was a more generic question. The reporter said, what is the risk to the industry, not specifically to Eagle, and I am going to answer the question the same way. Because the risk to the industry and the risk to Eagle is the same, which is I think we currently in a pandemic of crew shortages not just in dry-bulk but across the industry. So, what we’ve told in our prior calls and what I think we are going to continue to signal to investors and callers on our next calls is don’t expect crewing costs to go anywhere but north. We have tried to stay ahead of the curve because frankly these are $60 million ships that are generating $30,000 a day and we believe that you want to find the best crews you can to be stewards of those assets and those cash flows. So, we want to be ahead of the curve and actually pay pretty healthy salaries. So, we are the upper quartile of what most people pay. We also instituted a cadet system where we take top quartile of the cadets out of the maritime academy and put them on our ships. We pay them salary, we pay them expense, food and board and transportation because we want to create a pipeline of good cadets going forward, and junior officers on the fleet.

The expenses are going up. That is just a reality but if you look at for example crewing costs which represent probably about 55% of the say, $4000 operating costs, and even if you factor in a five or ten percent cost, today you are talking about an increase of $100 a day. Relative to the revenue generation, it is still a small number.

Michael Sasprasky

OK. But is there a relationship between shipping rates and crew costs? In other words, as crew costs go up, shipping rates will go up or profit sharing income will go up as well?

Sophocles Zoullas – Chairman and CEO

No. Crewing costs tend to be dis-associative with the market. Crews obviously are aware that the market is healthy. Because also crews can move from ship to ship, the challenge of the ship owners to create loyalty and keep them in the fleet, and we believe that with a 2 year old fleet, we have some very nice ships, good pay package and the promise for improvement in the ranks, that is how we build loyalty, but if the market falls, the crewing costs will not fall.

Michael Sasprasky

OK. So, the risk is really on the expense side, not on the revenue side?

Sophocles Zoullas – Chairman and CEO

Correct.

Michael Sasprasky

Congratulations on a good quarter.

Operator

Your next question comes from the line of Mr. Elliot Miller. Please proceed.

Elliot Miller

Number one, does the credit insurance include the profit sharing component or is it just for the base rate.

Sophocles Zoullas – Chairman and CEO

Alan, do you want to take that?

Alan Ginsburg – Chief Financial Officer

It includes everything.

Elliot Miller

It includes the profit sharing components as well?

Alan Ginsburg – Chief Financial Officer

If the charter cannot pay Elliot, then there is not going to be any profit sharing. It will only be down to the base rate.

Elliot Miller

Number two, As per the 26 new builds, can we get an update on the status of the five unchartered ships? I know you were expecting all kinds of phone calls and all kinds of offers, and I wonder how you are progressing on that.

Sophocles Zoullas – Chairman and CEO

First of all, everything we prognosticated happened has happened which is we have received many not just indications, but bids on the five new builds, and we very intentionally held back because we believe the fundamentals for the dry bulk market are actually improving so, these are sort of very desirable if not the most desirable ships that have a very high value. So we are just sitting back and waiting at this point. And we are going to opportunistically start chartering them but this is supposed to be a summer lull season and August is proving to be anything but that.

Elliot Miller

Another follow up on the 26 new builds. Alan, you are having any difficulty in terms of the cost increases in terms of finding interest rate swaps for those new builds?

Alan Ginsburg – Chief Financial Officer

No. Not at all

Elliot Miller

So this credit crunch has not impacted that?

Alan Ginsburg – Chief Financial Officer

No. Not at all.

Elliot Miller

That’s it. Thank you.

Operator

At this time, there are no further questions in the queue. I would like to turn the call back over to Mr. Zoullas.

Sophocles Zoullas – Chairman and CEO

Closing Remarks:

I would like to thank everyone again for joining us for our second quarter 2007 earnings call, and we look forward to keeping you updated with new developments throughout the balance of this year. Thank you very much.

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Source: Eagle Bulk Shipping Q2 2007 Earnings Call Transcript
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