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  • FTD Companies - An Undervalued Spin-Off [View article]
    Can the author or anyone here comment on why the short interest is so high in this name? I see short interest over 15% of the shares outstanding.
    Feb 20, 2014. 07:05 PM | 1 Like Like |Link to Comment
  • Genco Shipping: Overvalued and Overleveraged in a Collapsing Market [View instapost]
    I probably agree with your point, it no longer makes sense to value GNK on any sort of earnings/cash flow metric or DCF metric. I think best way to think about valuation now is as an option on a ship (or rather a collection of 53 ships).

    Yes, there is a difference in cost structure when you are comparing a spot voyage with a time-charter. In a time-charter (or a spot linked index charter), the charterer pays for fuel and the owner (GNK) pays for everything else (crew, insurance, etc). In a spot voyage, the owner (GNK) is responsible for fuel in addition to all other operating expenses. So when you look at GNK's income statement, you actually see an expense line item called "voyage expenses". This represents the fuel component of spot voyages. Most analysts in the industry like to look at a "time-charter equivalent" form of revenue (for comparability) and to get that figure you simply take the voyage revenue line item and subtract it by the voyage expense. For GNK, spot voyages represent a pretty small part of their business. However, don't be fooled into thinking they have a lot of revenue/cash flow coverage. Many of their time-charters are actually 100% spot index linked, so there is no revenue guarantee. Furthermore, the vast majority of their fixed rate time-charters will be expiring in 2011. Hope this helps.
    Apr 29, 2011. 06:37 PM | Likes Like |Link to Comment
  • A Look at Dry Bulk Company Valuations [View article]
    There are also two capes that have fixed time-charters through the end of 2011. The Genco Constantine and the Genco Hadrian.
    Apr 29, 2011. 02:49 PM | Likes Like |Link to Comment
  • A Look at Dry Bulk Company Valuations [View article]
    I want to address some of the comment being brought up on this article, as I think there are some misconceptions about Genco Shipping.

    Balance Sheet Fleet Value ($2.8bn) vs. Second Hand Value ($1.6bn):

    GNK marks its fleet at cost less accumulated depreciation. According to its filing, GNK depreciates the value of its vessels straight-line assuming a 25-year useful life. To best illustrate the difference between cost less accumulated depreciation vs. 2nd hand value, lets look at GNK’s Capesize fleet. GNK owns 9 Capes. It purchased these vessels in July 2007 for $1.1 billion (, or about $122 million per vessel. At the time Cape’s were earning about $100,000/day in the spot market. These vessels were all new-buildings and were delivered from 2007 to 2010. Based on when these vessels were delivered and assuming depreciation of about $5m per year, I would assume that GNK is holding these vessels on its books for about $1.01bn, or about $112 million per vessel. Today, Cape’s are earning about $7,000/day in the spot market and can maybe get $17,000 per day in the 1-year time-charter market. Of course second hand values are somewhat subjective but, using data from Clarksons (one of the largest, most well respected ship-brokers) GNK’s Capes are worth about $52.5m in the second hand market today, or less than half of balance sheet value. Clarksons’ data might be wrong, but I am willing to bet Cape values are nowhere near $100m plus. Using Clarksons values for GNK’s entire fleet, I get to a figure that is around $1.6bn as well. Bottom line, I don’t think its useful to use balance sheet value when determining asset value for this Company. (Also note that GNK consolidates Baltic Trading into its balance sheet while I look at it on a standalone basis.Balance sheet value of BALT vessels is $384m, so for comparison purposes should strip this out).

    Does GNK have time-charter coverage or not?

