Thursday, February 19, 2009

Guest Post - Zero Hedge: Some More Bad News for Dry Bulk Shippers

We've been focused on trades today; haven't had time to do any economic stories... busy day. Every so often I am thinking about adding a guest poster who blogs about similar topics to Fund My Mutual Fund so today we'll start with Zero Hedge with a look at Excel Maritime (EXM) - following up on our piece from last week [Feb 9: China and the Baltic Dry Index - What is Really Going On?]

The following guest post by Tyler Durden of Zero Hedge is a good representation of his thematic focus: the current economic and financial system has reached its limits and in order to return to any sort of progress a wholesale teardown of the system is required in order to allow a fresh start.

Zero Hedge: Some More Bad News for Dry Bulk Shippers

Excel Maritime came out with this bombshell earlier, claiming that two major charters have begun paying the company dayrates at half the agreed rate, and that Excel is seeking legal action. The Baltic Dry Index, which is a representation of blended spot and charter day rates for various bulk ships (Cape Size, Panamax, Handymax) has been easily the most volatile index in recent months, and a great representation of how investors can get the woodshed treatment when they lock in long-term prices when the underlying spot value can fluctuate by over 90%. This is exactly what has happened to charter customers of dry bulk shipping providers such as Excel, Genco and Eagle Bulk Shipping.

(Baltic Dry Index, aka roller coaster for masochists)

Where previously ore transporters would purchase day rates on charter instead of spot rate to establish a price ceiling (at a time when Day Rates were higher than $100,000/day for Cape Size tankers), now that spot day rates have dropped by over 80%, the charter customers find themselves overpaying by up to 100% relative to spot rates. And they are angry, kinda like renters in New York locked in with long term leases. If the Excel case is any indication, dry bulk companies that had been relying on charter rates to provide a downside price cushion, may now find themselves ensnared in lengthy and expensive litigation as more and more charters decide to simply pay whatever they feel. In the meantime, companies like Excel, which has $1.4 billion of debt to service, or Dry Ships, which has a staggering $3 billion of debt, are praying for decoupling and the skyrocketing of day rates, as their fleets currently operate at significantly cash flow negative levels.

As an aside, speaking of Dry Ships, the company's CEO is probably one of the most colorful executives (in a non-criminal sense) of any company today. After he sank his first company, he managed to grow Dry Ships from $10/share to $130, briefly entering the Forbes commodity billionaire club, and proceeded to ridicule all analysts and pundits who had previously made fun of his management skills at any and every possible venue, and provide ludicrous near-term profit projections. Ironically, with his stock at $4 again, a massively leveraged balance sheet, and bankruptcy staring him in the face, George has been somewhat quiet lately, proving his critics right once again.

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