Star Bulk Carriers Corporation (NASDAQ:SBLK) Q3 2014 Earnings Conference Call December 2, 2014 12:00 PM ET
Petros Pappas - CEO
Hamish Norton - President
Simos Spyrou - Co-CFO
Christos Begleris - Co-CFO
Doug Mavrinac - Jefferies
Jon Chappell - Evercore
Ben Nolan - Stifel
Sal Vitale - Sterne Agree
Noah Parquette - Canaccord
Thank you for standing by, ladies and gentlemen and welcome to the Star Bulk Carrier’s Conference Call on the Third Quarter 2014 Financial Results. We have with us Mr. Petros Pappas, Chief Executive Officer; Mr. Hamish Norton, President; Mr. Simos Spyrou and Mr. Christos Begleris, Co-Chief Financial Officers of the company. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I must advise you this conference is being recorded today Tuesday, December 02, 2014. We now pass the floor to one of your speakers today Mr. Petros Pappas. Please go ahead sir.
Thank you, operator. I am Petros Pappas, the Chief Executive Officer of Star Bulk Carriers, and I would like to welcome you to the Star Bulk Carriers conference call discussing third quarter and nine months of 2014 financial results.
Before we begin, I kindly ask you to take a moment to read the Safe Harbor statement on slide number two of our presentation. Ladies and gentlemen, it is with great pleasure to report profits in the first quarter following the two transformative transactions announced back in December. We do look to more profitable quarters in the future, but this is certainly a good start, in particular, for the third quarter of 2014, Star Bulk reported net revenues of 25 million, adjusted-EBITDA of $9.7 million, and net income of $200,000 or $0.03 per share. Going through our recent corporate events, on July 11, 2014, we successfully closed the merger with Oceanbulk, approved essentially by all shareholders of Star Bulk. As a result of this transaction, we have recognized a non-cash gain from bargain purchase of $12.3 million. Furthermore, we continued to take delivery of the 34 vessels acquired en bloc from Excel Maritime. As of today, we have taken delivery of 20 vessels, nine of which during the third quarter of 2014. We expect to complete the delivery process by the end of the year.
Total cash consideration paid as of today is $176 million, financed by $156 million debt and the remaining from cash on hand. We have drawn circa of $131 million from the Bridge loan facility provided by Oaktree and Angelo Gordon, while $24.75 million debt financing have been provided by DVB Bank. Having commissioned a major growth plan, we’ll have shifted our focus on securing financing for it. On November 07, 2014, we successfully completed the public offering of 2 million notes due in 2019, bearing fixed interest at the rate of 8% per annum raising $50 million in gross proceeds. This does demonstrate our access to various sources of capital.
In addition, we agreed to procure $30 million debt financing on 11 vessels acquired by Excel, which will further boost our liquidity position when drawn. We also secured a commitment of $157.3 million from two major lending institutions for ECA backed financing of eight Ultramax new buildings due for delivery in 2015. On the new building front, this quarter we have taken delivery of two Japanese build Capesize vessels, both with fuel efficient specifications. We clearly believe in the eco story and in the potential of these vessels, and we look forward to the delivery of the remaining 35 new building vessels over the next two years.
Total financing committed or nearly committed from June 30th to date of $694 million against 440 vessels. Finally, we have settled a back claim with STX Pan Ocean regarding a repudiated long-term charter of Star Borealis netting $8 million of cash compensation collected in full in October plus $1.4 million in bank compensation.
Our long-term goal remains to build a large, well capitalized dry bulk shipping company, while in the short term smooth execution of our growth plan and bridging of our new building funding gap remain top priorities.
Let me now pass the floor to our President, Hamish Norton who will drive you through a brief overview of our current fleet, and its lined up growth plan. Hamish, the floor is yours.
Thank you, Petros. Please turn to Slide number 4 for a brief review of the characteristics of our fleet following the two transformative transactions with Oceanbulk and Excel Maritime. This graph illustrates our pro forma fleet, which is diversified across all five segments. You can see how the acquired fleet from Excel Maritime complements our existing fleet in sizes in which we had a little exposure. We believe that this versatility and diversity will enable us to better service our customers’ needs commercially. We will be able to do business with a variety of charterers and handle all types of dry bulk cargos.
Furthermore, operating a large fleet allows us to provide scale to our dry bulk customers since they can charter many similar and sister vessels from us instead of the logistic issues of having to shop through various owners. Excluding the older 90s-built Panamaxes, the average age of the fully delivered fleet in August of 2016 when our last new buildings would have been delivered will be 6.5 years. It is worth mentioning that in terms of deadweight tonnage, over 60% of our fleet will be Capesize and Newcastlemax vessels with 39 such vessels in operation on a fully delivered basis. Newcastlemax vessels are slightly larger Capesize vessels, which are optimized for carrying iron ore. Our Newcastlemax vessels can carry 208,000 to 209,000 tons of cargo.
