Safe Bulkers: A Pending Catalyst To Improve Price Performance

| About: Safe Bulkers (SB)

In December 2010, Safe Bulkers (NYSE:SB) contracted with a Chinese yard for the construction of a Cape-size vessel (180,000 MT DWT Capacity). The vessel was originally expected to be delivered to SB during the third quarter of 2012, but in any case not later than December 31st, 2012. During the most recent earnings conference call, the company's CEO Mr. Polys Hajioannou disclosed that the yard was facing significant construction delays and would not be in position to meet the delivery deadline. Mr. Polys Hajioannou also briefly discussed the options available to the company stemming from the yard's inability to meet its contractual obligations.

I believe that SB has a huge bargaining chip on its side that could greatly improve its current financial position. The contracted price for the new-building vessel was $53 million. In today's market environment, the resale price of a Cape-size new-building vessel is approximately $41 million.

In this article I will analyze the three options available to the company and their financial effects from the pending cancellation of the new-building contract.

Option No 1: Accept Late Delivery on Original Terms

SB could in theory accept late delivery of the vessel without renegotiating the original payment terms. Given the above price difference of approximately $12 million, I do not believe that this option makes any sense for SB and is very unlikely.

Option No 2: Accept Late Delivery on Renegotiated Terms

On face value, this option may have a financial appeal (potential to save the company $12 million or more in delivery cost), but it may not be the optimal solution. The vessel has no fixed employment at the moment. The spot freight market for Cape-size vessels is currently at historically low levels. It is also more difficult to trade a Cape-size vessel in the spot market, an opaque market compared to Panamax vessels that is controlled by a few industrial players and commodity-trading houses.

Option No 3. Cancel New-Building Contract

Now this option is worth looking at very closely. SB has already advanced $31.8 million to the yard as pre-construction payments. Such installment deposits are typically covered by refund guarantees issued by first-class import-export agencies or banking institutions. If SB were to cancel the contract, as it has the right to do so, it would be reasonably expected to collect the full advance payment plus interest. The benefit to the company would be significant. Instead of having to pay an additional $21.2 million out of current cash reserves, it would instead boost its cash reserves by $31.8 million plus interest.

The refund guarantee alone would be sufficient to cover the current portion of long-term debt as of September 30th, 2012, that stood at approximately $23.8 million.

The company could deploy the extra cash to pay down debt and ensure continuous compliance with all debt covenants. Alternatively, SB could add to its opportunistic acquisitions of second-hand Panamax vessels.

As I have explained in my recent article, Safe Bulkers has been plagued by uncertainty regarding its fixed-rate contracts, and has seen its stock price plummeting to near all-time low levels. The cancellation of the new-building vessel may provide the necessary spark to improve its near-term price performance.

Disclosure: I am long SB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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