The 'Perfect Storm' Brewing In Dry Bulk Shipping

• Shares of Star Bulk Carriers Corp. SBLK, Scorpio Bulkers Inc. SALT and Diana Shipping Inc. DSX are down 81 percent, 42 percent and 22 percent, respectively, year-to-date.
• Deutsche Bank’s Amit Mehrotra downgraded the ratings on all three companies from Buy to Hold, while reducing the price target for Star Bulk from $3.00 to $1.00, for Diana Shipping from $10.50 to $4.00 and for Scorpio Bulkers from $3.00 to $1.00.
• Continued weakness in dry bulk rates is expected to result in asset sales by companies, and this in turn has negative implications for asset and equity values, Mehrotra mentioned.

Analyst Amit Mehrotra said that the expected improvement in dry bulk rates into the yearend has not materialized. He believes that a number of dry bulk companies are considering asset sales to raise liquidity, reduce their capital commitments and lower daily cash burn.

This glut “for sale” tonnage will have negative implications for assets and equity values. This may also result in dry bulk companies breaching the loan-to-value covenants, Mehrotra added.

A majority of publically listed dry bulk companies have taken painful measures, like filing Chapter 11, issuing equity at deep discounts or delaying new building deliveries. The analyst added, however, that the additional cushion will not be adequate if asset values decline further.

“The move to sell assets in unison can lead to a downward spiral, where the decline in values leads to an immediate need for additional equity to cure LTV breaches. Some are better positioned than others, but everyone is vulnerable,” Mehrotra pointed out.

Shares of Star Bulk, Scorpio Bulkers and Diana Shipping offer value on NAV basis, but the pressures on the industry over the next few months from liquidity and covenant standpoints may be too high to counter, the Deutsche Bank report stated.