On slide number 5, you can see our contracted growth by number of ships and deadweight tons. In December 2014, when we expect to have taken delivery of all 34 vessels of the acquired fleet, Star Bulk will own 68 ships on the water up from the 52 currently and up from the 17 prior to the merger with Oceanbulk. By Q4 2015, when we will have taken delivery of the majority of our eco new building orders, we will own and operate 96 vessels followed by our full fleet of 103 ships by August of 2016. This expansion plan was well timed across the shipping cycles from both the short and the long term perspectives. Slide number 6, provides a more detailed view.
First of all, our new building orders were placed at one of the lowest points of the new building price cycle. Subsequently, we merged with Oceanbulk at an opportunistic time in July after high price levels of March had faded. We then agreed the acquisition of the Excel vessels in August taking advantage of even lower vessel prices at that time. Going forward, we continue to explore consolidation opportunities.
Let us now turn to Slide number 7 of the presentation. With an on-the-water fleet of approximately 6.8 million deadweight tons as of December 2014 and a total owned fleet of 11.9 million deadweight tons on a fully delivered basis, we’re by far the largest U.S. listed dry bulk company by deadweight.
I would like now to pass the floor to our Co-Chief Financial Officer, Christos Begleris to walk you through our third-quarter and nine-month financial statements.
Thank you Hamish. Let us now turn to Slide number 9 of the presentation for a preview of our third quarter 2014 financial highlights in comparison to last years. In the three months ended September 30, 2014, net revenues amounted to US$25.2 million versus $17 million during the same period of 2013. Net revenues represent our total revenues adjusted for non-cash items less voyage expenses. The reason we refer to our net revenues is because this figure nets out any difference in revenue recognition between voyage charter and time charters, and therefore it’s directly comparable to other periods. This increase is attributed to the increase of the average number of vessels to 31.5 in the third quarter of 2014 from 13 vessels in the third quarter of 2013.
Note that the majority of the revenues from the management of third party vessels was being generated from Oceanbulk’s vessels which as of July 11 became owned vessels and thus we will not be getting management fees going forward.
Adjusted EBITDA for the third quarter of 2014 was at $9.7 million, increased by 24% versus last year’s respective figure. Net income for the third quarter 2014 was $0.2 million or $0.03 per basic and diluted share versus $0.2 million net loss or $0.01 per basic and diluted share in the respective period of 2013. Excluding non-cash and one-off expenses related to the Star Bulk Oceanbulk merger, our adjusted net loss for the third quarter amounted to 2.2 million or $0.03 per basic and diluted share versus 2.3 million adjusted net income or $0.13 per basic and diluted share during the respective period of 2013. Our Time Charter Equivalent rate during this quarter was $11,159 per day compared to $14,652 per day last year. Our average daily operating expenses were $5,192 per day per vessel compared to $5,675 during the same period last year, representing a 8.5% reduction. This reduction is even bigger, if we exclude approximately 1.1 million or $376 per day of pre-joining and pre-delivery expenses related to the acquisition of Excel Vessels and the two new buildings delivered during that period.
Continuing with Slide number 10 of the presentation, and the preview for nine months 2014 financial highlights in comparison to last years, in the nine months ended September 30, 2014, net revenues amounted to $65.6 million 28% higher versus $61.4 million during the same period of 2013. This increase is attributed to the increase of the average number of vessels to 21.5 in the nine months of 2014 from 13.4 in the nine months of 2013. Adjusted EBITDA for the nine months ended September 30 was $27.1 million 8.5% higher than the $24.9 million versus last year’s respective figure. Net loss for the nine months ended September 30, 2014 was 3.7 million or $0.08 per basic and diluted share versus $1.8 million net income or $0.19 per basic and diluted share in the respective period of 2013.
Excluding non-cash and one-off expenses related to the Star Bulk Oceanbulk merger, our adjusted net loss for the third quarter amounted to $2.4 million or $0.05 per basic and diluted share versus $7.6 million or $0.82 per basic and diluted share during the respective period of 2013. Our TC equivalent rate during this nine month period was $12,813 per day compared to $14,414 per day last year. Our average OpEx were $5,302 per day per vessel compared to $5,622 per day per vessel during the same period last year, representing a 5.7% reduction. This reduction is even bigger, if we exclude 1.5 million or $256 per day of pre-joining and pre-delivery expenses related to the acquisition of Excel Vessels and the two new buildings delivered during that period.
Kindly turn now to Slide 11, for a review of our balance sheet as of September 30, 2014. This is the first consolidated balance sheet of Star Bulk and Oceanbulk following the merger of July 11, 2014. Total cash including restricted and pledged cash stood at $107 million. Other current assets stood at $47 million increased from $14.5 million in the previous quarter. Net fixed assets stood at $1 billion versus $377 million on June 30, 2014. Please note that this figure includes the 30 on the water vessels owned by Star Bulk and Oceanbulk prior to the merger to new building Capesize vessels delivered during the third quarter and 9 of the 34 vessels acquired from Excel Maritime during the same period i.e., 41 vessels in total.
Advantage for vessels stood at 392 million as of September 30, 2014 and were basically comprised of $290 million of cash paid for new building installments for our 35 new buildings, $25 million for the two vessels to be acquired from Heron Ventures and $10 million of capitalized borrowings and supervision costs. The figure also includes a figure that comes from the process for consolidation with Oceanbulk as for U.S. GAAP Provision for these combinations, which is a fair value adjustment of a 138 million recording in this account on top of the cash new building installment bid.
