In an exclusive interview with The Shipping Herald
, Star Bulk
President, CEO & Director, Spyros Capralos
discusses the company's competitive advantages and prospects in the current market. He also gives us insight on StarBulk's profitability in the first quarter of 2012, the company's strategy going forward as well as an analysis of the current weak freight market.
Q: Dry bulk shipping companies have suffered in recent years. What are the competitive advantages of Star Bulk over rival companies in the current market?
A: Shipping is a cyclical business and so, in the low part of the cycle, most companies suffer. This is nothing unexpected or out of the ordinary for this industry. Having this in mind, Star Bulk has always been implementing a conservative business model, which may not yield the maximum benefits on the top of the cycle, but protects the company in difficult times like this and ensures its longevity. Our conservative strategy was evident in all aspects of strategic forward planning.
First of all, we resisted high leverage levels. Our initial loans were not only balanced compared to the value of the vessels and the available financing at the time, but were also designed to be front-loaded, so that the revenues earned in the high part of the cycle were used to deleverage the company and prepare it for lower asset values. As a result, we are in a similar moderately leveraged position and compliant with our loan covenants, even though asset prices have dropped significantly.
We also resisted ordering vessels at the peak of the market. This has allowed us to preserve cash and to have a lower entry point. Additionally, practically all the acquisitions we have made so far have been accompanied with a long term charter, providing an employment that reflects the market conditions at the time of the acquisition. This was an essential precondition for the service of our front-loaded loans.
Finally, our conservative chartering strategy has rewarded us by protecting us from the recent low freight rates. Our capesize forward coverage currently stands at 92% for 2012, 73% for 2013 and 43% for 2014. Capesize hire rates have been underperforming other sizes for some months now, so we feel pleased to have secured our employment for this sector at very healthy rates. Indicatively I will mention that during the 1st quarter of 2012 our capesize vessels earned a gross daily average of above $20,000. Most of our spot exposure lies with the Supramax sector, which has been outperforming the capesize sector for the greatest part of the 2011 and almost all of 2012 year-to-date.
At this moment we have a cash position of over $40 million, while our overall balance sheet is considered one of the healthiest in the public dry bulk shipping industry. I believe that our forward charter coverage – especially in the volatile capesize sector – provides us with the revenue visibility we need to weather this period of low rates.
Q: Star Bulk was profitable in the 1Q2012. How do you expect the company to perform in the remainder of the year and what scope is there for further growth and stronger balance sheets?
A: There is no doubt that dry bulk shipping is going through a tough time. The low part of the cycle dictates low charter rates, which means lower revenues. While our revenues can be volatile, our expenses and our cash needs are more or less stable and visible going forward. Our profitability in the 1st quarter was affected positively by the claim settlement regarding the early termination of a charter on the Star Sigma. In order to make an estimation on Star Bulk’s future profitability, one has to make assumptions on the forward hire rates of our unfixed vessels. Indicatively, I will say that according to internal calculations we have a cash-flow breakeven charter hire level of about $13,000.
At this moment, even though our financial position is one of the strongest within the public dry bulk shipping industry, our cash position allows for limited fleet growth. We are always monitoring the market for opportunities that might arise, however we intend to continue our fleet growth and renewal plans without compromising our financial stability. I believe that Star Bulk has all the elements in place, not only to withstand the current weak freight market, but also to take advantages of acquisition opportunities in the future.
Q: Can you give us an overview of the Star Bulk chartering strategy in this difficult market?
A: We are in the fortunate position to have hedged most of our capesize vessels on a mid- to long-term basis at levels significantly above the current spot market rates. Our chartering strategy is mirrored on our current fleet employment table which speaks for itself and can be found on our website. What is more important though is the fact that we are continuing our cost optimization campaign, which we believe is vital for a company’s survival during times of reduced revenues. This is why, I believe we are currently well positioned to withstand this challenging freight market and take advantage of opportunities to grow and renew our fleet.
Q: Bank financing has become more expensive and banks are lending owners less. How is Star Bulk coping with financing and loan obligations?
A: Ever since the Lehman collapse, bank finance has been more difficult to find and more expensive. Fortunately Star Bulk is in a healthy financial condition and our lenders feel comfortable having us as their borrowers. Only a few months ago we successfully restructured two of our oldest loan facilities into a new one with favourable terms. The new facility has a longer duration and lower interest costs than we would be paying otherwise.
We are pleased to be enjoying our lenders confidence during such adverse market conditions – at times when it counts the most. It is important to mention that our compliance with our loan covenants and our overall financial health are significant elements which support our lenders’ trust.
We have already paid $24 million of the $40 million of our total principal repayment obligations for 2012. Going forward, our principal repayment obligations are reduced to $32 million in 2013, to $33 million in 2014 and to $28 million in 2015. In order to give you an idea on our front-loaded loan repayment schedule, I would like to mention that our principal repayment for 2010 stood at $68 million. I believe our relatively low cash flow breakeven level will enable us to service our loan obligations without problems.
Q: Are there alternative funding options that Star Bulk may contemplate taking in the near future?
A: Since the Company is listed in NASDAQ, our access to alternative funding is better and our variety of options is wider than those of private companies. The most common alternative funding options that have been chosen by public companies in the recent past are Follow-on offerings, Backstopped Rights’ Offerings, ATM Offerings, Preferred Convertible Equity Offerings, Bonds and Convertible Bonds. While some of the options above could be potentially available to private companies too, the fact that public companies have audited financials, organized procedures (like Sarbanes-Oxley) and a high degree of operational transparency in general makes investors feel more comfortable. Unfortunately, these days shipping is out of fashion in the investing community and most of the above options are very expensive.