    I commend GNK for doing a good job of making it look like they have decent time-charter coverage. In my mind, the benefit of time-charter coverage is a guaranteed stream of revenue and cash flow. However, if you look carefully at the type of “coverage” that GNK has, you will see 18 are on index charters, where the rate is directly linked to the spot rate that the Baltic Exchange publishes every day. The downside of this type of arrangement can be witnessed today. The Genco Augustus is a Capesize vessel on a index charter. Today, it is earning about $7,000/day, a figure that barely covers marginal operating expenses. So some might consider this a “long-term contract”, but what good is it to be on a contract if the rate you are earning can fall below marginal operating cost? The flip side of an index contract is it allows you to benefit in a freight rate rally, but my feeling is that there is a better term for this type of exposure; its called spot exposure. So going back to GNK’s fleet…they have 53 ships (pro forma for deliveries this year), 18 of which are on index charters, 4 are on index charters with floors (very low floors), 6 are on the spot market, 20 are on fixed rate time-charters that will end by the end of 2011 and 5 are on fixed-rate time-charters that extend beyond 2011. So in my mind, GNK only has 5 ships that are on fixed-rate long-term time charters.
    Apr 28, 2011. 03:46 PM | 12 Likes Like |Link to Comment
  • Genco Shipping: Overvalued and Overleveraged in a Collapsing Market [View instapost]
    Sorry about not responding earlier, I’ve been tied up. So quick background, the Company announced Q4 2010 earnings and provided an updated charter list.

    Q4 earnings were inline with what I expected (inline/slight miss with the street as well). GNK (not including Baltic) ended the quarter with $245m of cash and $1.6 billion of debt, so $1.355 billion of net debt. If we include the par value of the convertible notes the Company’s net debt at the end of the quarter was $1.38 billion of net debt, this compares to the net debt figure I have in my analysis above of $1.4 billion, so my balance sheet estimates were very close.

    On the charter list update, the Company has continued to fix its expiring vessels onto index-linked charters. As a reminder, an index linked charter means these ships are earning around 100% of spot rate. So, for example, GNK has 3 of its Capesize vessels on index linked charters (one at 100%, the other 2 at 98.5%). So these ships are currently earning about $4,600 per day. GNK now has 22 out of its 49 vessels operating on index linked charters or operating in the spot market. GNK has chosen to do this because they are anticipating a sharp rally in shipping rates in the back half of the year (or sooner). So I think this is a very important point about GNK. There should be no disagreement here, GNK is a levered, spot exposed Company. So to the extent you have a very bullish view on freight rates, then GNK’s strategy is a good thing and you should be long the Company. To the extent you have a negative view on freight rates (as I do) GNK is a short.

    As another reminder, I don’t think Cape rates will remain under $5k per day. Instead, I run my models at the current 1-year time-charter rate. As of today, those rates are as follows:

    Capesize: $17,000
    Panamax: $17,500
    Supramax: $15,500
    Handymax: $13,250
    Handysize: $11,750

    Using these rate assumptions, which for Capes are over 3x current spot rates, I show GNK trading at a non-meaningful PE figure for 2012 and 9x EV to EBITDA. I also show them at over 6x net debt to EBITDA. This second point is important, as it would imply a covenant breach for GNK. Now, I can’t say what will happen to the Company in a covenant breach. Obviously lenders could waive them by without much penalty. But my view is that this is a risk that is not really being priced in by the market. So to reiterate, I still believe GNK is overvalued, over-levered, won’t be returning cash to shareholders for the foreseeable future and is at risk for a covenant breach. I am still short the Company
    Feb 28, 2011. 11:19 AM | Likes Like |Link to Comment
  • Genco Shipping: Overvalued and Overleveraged in a Collapsing Market [View instapost]
    You are correct, GNK had is collateral maintenance requirements indefinitely waived when it renegotiated covenants in 2009. However, the Company still has a 5.5x total net debt to EBITDA covenant (among others). My analysis focuses on this particular covenant as it seems like they could breach this covenant if weak freight rates persist.
    Feb 14, 2011. 07:23 PM | Likes Like |Link to Comment
  • Genco Shipping: Overvalued and Overleveraged in a Collapsing Market [View instapost]
    Here is my response to the comment above.