On the liability side, total debt as of September 30, 2014 stood at $576.25 million versus $253.9 million on June 30, 2014. The former figure includes $69.8 million of the bridge loan facilities provided by Oaktree and Angelo Gordon to take delivery of the 9 vessels from Excel Maritime, we took delivery during the third quarter of 2014. Total shareholders’ equity as of September 30, 2014 stood at 1 billion versus 264 million as of June 30, 2014.
Basically above all our net debt was at $470 million approximately implying a net debt-to-capitalization ratio of 30% we clearly feel comfortable with. And now I will pass the floor to my Co-Chief Financial Officer Simos Spyrou to continue with an update on our current debt our CapEx and overall leverage profile.
Thank you Christos. Let us now move to slide 12 to discuss the current status of our balance sheet and leverage profile. Currently, our total debt stands at $716.3 million and our total cash position $110.7 million consequently our net debt is $605.6 million. The above figures are inclusive of certain changes since September 30, 2014 such as the successful public offering of 50 million was of senior secured notes during 2019. The drove down of an additional $71.67 million from the bids loan provided by Oaktree and Angelo Gordon, the drove down of $24.75 million of debt financing provided by DVB in order to finance the acquisition of Christine. Going forward as you can see from the bottom graph our principally payment so far this year stand at $32 million while our remaining scheduled principally payments for 2014, 2015 and 2016 stand at $5.8 million, $70.8 million and $53.9 million respectively.
Moving to slide 13, this is a list of the certified new building vessels we are scheduled to take delivery by the second quarter of 2016 and starting to financing for each one of those. We have obtained committed financing for 24 out of the 35 of our new building vessels. We are in negotiations for the financing of nine new building vessels and we expect this negotiations to turn into committed financing in the next one or two months. There are only two vessels for which we have not commenced negotiations yet and for which we are targeting a total of 65 million of senior debt financing which is the equivalent figure we have obtained for sister ships of those vessels. Regarding the on the water vessels we have recently signed committed term suites with CIT for up to 30 million secured debts financing on 11 1990s build vessels being acquired from Excel Maritime.
Furthermore, we are in discussions to proactively refinance the 231 million bridge loan facility provided by Oaktree and Angelo Gordon and we have signed committed terms suits for 17 out of the 33 vessels securing the facility. In addition we are currently in preliminary discussions such to refinance certain of our balloon payments due in 2016 aiming to smooth out our cash flows during this year.
Overall we see strong demand from major lenders to finance our vessels and this is reflected in the terms offer to us. For example our cost of debt financing has been reduced by 50 basis points to 75 basis points as a direct result of the improving financing market as well as the increased size of the company following the merger with Oceanbulk.
Moving now to slide 14 you can see that our CapEx fund is mostly address. The total constructed cost of our 35 vessels or north stand at 1.5 billion. Our sights from new buildings as of today we have 12.5 million of cash to be paid to Excel Maritime for the delivery of the remaining vessels representing our equity portion of them.
We have also paid so far $244.6 million in the form of advance payments for the new building vessels, we have committed debt financing of $717.4 million while we are currently on the final stage of negotiating with lenders another $305 million of debt financing. Assuming 60% debt financing for the non-finance new building vessels on their contracted values as we said before, we estimate another $65 million of debt financing there. Subtracting the total debt financing of 1.04 billion from the remaining CapEx leaves a remaining equity CapEx figure of $186.2 million. Furthermore, the 11 1990s build vessels acquired from Excel Maritime have today an aggregate scrap value of 49 million which [definite] [ph] against the 30 million of the aforementioned CiT facility results in 19 million net scrap proceed from the potential sale of these vessels. We may be able to sell them for more but we are clearly taking a conservative side here. Adjusting for our cash on hand, expected cash inflow from refinancing and Angelo committed that a minimum liquidity requirements leaves an equity CapEx graph slightly north of a $102.7 million which is a figured as we feel comfortable give the size, the visibility and the shareholder base of this company. Just to clarify this amount is spread over a period of 1.5 years to 2 years, so we have some time ahead of us to select the best financing solution. Let me now pass the floor back to Petros to give you an update on the market.
Thank you, Simos. Let’s now turn to Slide 16 in order to summarize the dry bulk trade demand dynamics. Commodities and raw materials currently experienced substantial price corrections with oil, iron ore and thermal coal prices being reduced by 32%, 49% and 21% year-on-year respectively. The top right graph illustrates these exact points. It is clear to us that this weakness in commodity markets is mostly supplier related and not demand related. Commodity demand remains healthy, while substantial supply expansion has resulted in surpluses across various commodity markets. These low price levels and the related trade arbitrage clearly provides a great incentive for importing countries to continue to source commodities, carried through the international seaborne market.
