This website presents my analysis of macro economics trends and individual companies.

Saturday, July 30, 2011

Paragon Shipping (PRGN) & Baltic Trading (BALT)

Due to the slowing economy, overbuilding of dry-bulk ships and consequently a low Baltic Dry index, the dry bulk shipping company's share prices are down considerably.  From a liquidation-value point-of-view, there are two companies I have identified as being quality value-opportunities.  Since most of a dry-bulk shipping company's assets are its PPE (property plant equipment) one needs to start by getting resale values for the ship-fleet they have.  Luckily, one such source is available of recent dry-bulk ship sales as of Jan. 2011.  (UPDATE: A more up-to-date listing of recent dry bulk ship sales can be found in the Fearnley Weekly - Dry Bulk report)  Based on this I arrive at an approximate liquidation value for each of these companies.  What makes them attractive are their:

  1. Young dry-bulk ship fleet:  The younger the ship is the lower the operating costs are (due to less maintenance needed) and the higher the resale value is.
    1. Baltic Trading : Avg. age 1yr
    2. Paragon Shipping : Avg. age 7.7yrs
  2. Management teams are not doing terrible jobs.

Liquidation Valuations:

*Financial numbers as of Mar 2011 filing.

Share Prices

Debt Levels & Covenants
Special attention should be paid to the debt levels and attached covenants for each of these companies.  Once 2Q financials are release I will present such information.

Historical Look at Baltic Dry Index


The index is currently at historically low levels and as we can see it usually does not stay that low for more than a year.

The shipping industry is a difficult business that is notoriously cyclical and capital intensive.   Using a discount to liquidation value, a downside protected investment entry point can offer an attractive investment opportunity as dry-bulk shipping condition revert to the mean.  The main point of interest though is picking investment candidate with the low chance of going out of business but providing a margin of safety allowance in the event they do.

Thus far I have no position in either PRGN or BALT.

Update: (27-Aug-11)

Since their 2Q2011 financial release Paragon Shipping has paid down a portion of its debt bringing their debt / asset ratio down to 34% from 39% in Dec-10.  Their liquidity position is $45m cash, $28m in Box Ship shares (3.44m shares of TEU) against $42m in current liabilities.  Yet, the share prices has continued to deteriorate.  When the PRGN share price is normalized to the Baltic Dry Index one can see just how see the degree it is undervalued by.

The updated liquidation value breakdown is as follows: 

Here I have been even more conservative than before and taken an additional 33% discount to the liquidation ship-value in order to bring the valuations down to the comparable low levels seen in Jan-2009. 

Below is a historical look at the resale price for 10yr old Panamax ships which can be used to put in perspective what the additional valuation downside can be.


The 2Q2011 Avg. Daily Vessel Revenue was $25k but will continue to fall as 6 charters will reset between now and June 2012.  If all these were to reset to $10k the avg. Daily Vessel Revenue would fall to $15.4k as is calculated here:
In such a scenario the revenue would cover operating expense and interest expense but be insufficient to amortize the loans outstanding at the prescribed repayment schedule.  The short-fall would amount to $9m annually.  However, with approximately $58m in TEU shares & Box loan, they could conceivably fund this short-fall through the downturn.

In addition, the loan covenant debt / EBITDA < 5 or 6 is initially violated at the daily-revenue thresholds of approximately $21k and $19k, respectively.  In the above scenario, with daily-revenue of $15.4k, this covenant would need to be renegotiated.  The EBITDA / Interest Expense > 2.5 covenant would be violated if daily-revenue falls below approximately $14k.

Before year-end Paragon Shipping will take delivery of two Handysize vessels which will require a payment of approximately $40m on-top-of the cash advance they already made of approximately $20m.  They expect to pay the $40m using their credit-line. 
Source: 20-F

The market supply of drybulk carriers has been increasing, and the number of drybulk carriers on order is near historic highs. These newbuildings were delivered in significant numbers starting at the beginning of 2006 and continued to be delivered in significant numbers through 2010. As of January 2011, newbuilding orders had been placed for an aggregate of more than 49% of the current global drybulk fleet, with deliveries expected during the next four years. (SOURCE: 2010 20-F)

To put this into context, if the age of drybulk carrier's age were evenly distributed and they are scrapped at 25yrs than four years should have a 16% (4 * 1/25) newbuild order-book.  One or some combination of these three things must happen:
  1. Volume of dry-bulk shipping increases.  This is unlikely considering the state the world finds itself in.
  2. Many of these newbuilds will be cancelled.
  3. Scrapping will increase.
Terms of Paragon Shipping Loan to Box Ship (TEU)
 Unsecured Credit Facility with Paragon Shipping
Upon the completion of this offering, we will enter into an unsecured credit facility with Paragon Shipping of up to $30.0 million, of which we will draw down $26.1 million to partially fund the acquisition of our Initial Fleet and expect to draw most or all of the remaining borrowing capacity under this facility to meet the minimum liquidity of $8.0 million required under our Credit Facilities as of June 30, 2011. This facility will bear interest at LIBOR plus 4.0% and amounts drawn will be repayable in full by the second anniversary of the closing of this offering.

Update: (14-Sep-11)

Since the last update the Baltic Dry Index has gone up off its lows yet PRGN is still drifting lower.  This has sent the PRGN / BDI ratio to a 3yr low.  It seems the problems in Greece are weighing on the Greek shipping companies.  However, this goes against the fundamentals because these international shipping companies do not have counter-parties in Greece.

Still No position to disclose.

Update: (12-Feb-12)
Due to the continued deterioration of Paragon's fundamentals and the reduction in their margin of safety, particularly related to cash-flow and debt covenant issues, my interest in PRGN has waned.  However, my interest in the beaten-up shipping sector still exists as I continue to follow other shippers, such as Euroseas, with stronger balance sheets and able to take advantage of the downswing in the cycle to purchase ships at these low prices. 

Below is a long-term shipping index chart showing just how volatile the industry can be.
Source: Maritime Economics, 3rd edition, 2009

No comments:

Post a Comment

About Me

Los Angeles, California, United States
Chris Rutherglen is a scientist and engineer by profession and pursues financial & investment analysis on the side. In 2011, he completed lever 3 of the CFA program.