Publicly traded dry bulk companies face risks of foreclosures and bankruptcies that are far worse than those faced at the peak of the crisis in 2008, Dahlman Rose has warned.
The investment bank is not projecting a "major improvement" in the dry bulk industry until 2014-2015. It also says ship values could again test the lows set two years ago.
Dahlman Rose managing director Omar Nokta said dry bulk balance sheets "were becoming a major concern again". He has issued downgrades on five dry bulk companies – FreeSeas, Genco Shipping & Trading, Eagle Bulk Shipping, Navios Maritime Holdings and Paragon Shipping.
Pressure on dry bulk balance sheets this time round is more severe and potentially more catastrophic, because in many cases the companies do not have future time charter coverage that kept them within some key covenants dring the trough of late 2008.
At that time, ship values collapsed to new lows, which meant companies were violating loan-to-value covenants. However, projected cash flow from time charters in place for a couple of years into the future prevented similar breaches on interest coverage and the ratio of earnings before interest, tax, depreciation and amortisation to interest.
Meanwhile, many covenant waivers granted two years ago are nearing their expiry dates. The absence of contract cover this year could lead to new waivers that "restrict growth and limit companies' ability to adapt to changing market conditions".
The fact that asset values could fall more adds to the tension. The last round of covenant waivers saw many lenders raise loan-to-value ratios to 100% or even higher. This meant the value of the loan outstanding could exceed the theoretical market value of the ships.
Three dry bulk companies – Genco, Excel Maritime and Eagle Bulk – currently carry loan-to-value ratios of 78%-87%, which is more than the assumed maximum of 77% contained in a typical loan agreement. As asset values drop in the coming quarters, several more listed companies would cross this rule-of-thumb threshold.
Current rates of $10,000 per day in the capesize sector were "unsustainable", and Dahlman Rose is forecasting a 2011 average of $20,000 per day. However, the bank is pessimistic on a mass rebound.
A glut of capesize of deliveries toward the end of 2010, Australian flooding, and Indian taxes on iron ore exports that affected panamax and supramax demand are three factors projected to keep rates soft.