The bad news just keeps pouring in for dry bulk owners, whether it is vessel arrests, dividend cuts or further sell-offs by weary investors.
And with some public dry bulk owners now trading near $1 per share or below in New York, even the buy-side investment analysts appear worn down by the market trough that seemingly will not end.
They are not exactly rushing to slap a “buy” rating on the stocks as being undervalued even at today’s seemingly bargain-bin levels.
Meanwhile, both lenders and bankers are girding for what could be a tougher fight on covenants than in the last dry bulk collapse of 2008/2009.
Analyst notes in the past week reflect the grim realities.
“We would not recommend that anyone attempt to catch the falling knife in the current environment,” wrote Evercore ISI analyst Jonathan Chappell in a note to clients last week.
Reflecting on a week when dry bulk equity prices plunged an average of 22%, fellow New York analyst Omar Nokta of Clarksons Platou Securities also warned investors not to place many bets on shares that are trading at a deep discount to net asset values (NAVs).
While the stocks may appear cheap at an average 74% of NAV, the measure is misleading in the current environment, Nokta says. Better to take a look at the ratio of enterprise value (market capitalisation plus net debt) to fair-market value of the fleet, which tells a different story.
On that measure, dry bulk owners are at 93% of fair market values — or about where they should be, even at today’s anaemic share prices.
Nokta explained his reasoning in an interview with TradeWinds this week.
“The stocks look cheap on the basis of price to NAV but you have to ask yourself, ‘what are we missing?’” Nokta said.
“Enterprise value takes a look at both sides of the balance sheet. You combine market capitalisation with net debt, and compare it to the marked-to-market value of the fleet. It ought to just about match up, and with these stocks it does.”
This is because in the current slump, market capitalisation of owners is damaged quickly and becomes misleading in the price/NAV calculation. Bringing in net debt tells a fuller story — especially for companies that are likely to be looking for more concessions from their lenders.
And about those lender discussions — Deutsche Bank sent a chill through the market earlier this month when it arrested a bulker belonging to Maritime Equity Partners (MEP), the private outfit formerly headed by Peter Georgiopoulos and still backed by Oaktree Capital.
Private-equity ‘stare-down’
As sources told TradeWinds last week, the move reflected a shot across the bow by Deutsche Bank after what was described as a long “stare-down” with Oaktree, the largest private-equity investor in shipping. The bulker was released this week after an apparent resolution of the dispute.
It was likely a signal that banks will have limited patience with private-equity-backed companies that are unwilling to put up more equity to meet strained loan-covenant terms.
One shipping banker interviewed by TradeWinds this week said he was surprised by the MEP arrest but confirmed that banks are keeping close tabs on covenant issues.
“That’s a pretty bold move,” he said of the arrest.
“When it comes to covenants, there are two things that are on everyone’s radar. One is collateral-maintenance covenants. If the market keeps going the way it is, you’re going to see an industry-wide breach of collateral-maintenance covenants.
“The other issue is cash liquidity. Clearly cash is king at the end of the day and running out of it is a big fear for everyone. Both of those are areas where banks are going to hold their customers to account.”
Nokta sees banks watching minimum cash balance and interest-coverage covenants, the latter making sure that an owner’s earnings before interest, taxes, depreciation and amortisation (Ebitda) is sufficient to cover interest expense.
What makes this market trough worse than the downturn of 2008 and 2009, Nokta says, is that companies then had residual charter coverage at fairly strong rates. That is rarely the case today, he notes, with the exception of an owner like Diana Shipping and its 56% charter coverage in 2016 — but even that at less compelling rates.
“Companies will look to amend those covenants in exchange for payments of some kind,” Nokta said. “In the past, we’ve seen banks willing to amend in return for cash-flow sweeps or agreement that lenders get a large percentage of any new capital raised.”
Two veteran shipping executives tell TradeWinds that they feel banks are tightening the screws in this cycle.
“First, banks have learned that the minimum cash liquidity [requirement] is really important to maintain, as if all else fails, they have some cash which provides time,” said one senior manager.
“LTV [loan-to-value] covenants are like a break on a truck going downhill. If banks enforce this, they maintain ability to de-risk the total debt, as a company must either sell ships or raise equity. As new banking [capital] regulations come into force, I believe both these levers will be applied.”
Banks have learned hard lessons from the last dry bulk crash, he says.
“They have learned that waiving debt repayment, reducing cash covenants and turning a blind eye to LTV covenants results in sales of loans at a discount to the distressed guys,” he said. “Whereas, if, as we saw recently with Deutsche Bank, they stay firm early, they can themselves turn the tables on the private-equity guys.”
The second shipping executive says banks are still willing to listen if owners can show them the money. “You can still achieve great things with the lenders but you have to have money,” he said. “You have to be able to offer them something, and that can’t be an extra half-a-point fee. If you want to achieve a waiver, you can’t have nothing.”
The banker confirms that lenders indeed will be looking for something more than just extra fees.
“You can repay some of the loan early,” he said. “You can add some additional collateral. Sometimes you have ships or cash you can put in. Otherwise, outside capital has to come in.
“Banks are going to hold their customers to these covenants. There will be substantial pushback if they’re not met. Lenders are more concerned about the overall credit than to get fees to waive things. The first response will be to get additional collateral.”