In addition to these, there are two more alternative and perhaps indirect funding options that are available for shipping companies. Some shipyards are providing Seller’s Credit for their newbuildings, as a way to attract more orders. This is an indirect way to increase the leverage of the investment. Also there are private equity funds and hedge funds which have shown an increased interest in investing in shipping.
As you can understand, at Star Bulk, we have no intention of limiting our options. When we feel that the time is right, we will do whatever we think is best for the long-term interest of the company and our shareholders.
Q: Is the company exploring opportunities in the Dry Bulk marketplace currently?
A: In my view there are two kinds of opportunities at this stage: distressed assets and new generation vessels. Lately we have been seeing vessels that due to issues between owners, charterers and shipyard’s banks are being offered in the market at reduced prices. As you can understand, when someone is in a hurry to sell a vessel, they might not get the best possible price for it and therefore, the buyer of that distressed asset hopes that eventually he will benefit from the low purchase price. The other potential opportunity in the market today is new generation eco-type vessels that shipyards push for construction. These ships are designed to be fuel efficient and therefore much better performers from an economical point of view. The opportunity here is that while there is a natural floor set by the market around the daily running expenses level of the inefficient ships, the fuel savings of the eco-type vessel would effectively become additional income for both the owners and charterers, however let’s not forget the oversupply of vessels in the market.
Q: Should we expect acquisitions in the remainder of 2012?
A: Star Bulk is open to new deals and structures that will add value to the company. We are always looking for opportunities that may arise however we don’t intend to compromise our balance sheet’s strength. We are not in firm negotiations for any new acquisitions at this point, however I am not in a position to rule out anything. As you can understand, unless it is for the best interest of our shareholders, I am not in a position to disclose the Company’s future plans, as that could potentially weaken our negotiating position.
Q: What is your view of the current dry bulk rate slump? Considering current supply-demand when do you expect rates to recover?
A: In essence I believe that what we are seeing is the result of excessive ordering over the past years. So far, demand for dry bulk shipping, driven mainly by China, has been consistently underestimated and has usually surprized on the upside. However, the recent rate of newbuilding deliveries has been so massive, that it would be practically impossible for demand to follow at the same pace. Having said that, I have to point out, that demand prospects going forward continue to be promising. Chinese imports of iron ore and coal will continue growing at healthy levels, while India and other emerging economies will contribute as well to the demand growth, despite the crisis in Europe and the developed world. Along with vessel deliveries, vessel scrapping has also been at record high levels – especially during the last 18 months – and we expect more than 30 million DWT of dry bulk vessels to be scrapped in 2012. Scrapping is the most important and the most effective self-correcting mechanism within the shipping industry and it is bound to play an important role on the market’s recovery.
While the long term prospects for dry bulk shipping are positive, it is practically impossible to predict a timeframe as the market balance depends on many factors. Future orders and deliveries, shipbuilding capacity, scrapping, port congestion, slow-steaming, GDP growth in emerging and developed economies, cargo supply growth, port facilities expansions, availability of finance are only a few of the major factors in the equation. At the end of the day, each company has to put a weight on each factor, have a view on market developments and act accordingly. We expect 2012 and 2013 to be challenging years for the dry bulk business, especially for the capesize sector, and I believe this is mirrored in our chartering strategy.
Q: What is your view of Greece's on-going debt crisis and its effect on the Greek shipping industry?
A: Greece is in a difficult position, carrying a large amount of debt, despite the recent haircut, with big budget deficits and with a contracting economy. There is no doubt that the country needs to implement significant reforms in practically all sectors; especially – but not limited to – the public sector. I believe that what we are going through is a transitional period during which Greece is changing. Nevertheless, such great changes are hard to digest all at once, so we all need to have increased patience and persistence in order to achieve our goals and get the country back on the right track.
As for Greece’s effect on the Greek shipping industry, I do not believe there is much correlation. Shipping is an international business with the assets being the vessels, conducting business all around the world. We have offices in Greece and provide technical, operational and commercial management to our 15 vessel fleet. I do realize that there is a cloud of uncertainty surrounding the whole country right now, but I hope that we will continue operating in the shipping industry in the same professional and efficient way we have done up to now without the Greek State creating any obstacles.
Q: Finally, as President of the Hellenic Olympic Committee, how do you expect Greece to perform at the London 2012 Olympic Games, considering the financial crisis in Greece and its toll on the country's sporting world?
It is true that due to the financial problems of the country, the financial support by the State to sport has been reduced. Nonetheless, we have done our best to attract private sponsors to support our Olympic Team of elite athletes. Of course, in a contracting economy private companies are being affected too as they see their revenues shrink and many times sponsorships are not their first priority. We expect to have an Olympic Team exceeding 100 athletes and our goal is to get more than the 4 medals Greece won in Beijing in 2008. I believe that the success of the Greek athletes in London this summer will bring pride and self-confidence to the Greek people.
- Spyros Capralos is President, CEO & Director of Star Bulk.
About Star Bulk
Star Bulk is a global shipping company providing worldwide seaborne transportation solutions in the dry bulk sector. Star Bulk's vessels transport major bulks, which include iron ore, coal and grain and minor bulks such as bauxite, fertilizers and steel products. Star Bulk was incorporated in the Marshall Islands on December 13, 2006 and maintains executive offices in Athens, Greece. Its common stock trades on the Nasdaq Global Market under the symbol "SBLK". Currently, Star Bulk's fleet consists of fourteen dry bulk carriers, consisting of six Capesize vessels and eight Supramax vessels and a combined cargo carrying capacity of 1,475,005 deadweight tons and an average age of approximately 10 years.