Turning to China now, Chinese crude steel production growth has grown by 4% year-on-year, lower than last year's respective figure of almost 10%. At the same time Chinese steel exports are up 54% year-on-year which might not be a sign of weak domestic market as many analyst suspects, but may also be due to the trade arbitrage between Chinese and USA steel prices. Furthermore, given the fact that steel prices have fared better than iron ore and coking coal prices, Chinese steel mills production margins have increased substantially in certifying production expansion. As you can see from the bottom right graph, the cost produced one ton of crude steel in China used to be 73% of its selling price, while now it stands at only 54%.
The above situations to support the revival of Chinese crude steel production growth. Interestingly, Chinese iron ore imports have grown year-over-year by 13%, which may be explained by the substitution of domestic production by imports and inventory buildup. Aside from increases in the volume of iron ore imported to China, the source of imports and the average differences are also very important for ship owners. This year while the iron imports grew at 13% year-over-year this figure when translated to ton miles was lower at 9%. This has put a ceiling on Capesize rates and was mostly due to the substantially higher expansion of mining capacity and export volumes Australian iron ore may reduce vessels value from the Atlantic. We expect that in the next two years Valley will cover the lost ground as it ramps up its production given also its target essentially double itself to the Pacific market by 2018. As we had explained in the past this will increase ton miles approximately eight times of tons transported.
Moving on Slide 17, we will try to provide an update of the coal and grain trade. Chinese growth rate has contracted by 12% during 2014 due to the substantial increase in hydropower electricity production. In our view the effect of recently announced coal import restrictions was minimal while the signing of a fret rate agreement between Australia and China can be considered a very positive development going forward. In that respect that maybe little downside with regards to the Chinese coal imports. While I would like to note that hydropower production is volatile. The bottom-left graph highlights this last point exactly.
Turning to India now, Indian thermal coal imports are up 18% on a quarterly basis; this is due to thermal electricity production which as you can see from a top-right graph is increased 13.6% year-over-year. Going forward, thermal electricity output is projected to increase by more than 25% over the next three years, providing for a meaningful upside in Indian thermal coal imports. With regard to grain trades, this is expected to increase by 6% this year from the U.S. and Europe to Middle East and Far East, generating substantial ton miles as a consequence.
Let us now move to Slide 18 for an update on supply side. As you can see on the top right hand graph, deliveries in the period 2008-2012 compared of the scheduled or the book had an average annual fleet at the rate of around 30% West, the expected figure for 2015 was close to 40%. For the 10 months of 2014, 42 million deadweight of dry bulk vessels has been delivered we are still 75 million scheduled for the whole year, assuming the regular slowdown in the last two months of the year we would expect total deliveries for the year to be in the 249 million deadweight implying a slippage rate of approximately 35%.
The nominal order book presently stands at approximately 23% of the fleet. On the bottom right hand of the graph we also provided the order book for the remainder of 2014, ’15, ’16 and 2017 broken down in vessel classes. At this point in time we can safely say that order book for 2015 is closed, while for 2016 capacity is almost non-existent especially Japanese and Chinese first year yards, we see limited risk in orders being placed in second year and third year Chinese yards due to a current freight environment as well as scarcity for bank financing for such a low quality vessels. A positive sign is the recent slowdown of contracting which for the first nine months of 2014 was running approximately at 7% of fleet on the water, during September 2.8 million deadweight of dry bulk vessels where all dead vessels 14.5 million in January. Overall, we see slowing fleet growth across the three larger dry bulk vessel segments during 2014 while total freight growth currently stands at 5.8% versus 6.8% during the same period last year.
Let us now move to Slide 19 for a summary on key market trends going forward. According Clarksons, iron ore and coal expected to grow by 6.6% and 2.3% respectively in 2015. As outlined earlier, we are slightly more bullish on the iron ore ton mile side due to the expected increase in the Brazilian export share to China. Clarksons also expected the bauxite and nickel ore rate will assume positive growth, 2.8% and 11.3% in particular which if it materializes it will greatly support Kamsarmax, Panamax and Supramax vessels after the severe trade disruptions this year due to the Indonesian raw material export ban. The former is also based on the fact that Chinese bauxite inventories will be essentially depleted by the second half of 2015, especially if Chinese alumina production continues to grow at current rates of 19%.
Overall and according to the Clarksons forecast the dry bulk demand is expected to grow in by approximately 4% next year essentially in line with 2014. Given our more favorable view on iron ore dynamics this might be the lower point in the range of our expectations, especially ton-mile terms. On the supply side we believe that aside from the factors highlight in the previous slide we might see a further slowdown in fleet growth due to the application of environmental regulations such as the water balance system and consequent scrapping of all the vessels.
Having said that I will now pass the floor back to Hamish for an update on our Company.
Thank you Petros. Turning to Slide 21, we have an overview of our fleet employment and the portfolio of key charterers with whom we do regular business. As a result of our diverse fleet we serve almost every major charter around the globe including steel mills trading houses and multinational mining companies. From a commercial standpoint we’re currently exploring opportunities for direct and long term co-operations with major dry bulk consumers and producers which should provide us with steady flows of cargos and business.
As Petros outlined earlier our market outlook calls for more spot oriented vessel employment leased in the short to medium term. Currently, including the influx of d new fleet we have secured about 71% of the limited remaining available days in 2014, 9% of those days in 2015 and just 2% in 2016. Overall, as of today our total contracted revenue amounts to approximately $72.8 million.