    New ships are still getting financed because even at current time-charter rates (1year, 5year, take your pick) these ships are still profitable. According to Clarksons, a modern second hand Capesize is going for about $56 million. If we assume that vessel can get do a 25-year charter at $20,000 per day, 50% LTV financing at 6.0%, 25-year useful life, scrap value of $10 million (at the end of 25 years) we see that an equity holder can still earn ~9% IRR. So the first point is, banks are willing to lend because they are well covered even at today’s rates. The second point is, while the equity returns don’t look great, they are acceptable to some. The evidence that this level of return is acceptable can be seen in the fact that 76 million dwt of new dry-bulkers were ordered in 2010. This compares to a total fleet of around 500mt, so 2010 new ordering represents 15% of the current fleet. The problem with this math is that it shows $20,000 per day rate working for a new ship-owner, however, the math doesn’t work if you paid $120 million for your Capes (like GNK did in 2007)

    If banks and shipowners are pulling back, its not really coming through in the numbers. December and January were pretty dismal for freight rates but both months saw a good amount of 1) new ship deliveries and 2) new ship ordering.

    Dec 10 and Jan 11 New ship deliveries: 13.77m dwt (~2.7% fleet growth)

    Dec 10 and Jan 11 New ship ordering: 9.4m dwt

    Obviously, if we see Capesize rates under $10,000 for an extended period of time, it will discourage new ordering and deliveries and encourage scrapping. Overtime this will lead to a more balanced market, but with tight debt covenants and mandatory debt amortization, GNK does not have this kind of time.

    Yes, Vale is 100% committed to building a large dry-bulk fleet. These ships have been ordered, financed and are being built today.

    Vale is committed (see page 24 and 25 of “2010 Vale Day NY”):

    Ships are ordered:

    Ships are financed:

    Ships are being built today (see pg 190):


    I agree that flooding issues in Queensland and other parts of the world as well as Chinese New Years could be having an impact on dry-bulk SPOT rates. But, I disagree that they should have an impact on longer term time-charter rates. So, to be very clear about what freight rate assumption I am using in my model, I’ve detailed current spot rates, 1-year TC rates, 5-year TC rates and 2012 FFA rates below (apologies if its confusing, having trouble inserting a table).

    Capesize (Spot, 1yr time-charter, 5yr time-charter, 2012 FFA): $6.4k, $18.5k, $21.75k, $20.18k.

    Panamax (Spot, 1yr time-charter, 5yr time-charter, 2012 FFA): $12.5k, $16.6k, $15.25k, $15.5k.

    Supramax (Spot, 1yr time-charter, 5yr time-charter, 2012 FFA): $11.7k, $14k, $14.2k, $13.5k.

    Handysize (Spot, 1yr time-charter, 5yr time-charter, 2012 FFA): $9.4k, $11.5k, $11.5k, $11.0k.

    So, to be absolutely clear, I am using 1yr time-charter rates, not spot rates. The rates that I am using are 20% to 190% above current spot rates. As you can see from my figures, I could have used 5-year time charter rates of 2012 FFA rates to get to pretty similar figures for Genco (they have mixed fleet exposure). THE FIGURES I AM USING ARE ALREADY PRICING IN A POST-FLOODING/CHINESE NEW YEARS REBOUND. I don’t think you can make the argument that a one week event that happens every year, or a flood that will take several weeks to clean up should impact a 5-year time charter rate. Furthermore, there is a liquid, traded market for future spot rates, its called the FFA market. The FFA market is cash settled on the spot number that the Baltic Exchange publishes. I have the 2012 FFA figures shown above. These figures clearly show that the market is expecting dismal (albeit, higher than spot) rates even through 2012. Its one thing to say you think I’m using the wrong rates because your view is more bullish than mine, but don’t say I’m using the wrong rates because I’m not factoring temporary events like Chinese New Years and Australia flooding.


