Is Genco Shipping & Trading Limited Worth More Dead Than Alive?

The upcoming March 31 deadline for Genco Shipping & Trading (NYSE: GNK  ) to score waivers from its debt holders hangs over it like the sword of Damocles. Whenever you are considering the ultimate fate of a company struggling to survive such as Genco, one thing that you should ponder is if its creditors have an incentive to foreclose. Would Genco be worth more in liquidation? The answer may surprise you.

A new problem for Genco
Genco Shipping & Trading has 53 vessels in its fleet, with 42 of them generating revenue based on the daily spot rates. Nine out of the other 11 run at fixed-rated contracts that are near or below the average daily spot rates for the fleet. The problem is that these rates have recently had a dramatic plunge.

I'll spare you the math, but the average rate each of Genco's ships is getting is around $10,000 even per day as of the time of this writing. According to the company's third-quarter presentation, its out-of-pocket cash expenses are around $10,700 per day. This means that Genco is currently losing tens of thousands of dollars every day while it negotiates for mercy from its creditors. In order for its creditors to grant that mercy, they must take a risk and gamble on the chance that shipping rates will improve. At the current pace, Genco won't be able to afford to keep the lights on, never mind pay its creditors if rates don't go up.

In debt up to its eyeballs
As of Sept. 30, Genco was almost $1.9 billion in the hole to creditors (including various other liabilities). After you back out liquid assets, an illiquid investment, and its equity stake in Baltic Trading Limited (NYSE: BALT  ) , the company is still on the hook for around $1.7 billion. While Baltic Trading is cash rich following a serious of equity raises and has a number of analysts forecasting a profitable 2014, the 5.7 million shares Genco owns is a pittance compared to its debt unless the stock price of Baltic Trading rises multiple times. This leaves the value of its ships.

Possible liquidation
Many experts, analysts, and dry ship executives believe the current rate environment will get better; the lenders don't necessarily share that optimism. In the most recent conference call, when rates were much higher, Chairman Peter C. Georgiopoulos warned that lenders in the industry are "still conservative." CFO John C. Wobensmith added that banks have their own balance sheet issues that suggest that their ability to be lenient may be limited.

Now the question is whether the lenders could be made whole through liquidation. While I'm no expert at forecasting what each of 53 ships could fetch in a sale, we could probably make a decent best-case, optimistic estimate.

The average age of Genco's Capesizes is three to four years old. Capesize ships of that age generally sell for around $50 million each; Baltic Trading Limited recently acquired two Capesize ships that were one to two years old for $103.5 million. Using $50 million each would seem generous or a total of $450 million for its nine Capesizes.

the average age of Genco's eight Panamax ships is around 13 years. Navios Maritime Partners recently bought a seven-year-old Panamax ship for $17.8 million. Using this figure for Genco's eight yields a very optimistic $142.4 million.

Finally, Genco has 36 Supramax, Handymax, and Handysize ships. The average age of this group is around eight years. Very recently a Supramax vessel was sold for $20 million. Using this number for the entire group would yield $720 million.

Adding it all up
Based on all these optimistic figures, liquidation of the ships would yield just over $1.3 billion, leaving Genco around $400 million shy of paying off its liabilities. This is before any additional costs that would come with the unwinding of any company, including things like severance packages, legal fees, and the like. The question is: Would the creditors want to take a 24% or more hit on what they're owed by foreclosing and liquidating? Or would they rather take a chance, even if it's not a chance that they'd like to take and hope that things to improve (and that cash flows improve with them)? Or will the creditors just force Genco into bankruptcy, take over the company, and cut the little shareholders out?

There's even the possibility that the creditors enact a quasi–bankruptcy, by which they would be issued so many shares of Genco that the dilution devalues the common shares to almost nothing. Any way you slice it, holding on to the stock is extremely risky at best. There's enough risk with dry shipping stocks in general due to the nature of the industry. Fools should consider sitting this one out.

So, yes, Genco Shipping & Trading Limited is worth more dead than alive. With higher debt than its assets could realistically fetch, it's net worth is negative. 

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