On Slide 22, we present Star Bulk’s operating leverage after the acquisition of the 34 vessels Excel fleet which provides Star Bulk with significant earnings and cash flow upside in an improving market environment. On a fully delivered basis, we expect to have about 37,000 spot days in 2017 which would be after all of our new buildings have been delivered. As u can imagine each $1 swing in spot rates will have a material impact on our cash flow, for example a $1,000 per day increase in cape rates combined with the $400 per day increase in Panamax and Supramax rates would translate into an increase in EBITDA of approximately 23 million once the fleet is delivered.
Let’s now turn to Slide 23 for a presentation of our commercial performance. As you can see from the slide we consistently outperformed the Baltic Capesize Index and the Baltic Supramax Index on our Capesize and Supramax vessels respectively and this trend continued for this past quarter as well.
Turning to Slide 24, we will try to evaluate our operational performance over the last five years. As a general comment our cost cutting efforts in our operating and G&A expenses has played an important role in our financial and operating performance in this challenging market environment. This of course has been achieved without a compromise in our high quality and operational standards.
On the bottom left graph you can see the evolution of our average daily operating expenses, since 2009 our daily operating expenses have been reduced from $6,903 per day to $5,192 in the third quarter of 2014 which is a 25% cumulative reduction. This increase would have been higher if we exclude approximately $376 per day of pre-delivery expenses for our new buildings and acquired ships resulting in an average resulting OpEx per vessel of 4,816 per day.
It is also important to note that the reduction in average daily OpEx is even more important if we consider the average size of the fleet has been increasing over time. On the bottom right graph you can see the evolution of our average daily net cash G&A expenses per vessel versus personnel growth over the years. While we grow our personnel headcount to accommodate the managed fleet growth over the years, we’ve been lowering our core overhead cost per vessel. You can see this for the nine months of 2014, our average daily net cash G&A expenses per vessel has been essentially the same as 2013 levels. While at the same time, we’ve increased our onshore personnel by 43% for us to accommodate the 34 vessels already acquired and to be acquired from Excel. So basically once the transition is complete, we expect our daily G&A expenses per vessel and this is the transition with Excel and also the new building deliveries. We expect our daily G&A expenses per vessel to move below $1,000 per day per ship on a run-rate basis. This is one area where we clearly look to benefit from economies of scale and the projected cost synergies with our G&A expenses developing from over $1,400 per ship per day for a fleet of 17 vessels to below $1,000 per ship per day for a fleet of 103 vessels.
Moving forward, we expect that the expanded size of our operating -- we expect the expanded size of our operating fleet to make Star Bulk the lowest cost operator amongst our peer group. And now let me pass the floor back to Petros for his closing remarks.
Thank you, Hamish. Before we close this presentation and pass the floor back to you for any questions that you might have, let me walk you through a summary of our strategy going forward as presented on Slide 25.
On the chartering side, we will continue the spot employment of our fleet except in cases where we see opportunities to fix vessels for this and medium term charters. We want to be well positioned to capitalize on increases in demand for drybulk shipping in the second half 2015 onwards, when we believe that ship oil and raw materials will have kick started the world economy. We tend to employ our fleet in an active and sophisticated manner tailored to the fuel efficiency another specific attribute of its vessel. In particular, our eco new building vessels are ideal for employment on a voyage basis, while our older vessels maybe more appropriate for time charters. Once we see the market sentiment improving, we may start picking some of this vessel on longer term charters.
Furthermore, as we have already demonstrated, we will keep on monitoring the market for further acquisition opportunities aiming to further consolidate the industry. We intend to continue to opportunistically acquire high quality fleets at attractive prices as long as such transactions are accretive to our shareholders. We aim at maintaining a young average age for our fleet and may opportunistically dispose some of our older assets depending on the market conditions and their overall commercial prospects. We will also continue to improve the performance of our fleet through modifications and enhancements that increase efficiency.
The above will be facilitated by the combined 120 years of shipping industry experience that we have as a management team. Our relationship with charterers, shipyards, ship brokers, bankers, suppliers et cetera have developed across several shipping cycles and we believe they will give us a significant advantage.
On the operational side, we view that the new and large Star Bulk will serve as a highly efficient platform which will strive for the lowest operating expenses and corporate overhead amongst our peer group in the years to come. Investments like the one we’re making for our vessel performance monitoring department will help us have real-time feedback on various vessel parameters including consumption of fuel and lubricants in order to be as efficient as possible and minimize the daily operating cost of our fleet. At the same time, we plan to maintain a healthy balance sheet through the moderate use of leverage, while we strive to reduce cost of financing through our access to equity and debt capital markets.
Last but not least, we have a transparent corporate sector. As our Board of Directors is mostly comprised by representatives of institutional investors and the technical and commercial management are performed in in-house in context with the majority of our peers.
Overall, we believe Star Bulk has a good set of characteristics that place us among the most promising companies in the drybulk industry. And with the delivery of our new building vessels, we aim to become the lowest cost operator in the peer group.