    I think I made it pretty clear in my write-up. GNK’s leverage works both ways. I present a bearish argument for dry-bulk freight rates. I think freight rates are going to stay at current levels (current time-charter or FFA levels, not spot levels) or continue to decline. This view basically comes down to supply outstripping demand for the foreseeable future. Under this scenario, even where rates remain unchanged from current time-charter levels, Genco will 1) not be generating any money for shareholders for the foreseeable future 2) will be facing debt covenant and debt pay-down issues. Under this scenario, GNK could be forced to issue equity and sell assets. I would point to GNK’s sister tanker company, General Maritime (GMR), as an example of what could happen.

    My view is that at current time-charter rates, GNK will blow a covenant in early 2012 and will be forced to issue stock and/or sell assets to cure default. I think the even if long-term rates rally 20%, GNK is overvalued. To the extent you have a different view on the macro picture for dry bulk and are very bullish, its pretty simple, don’t short GNK. I did my write-up to discuss the fundamentals, not necessarily on how to trade this, though you can probably tell from my profile how I’ve expressed my view.
    Feb 10, 2011. 05:03 PM | Likes Like |Link to Comment
  • Genco Shipping & Trading: Value Investment in a Rebounding Industry [View article]
    I have also recently done a write-up on Genco Shipping, however am on the short side of this trade. I have read this analysis thoroughly and here are my thoughts:

    1. This write-up focuses on increased demand as “global GDP continues to increase”. However it is important to note that for dry-bulk commodities, the recovery has already occurred. 2010 was a record year for dry-bulk commodities demand. I estimate that in 2010 iron ore demand grew by ~8% and coal demand by ~14%, demand for both commodities are now far above pre-recession levels. Yet, despite record setting levels of dry-bulk volume, freight rates remain suppressed. Why?

    2. This write-up seems to neglect the other side of the dry-bulk equation; supply. Supply is the reason why freight rates are currently crashing, despite continued strong demand for dry-bulk commodities. 2010 was a year that saw the dry-bulk fleet grow by 80 million dwt, which translates to 16% fleet growth. To put this figure into perspective, it would be practically impossible for dry-bulk demand to keep up with that pace of supply growth. Even when considering factors such as increased shipping distances and port congestion it is very difficult to see how demand for iron ore, coal and other bulk commodities will be able to keep pace. Even worse, new ship deliveries are set to continue at a very strong pace. For example Vale, the large Brazilian iron-ore miner, will begin taking delivery of 400,000dwt vessels beginning this year. These vessels are the largest dry-bulk vessels ever built and when these deliveries are completed they will have flooded one of the most important dry-bulk routes (Brazil to China) with new capacity.

    3. Onto Genco specifically. “Genco manages the short-term volatility of the BDI by contracting its fleet out over multiyear periods”. This statement may have been true in the past, but not anymore. Over the past year Genco has had a large number of ships come off long-term time charters, yet the Company has chosen to re-charter these ships on short-term charters, on index charters or keep them on the spot market. The result, today GNK is one of the most spot exposed companies in the dry-bulk space. A large number of GNK’s ships are earning the spot rate that goes into the BDI.

    4. Genco’s break-up value does not equal its net book value. GNK took delivery of a number of ships prior to the recession that today are worth 50% or less of purchase price. There is an active, secondary market for dry-bulk vessels and it would be more appropriate to use these values to do a break-up analysis on Genco. Using secondary values today (these values factor in ship size and age), GNK is worth around $8.80 per share. Most sell-side analysts come to a similar break-up figure.

    5. Genco’s balance sheet is not as strong as you think. The Company has around $200 million of cash but $1.7bn on long-term debt, $120 million of obligations on new vessel purchases next year, and mandatory debt amortization that will ramp up to ~$220 million per year beginning in mid-2012. Furthermore the Company has a number of financial covenants including a total net debt to EBITDA covenant at 5.5x. If I use current 1-year time-charter rates to project out GNK’s financials, I show them blowing through this covenant in Q1 2012. Note that 1-year time-charter rates are significantly above current spot rates, thus I’m being quite generous to the Company.

