In just two months and one week, Genco Shipping & Trading (NYSE:GNK) will be officially out of time and in default with its creditors, unless they show the struggling dry shipper some mercy. While others in the industry, such as DryShips (NASDAQ:DRYS), have been able to successfully stave off having their debt holders pull the plug, the clock is quickly ticking away while Genco remains silent.
The debt situation
According to Genco's SEC filings: "In the current drybulk rate environment, we anticipate it is probable that we will be unable to make required payments under our credit facilities commencing March 31, 2014 unless we obtain modifications to or waivers of the terms of these facilities."
That was filed on Nov. 8, 2013. So far in 2014, the spot rate environment has collapsed. Genco Shipping & Trading operates its ships almost exclusively based on the spot rate market which means its cash flow and gross profits per voyage have been in a tailspin so far this year. This is a terrible situation for Genco to be in while it hopes for leniency from its creditors.
Genco has been in discussions with its lenders for quite some time without even so much as a hint to the public that those discussions are going well. The company warns that failure to win waivers could mean that "some or all of the Company's indebtedness could be declared immediately due and payable, and alternative sources of financing would need to be sought on terms that may not be favorable to the Company." That's likely a fancy way of saying that either very ugly dilution or outright bankruptcy could wipe out its shareholders.
For the last few quarterly earnings reports and conference calls, Genco initially offered no information whatsoever on this situation until pressed during the question and answer sessions. During the last call, Genco did the usual tap dance around any questions at first, but Chairman Peter C. Georgiopoulos finally warned that lenders in the industry are "still conservative." This suggests, that at least as of November, one or more lenders were not showing encouraging signs of bending.
CFO John C. Wobensmith made comments that suggested he was blaming some of the banks themselves, stating that they had their own balance sheet issues. This implies that some of them may not be in strong enough financial shape themselves to afford being cooperative.
To make matters worse, due to the uncertainty surrounding Genco's near-term financial situation, the company is unable either to raise money via the equity route or buy additional ships that could potentially improve its ongoing cash flow.
DryShips gives hope?
The bullish case takes into account that DryShips' lenders were able to grant it some leniency, so perhaps the same could happen with Genco. Lenders don't tend to want to own complex assets such as dry ships if they can avoid it, especially if their clients are able to make some sort of substantial payments on a continuous basis. For DryShips, the lenders agreed to relax some of its financial covenants until the end of 2014. In DryShips most recent quarterly filing it stated: "Management expects that the lenders will not demand payment of the loans before their maturity, provided that the Company pays scheduled loan installments and accumulated or accrued interest as they fall due under the existing credit facilities. Management plans to settle the loan interest and scheduled loan repayments with cash expected to be generated from operations and from financing activities."
So far, though, there has been no indication that Genco will get similar aid. Also, DryShips has additional, substantial equity assets as backing, which is something that Genco doesn't have.
Foolish final thoughts
While it seems to be common sense that lenders won't kill a company that is making regular payments, stranger things have happened. Genco's current silence is far from encouraging, and the mere right to foreclosure by its lenders should be enough to give any Fool at least some pause. Remember that lenders are humans too and don't always make decisions in the most rational way. Keep a close eye on the filings and press releases for any informative hints about the debt situation.
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Nickey Friedman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.