Closing, I would like to thank our shareholders for their ongoing support and loyalty. And we assure them that we will continue our efforts to ensure the company’s long-term success and enhance the shareholder value. Without taking any more of your time, I will now pass the floor over to the operator. In case, you have any questions, we will be happy to answer them.
Thank you. We will now begin the question-and-answer session. [Operator Instructions] And your first question comes from the line of Doug Mavrinac from Jefferies. Please go ahead.
Good afternoon guys and thank you for your detailed commentary, again in particular your market outlook, I thought that was very good. My first question pertains to just something much shorter-term in nature and that is the current market conditions. When you look at Capesize spot charter rates as a gauge of what’s going on, now they have been extraordinarily volatile since really the beginning of August with the most recent volatility being to the downside over the last couple of weeks, so can you describe to us what’s happening most recently in the Capesize market that caused us to see the down draft, really, I guess since mid-November .
Hi Doug. Thank you for the question. What’s happening actually is that Vale has not exported in the open market any cargos for the last two and half weeks. I think this is the reason why this is happening for the time being. I don’t think this can continue for long, and I believe that in case Vale puts some more cargos in the market, we will see a potential upturn within December or even January.
Got and Petros following up on your commentary about the importance of the ton mile impact on Vale’s exports, as soon as those come back, we should expect to see the same impact that we saw in mid-October, would you agree with that?
Yes, I would agree with that. Brazil is very material in what is going to happen. And according to what we see coming out of Vale, they say that their production is increasing by about, I think, 50 million tons next year, so under normal circumstances we should be seeing longer distances going forward and that would help the market.
Yes for sure. And then on the topic of volatility itself, what does the fact that Capesize rates can go from 6000 a day to almost 30,000 in a short period of time. What does that tell you guys about the underlying supply-demand balance, i.e., vessel utilization levels, and in short, how close are we to being in a more sustainable charter rate environment, based on what you may be able infer from that underlying supply demand balance?
Well, to me, one can go from 6 to 13 and from 13 to 6, it means that we are very tightly balanced in a way, and I think actually charters and shippers also realize that, and I think actually in a way they try to manipulate the market. But the fact that the minute the five new cargos will come on Monday or Tuesday in the market, and the market goes from six to 26, I think that means that it is relatively finally balanced.
Got it, I would totally agree. And then just two final questions before turning it over, when we look at the sale and purchase market, what have you guys been seeing in terms of activity in the S&P market, and then also given the volatility in the spot market, how asset value has been trending?
Assets values actually since July and till end of November that we did our very recent calculation have gone down by like about on average 12%. We’ve seen values goes down more on second hand vessels and less on new building vessels.
And so, that could be an opportunity I guess given the outlook. And then just final question, you guys have a lot of things going on and you’ve been very busy in the corporate M&A front in recent months. Given that, what you list as your top two or three priorities as a management team, say over the next few months, you’ve got a lot of things going on. What do you as being most important between now and March?
Well, you mean commercially or in which sense?
It is the immigration of the fleet and whether as you are doing that if acquisition opportunities enters the discussion, does a share repurchase program enter in the discussion? I mean, as you are kind of balancing all of your priorities, what is important to you and then maybe what is second?
Well first of all, the first priority is kind of a defensive one like putting our housing order. Because you were still taking delivery of the Excel vessels, and we have new buildings to take delivery off, so that is one main thing, and we organize our company accordingly. So that’s one thing, that’s the defensive part. We’re also dealing with our funding up, which is important as well. Now on the commercial side, we don’t believe that we should stay stagnant. We think there is going to be opportunities coming up. We have people approaching us and one thing to potentially merge with us. We have opportunities we think that we might see, some perhaps even lower prices beginning of next year, especially due to the Yen going down and that might create some other opportunities, so we are looking at the market -- we have one eye in the market and we also one eye in our in house -- putting our housing order.
Our next comes from Jon Chappell from Evercore. Please go ahead.
Q - Jon Chappell
Thank you good afternoon guys. You just addressed I think the key to the whole story going forward which is the funding gap. Couple questions on that first of all what options are you looking at for the shortfall you obviously just called some 8% senior notes which -- is it horrible from an interest rate perspective are you thinking about pursuing other public debt issuances, equity how much leverage could you possibly take from the banks in addition to what you have already taken on and negotiated in the targeting?
A – Hamish Norton
So Jon its Hamish, Hamish Norton. Looking at several alternatives we continue to examine the bond markets for opportunities we look at equity and equity-linked markets for opportunities, and of course we do have some vessels that are probably non-core to our fleet that would be an opportunity to raise liquidity and frankly between those three massive sites I think we will be more than well covered.
And just as a follow-up to that, you mentioned the older vessels and you have that in the, I think Petros just mentioned that think that asset values may fall actually in the beginning next year mostly to do with the Indiana gas probably also some market sentiments, what’s the realistic timings on the potential sale of those older ships, number one and to just got any facility associated with them and then number two, what’s your expectations that asset value still make an amount.
Look, it’s very hard to predict it could be as soon it could be a little bit later but I point out that these older vessels are on our books for not much and they are unlikely to be the vessels that would fall in a following market to any great degree.