    The bottom line is I respect your opinion, but I think you are wrong. I think that ultimately, the dry-bulk market will bottom and there could be some winning value opportunities, but I don’t think we are there today and I don’t think Genco will be one of those opportunities. As with any oversupplied commodities market we should expect to see a low rate environment until the higher cost ship owners are flushed out of the market and capacity falls more in-line with demand. This scenario is troublesome for Genco because 1) its break-even operating costs are much higher than its low-leverage competitors 2) it can’t survive for long in this environment because it will breach covenants relatively soon.
    Feb 7, 2011. 11:20 AM | 11 Likes Like |Link to Comment
  • Buy Three Shipping Stocks and Slowly Step Away From the Rest of the Market [View article]
    You need to look at the cash relative to each company's current debt load and future funding requirements. GNK has $200m of cash and a current market cap of $400m. Maybe on the surface that looks compelling, but now when you consider they 1) have $1.7bn in debt 2) need to spend $120m in 2011 taking delivery of vessels they've already committed to 3) have mandatory debt amortization of ~$75m in 2011, ~$185m in 2012 and $220m in 2013 4) will get tight under their net leverage covenant (i.e. can't really afford to use that cash for anything except for debt repayment) 5) are not permitted to pay a dividend...then that cash pile looks a little less compelling.
    Jan 28, 2011. 07:41 PM | 15 Likes Like |Link to Comment
  • Genco Shipping: Overvalued and Overleveraged in a Collapsing Market [View instapost]
    Sorry, I need to make a correction to the above. At current long-term FFA rates, GNK will blow its net leverage covenant (according to my model) in Q4 2011, not 2010.
    Jan 27, 2011. 11:00 AM | Likes Like |Link to Comment
  • Genco Shipping: Overvalued and Overleveraged in a Collapsing Market [View instapost]
    The analysis above was done three weeks ago. Since then GNK has fallen 20%. However, should also note that the shipping market has fallen dramatically during that period too. The BDI (a measure of spot rates) is also down 20%, and long term FFAs are down an average of 11%. When i run these longer term rates through my model (which are far more generous to GNK than shorter term rates) a 11% drop in longer term rates has a huge impact on their fundamentals. For example, if i run GNK on yesterday's 2012 FFA rates I show them blowing their net leverage covenant by Q4 2010. So yes, GNK is now closer to my original price target of $8.85, but that price target is no longer realistic. I'm not ready to come out with a revised number, but I think its still a very attractive short at these levels.

    The Company's cash pales in comparison to its debt ($200m vs. $1.7bn in debt). The Company has a net debt covenant that will start getting pretty tight so it can't afford to do much with that cash. Also, beginning in mid-2012, the Company will start having mandatory debt repayment of ~$50m per quarter, so it will need to preserve cash for that.

    So to reiterate, i still think this is a very attractive short. If you are worried about potential volatility in this name given the recent dramatic move I would recommend getting short exposure through out-of-them-money put options.
    Jan 27, 2011. 10:32 AM | Likes Like |Link to Comment
  • Genco Shipping: Overvalued and Overleveraged in a Collapsing Market [View instapost]
    Thanks for the comment. I got all of the Company specific information from public filings. I build up exhibit 2 from information provided in the following link.

    I think for Capes and Panamax vessels there is a good chance spot rates rally from current levels. Spot rates are currently at $8.7k per day for a Cape and $12.7k per day for a Panamax whereas FFAs are at ~$20k for Q2 2011 and beyond for Capes and $15k for Panamax. I think the current level for Capes is unsustainable and may be driven by flooding issues in Queensland.

    In the analysis above my figures are run using $21.75k for Capes and $17.5k for Panamax. So as you can see I'm being very generous to the Company relative to market levels. Even under these numbers the Company doesn't look good.
    Jan 24, 2011. 11:13 AM | Likes Like |Link to Comment