Bulk in breach?

Four of five bulker owners under coverage by at JP Morgan securities could be in breach of loan covenants, an analyst said Thursday.

That scenario may be the case if asset values turn out to match up with recent bulk carrier sales, says Jonathan Chappell, who follows shipping stocks for the New York financial services firm.

He is not alone in the view. Another analyst came to the same conclusion in an interview with TradeWinds 7 November. (Click here for the story.)

All but Diana

Both analysts also said that the only company that appears in the clear is New York-listed Diana Shipping, which has far less debt than its rivals in the sector.

Chappell upgraded Diana to 'overweight' Thursday, but downgraded the stock Eagle Bulk Shipping to 'underweight' and Navios Maritime Partners to 'neutral.'

Are bulker owners in default?

"The good news is that the market now has some sense of what modern assets are worth in the current environment, despite continued reluctance from most brokers to label the recent sales as representative of the entire market," he wrote in a note to clients. "The bad news is that the asset sales were done at prices at least 50% below similar last-done deals."

"Even worse," he continued, "if these new values are indeed representative of current market values, then loan covenants will likely be breached by many public dry-bulk ship owners."

Earlier Thursday, Top Ships said it has breached the covenants of one loan and may be forced to sell ships if it breaches others. (Click here for the story.)

So far, leading brokers have not ventured to issue value assessments with so few sales to use as data points. But when they do, analysts and shipowners alike have rejected the prospect that banks would launch a string of ship foreclosures on US-listed companies if asset prices push owners into default.

Working together

Chappell says he expects banks to work with owners to take actions to resolve covenant breaches, and turn to taking over ships only if no agreement can be reached. Owners may have to cough up cash and pay down debt, accelerate amortisation or reduce dividends.

The analyst is recommending that investors stay on the sidelines for now, even though he says the recent sell-off in bulker stocks went farther than needed to factor in a decline in the dry-bulk market expected through 2009.

He says current stock prices may eventually be great buying opportunities for companies with the right cash flow and balance sheets.

"However, we still do not foresee a near-term material catalyst for the dry bulk shipping sector as sentiment and macro data points have continued to worsen over the last several weeks," Chappell said.

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