And then also just the last bar on the graph, the fully delivered minimum liquidity just wondering if you could provide your best case scenario for that number obviously with the fleet your size almost all spot exposed, there is a lot of leverage to rate. So if there is upside and obviously that minimum liquidity to be covered by operating cash flow and then some but that there is downside that gap can also potentially widen. So could you just give an idea of the base case that goes into that number?
We have in our bank covenants the minimum liquidity covenant of $500,000 per vessel so with the 103 vessels that 51.5 million and that’s basically what we are referring to. And just getting to your -- I realized I didn’t answer your question about bank lending, but we have been doing a pretty good job levering up our new buildings and second hand acquisitions. And I wouldn’t expect that we would be squeezing the banks for more senior secured debt, what we need to raise now is something that’s unsecured debt, equity, equity-linked or possible some vessel sales.
Okay, one last one, that’s on this topic. Can you just remind us of the lockups for Oaktree and insiders I guess Angelo Gordon, Monarch and the family both for the Oceanbulk transactions and itself, if there are any?
There were no lockups as such, but Oaktree and Monarch are affiliates of the company and have to sale pursuant to a registration statement. And there has been an effective lockup in Excel, simply because we are taking the ships one-by-one and we understand that there is an intension to make a couple of distributions of Star shares by Excel to its shareholders and those shares when they are distributed would be covered by our registration statement. Angelo Gordon is not an affiliate of the company and so could sale as they chose Oaktree even for its Excel shares still remains restricted by its status as an affiliate and so it would be covered by volume limitations unless its old pursuant or registration statement.
Thank you, our next question comes from the line of Ben Nolan from Stifel. Please go ahead.
Q – Ben Nolan
Thanks. Sort of circling back around to the funding gap, I think it was mentioned that there is sort of the net funding gap after vessel sales and other adjustments was a little over $100 million if I heard correctly, does that -- first of all does that include any operating cash flow assumptions in that $102.7 million number that was given?
It includes basically zero net operating cash flow after debt service.
Q – Ben Nolan
Okay. And then sort of on that basis what kind of timeframe should we think about that coming to or meeting to be results either in part or in whole?
Our new buildings deliver through August of 2016, so this is kind of a continuing obligation to make equity payments on the new buildings. So we have got some time but we did a baby bond issue recently, and that buys us a fair amount of time before we have to do anything else.
Q – Ben Nolan
Okay, that’s helpful. Well and sort of associated, I suppose with that and I know Hamish you outlined the number of alternatives, do you think that there would be any or there is any likelihood of sort of maybe some sort of a principle own or something from Oaktree or other affiliates should be capital markets not be available at the time that you may need the capital, is that at all an option or something that’s been considered?
It’s certainly not being considered. I think it’s unlikely that we would want something like that, but obviously Oaktree is a very large shareholder that will be a 57% shareholder roughly once all the Excel ships deliver and they are presumably going to want to make sure that their investment is protected, but we haven’t discussed anything like a bridge loan with them. And again I doubt that or anything like that is going to be required.
Q – Ben Nolan
I agree and just currently the markets are bit not sure so, but you never know I guess the -- in my opinion funding debt is relatively small and should be not too challenging to tell. But that in sort of gets to my next question, with respect to the bank finance both what’s already on the books and what you’re seeking to finalize. Are there asset value covenants in those loans that might, and if your asset prices fall further might limit the amount that you could all ultimately draw down on those facilities relative to sort of the stated amount?
This is Christos; effectively we have a corporate covenant of net debt-to-market value of the assets being at 70%, so we’re far off this covenant. Especially I think new buildings get delivered, the financing that we book for the new buildings are in the high 50s with a cap on 60% to the fair market value of the vessel at the time of delivery of the vessel. And therefore we would not expect under any potential reasonable scenario that we would reach the 70% threshold that we have on d corporate control [ph] level.
Q – Ben Nolan
So I suppose that the answer there is an outside charter really bad but you have so much clearance right now -- such that would create remote [ph] in your opinion that’s an affair analysis correct?
Thank you. Our next question comes from Sal Vitale from Sterne Agree. Please go ahead.
I just had a quick question, first on the utilization was in the high 70 third quarter. I assume that had to do with accepting delivery to the Excel vessels and redeploying them. And I guess the question is should that continue into 4Q and u get back to some kind of normalized mid-90s level, say in 1Q? How do I think about that?
This is Simos, this has nothing to do with the delivery of the Excel vessel, this is purely an accounting treatment and based on the U.S. GAAP, according to U.S. GAAP basically it’s distortion there the balanced leg of when you do a voyage trip the balanced leg of the voyage, you’re not basically allowed to book revenues up until the time that you sign the time charter agreement with the charter. So if you take the vessel from China to Brazil and basically you sign the time charter with the voyage charter with the charter in 20 or 30 days the first 20 or 30 days that you are ballasting basically you’re getting no revenues and are considered to be for the accounting according to the U.S. GAAP, so this is the region that we’re seeing this reduced utilization.
