texalope

Why I Prefer Excel Maritime to DryShips

There are 2 types of covenant violations. Technical or material.

A technical violation occurs when they breach a covenant like debt to equity (this can easily happen when prices of ships are falling). Under this scenario they are like our banks but they have liquidity due to their cash flow.

In a material breach the cash flows fall short. This is obviously much more of a problem. The banls' concern is how do we get paid? If the business revenues are falling the interest and principal payments are in jeopardy.

Stanislav, what insight do you have here regarding EXM.

It seems when they bought quintana one of the goals was to add the more predictable cash flows from their charter business. This should provide some insurance regarding a material breach.

Why I Prefer Excel Maritime to DryShips

Take this as constructive. This article does not make your reasons for preferring Excel over Dryships clear. My takeaway is the Dryships is overleveraged (no secret) and business is lousy.

Excel also has a weak balance sheet and faces the same business cycle. They've cancelled the dividend, postponed their earnings to negotiate with banks. What do you see that makes this a better investment or bet?

Slippery Slope: Dry Bulk Shipping Contracts Begin to Default

From todays' Lloyds

DRY BULK

Revival of Brazil iron ore cargoes lifts rates hopes
Michelle Wiese Bockmann - Friday 20 February 2009

EUROPEAN steel mills are booking capesize vessels to ship iron ore from Brazil for the first time since October, brokers have reported, boosting hopes of a sustained recovery in bulk carrier freight rates.

ArcelorMittal was among those mills that this week began to quietly nominate cargoes to be loaded from Brazil in March and April.

“These are the first cargoes to be transported that we have seen for some time,” said a London-based broker. “They’re trying to keep it quiet, but the principals and brokers are receiving nominations. Will it carry on? We don’t know. But for now it’s good.”

Steel mills around the world controversially defaulted on contracts of affreightment for iron ore shipments last October, when the global economic crisis saw the demand for steel collapse.

There have been no iron ore cargoes nominated from Brazil to Europe since then, several brokers familiar with the capesize market told Lloyd’s List.

The resumption of trade is viewed as one of the most positive signs for the global market for dry bulk since the five-year shipping boom ended in the final quarter of 2008. Rates to charter capesize vessels are expected to jump next week, as very few of the global fleet of capesize vessels are available for business in the Atlantic region. “I can count them on one hand,” said a broker.

Steel mills in Asia and Europe redelivered ships early and cancelled time charters or contracts of affreightments in September and October, triggering a dramatic fall in freight rates, as well as a wave of bankruptcies among vulnerable shipowners and operators.

The global steel industry provides business for roughly half the world’s fleet of bulk carrriers. Many mills are currently renegotiating long-term contracts of affreightment signed with owners to ship iron ore rates now much higher than current levels.

As a point of information the EXM contract problems are capesize vessels. Being in business and having the rights ships makes them a candidate for other business. The world has not come to an end.

Excel Maritime Carriers: Set Up To Excel

Evaluating a business requires more than just looking at ratios. EXM is a very good business. . Here are some qualitative thoughts;

1) Maritime shipping is an important business. Entry is not easy.
2) BDI rates are volatile. EXM business is built around AAA customers who sign long term contracts and need a reliable shipping resource. Getting your goods from point A to B in the promised 12 days is important o both customer and supplier. EXM has a reliable modern fleet. The BDI is not as important in the long term.
3) Many of the new ship yards are not coming on line. Consequently forecast overcapacity is not accurate.
4) EXM has 4 new ships scheduled for delivery. All have been prechartered and will provide positive cash flow.
5) The deep pocketed partners of this company will provide capital for future investment limiting EXM need to invest cash. Since the major owners are interested in dividends this should leave cash available.
6) Although the balance sheet has a heavy debt load it must be understood in the context of this industry. Investing in ships takes capital, often borrowed. The lenders understand this. If the value of the ships fall and the company violates debt covenants the lenders may view this as a technical default. As long as cash flows are continuing and the loan is current they will not foreclose. Think of the ship as a machine that generates revenue. As long as this continues what difference do the ship values make in the short run.
7) The world growth story may be slowed but not permanently impaired. EXM is well positioned to take part.

I own stock in EXM