Just to clarify, this is because we have a lot of vessels on voyage charter; a company that uses short term time charters instead of voyage charters is not going to have this accounting issue. Basically the number of voyage charter that we had this quarter versus the same quarter last year were significantly higher.
And the next question is really on the funding GAAP and I apologize I don’t have the presentation in front of me. You mentioned several figures earlier the 102.7 million
in particular, just to clarify is that after -- does that reflect already some vessel sales in that? Or is that the before the effect of any vessel sales?
Yes, basically if you see it’s on Page 14. What we have assumed there is that the 11 90’s built Panamaxes which do not fit our profile are basically sold and what we have said is that, we are a bit conservative there and we’re considering for the funding GAAP calculations that these vessels are being sold for scrap. So there is a room that we might be getting something more there, but just for being conservative, we’re calculating this sale at a scrap value. And that’s why on the last column of this table this we have the minimum liquidity requirement 46 million is for our 92 vessels, so it’s 103 minus the 11 that will be sold.
Understood, so just following up on that, thank you for that clarification, I’m sorry go ahead.
Sorry. That’s a very conservative obviously estimate because, these vessels in these set of vessels you have vessels 97, 98, so assuming that these are sold for scrap is definitely extremely conservative even in the big market.
And then I guess just following up on that, thank you for the clarification, are there at number one, are there any other vessels that you would consider selling? And I guess maybe you can answer that question in the context of, if you addressing your funding gap you mentioned three options one being corporate debt, then asset sales and you mentioned equity, how do I think about where you’re leaning or what your preference is I guess and if I try to frame it this way perhaps accepting a slightly lower price and you’d like on selling a vessel versus having debt issue equity at this attractive price as you know your valuation is very low at this point, how do I think about that?
Look we will have to examine our alternatives and opportunities every day. I suspect that it’s more likely that you might see us selling other vessels if we see opportunities to buy better vessel then other vessels to fund our funding gap, but you know you never know.
And then just last thing on that on the vessel sales, you said that you’re assuming scrap value that’s what you’re assuming on that slide. If you assume say the most recently reported Clarksons prices which I don’t have in front of me, what would that do to the funding gap, we’ll take it down from 1027 to what?
It would definitely take it down, but I mean we don’t have Clarksons values in front of us, but I mean Clarksons value would be a good bit higher than scrap.
Thank you. Our next question comes from Noah Parquette from the Canaccord. Please go ahead.
Firstly, I just had -- going back to industry side, on the kind of the Indian coal situation. They’ve been running at critical stock pulse for a while now, I mean I guess what have you seen in terms of increase trade coal into India? And then looking forward, it seems like to Government is trying to restructure the coal monopoly there to hopefully increase production domestically, how do you see -- how you enjoy the success of that initiative and over what time frame do you expect that to occur?
Thank you, Noah. It’s going to take at least three years the Indian Government to manage to create the necessary infrastructure for even a percentage of their need, so this is not a short-term matter I would say, I look at it as something of the medium-term. In the meantime, they’re saying that in the next two years or three years, India will probably increase coal imports by about 25% and this will mostly benefit the smaller size vessels up to Kamsarmax we think and hopefully will create at some point some congestion as well.
And then continuing I guess we seen dramatic fall in oil prices and bunker fuel, I mean I know it’s complicated calculation, but have you seen any speeding up of vessels with rate through they’re probably not, but how does that how close to that are we?
I don’t think we’re close enough to that there’s two reasons why vessels will speed up, one is that fuel prices fall of course but the main thing is vessel will speed up if rates go up and rates have not gone up, they will need to -- the capes they will need to be above $20,000 at least for vessels to have to increase speed by about 0.25 knots or 0.5 knots. So we are not there yet. On the other hand, this is a micro-picture; on the macro-picture we believe that low oil and low material prices will have a beneficial effect worldwide in economies. And usually that comes with a lag of like six months. So we think that we’re going to see better demand going forward because of that also of course low material prices as you know and hands straight and they replace local production. So we see at lower raw material and low oil prices we see as a bonus to the market going forward.
Would you take out that for and say lower bunker fuel prices make shipping longer distances more feasible and the overall cost is lower.
Yes definitely especially you are very right especially from iron ore from Brazil to China and all types of grains from the Atlantic to the Pacific and the Middle East.
Okay and then just really quickly the non-cash stock compensation I think was just at 3 million this quarter. Was there anything one-time with deals ever been closed or is this kind of a regular number where we could expect going forward?
Sorry I think we may have not completely heard your questions.
Non-cash stock compensation I think it was just at 3 million so want to know if there is anything one time in that or what can we expect going forward.
Yes actually there is a portion associated with the transaction between the merger between Star Bulk and Oceanbulk there was a severance payment for the CEO who left after the merger and this was in one off.
So that’s a one-time expense.
Thank you and there are no further at this time. I would now like hand back for any closing comments.
As already said our aim is to run a low cost, transparent and efficient organization that is always in position to take advantage of opportunities and create value for its shareholders so we will try for that. Thank you again for joining us in this call and for your support and believe in our company.
Thank you very much. That does conclude our conference for today. Thank you for participating. You may now all disconnect.
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