Genco posts $110.7m net loss in the second quarter

Genco

Genco Shipping & Trading Limited reported its financial results for the three and six months ended June 30, 2016.

Second Quarter 2016 and Year-to-Date Highlights

Recorded a net loss attributable to Genco Shipping & Trading Limited of $110.7 million for the second quarter of 2016
Basic and diluted loss per share of $15.32
Basic and diluted loss of $40.4 million or $5.59 per share, excluding $70.3 million of non-cash impairment charges;
Entered into a commitment letter for a senior secured term loan facility in an aggregate principal amount of up to $400.0 million (the “$400 Million Credit Facility”), which has been extended through September 30, 2016
Designed to refinance all of our existing credit facilities with the exception of the $98 Million Credit Facility and the 2014 Term Loan Facilities;
Participating lenders have agreed to provide or extend waivers of certain financial covenants through September 30, 2016;
Effected a one-for-ten reverse stock split of Genco’s common stock as of July 7, 2016.

Financial Review: 2016 Second Quarter

The Company recorded a net loss attributable to Genco Shipping & Trading Limited for the second quarter of 2016 of $110.7 million, or $15.32 basic and diluted net loss per share. Comparatively, for the three months ended June 30, 2015, the Company recorded a net loss attributable to Genco Shipping & Trading Limited of $40.3 million, or $6.67 basic and diluted net loss per share. Basic and diluted net loss per share for both periods has been adjusted for the one-for-ten reverse stock split of Genco’s common stock effected on July 7, 2016.

John C. Wobensmith, President, commented, “During the second quarter, we continued to tailor our commercial strategy to be responsive to market conditions, while maintaining our long-term focus on achieving operational efficiencies. We also took important steps aimed at strengthening our balance sheet and enhancing Genco’s long-term prospects. We are pleased to have signed a commitment letter for a $400 million credit facility which is subject to certain conditions including the completion of a $125 million capital raise and intended to enable Genco to refinance most of its credit facilities on more favorable terms. Specifically, the proposed $400 million facility includes a repayment structure with no significant amortization payments for two and a half years, the elimination of collateral maintenance tests through the first half of 2018, and a reduction of the minimum liquidity requirement.”

The Company’s revenues decreased to $31.9 million for the three months ended June 30, 2016, compared to $34.6 million for the three months ended June 30, 2015. The decrease was primarily due to lower spot market rates achieved by the majority of the vessels in our fleet during the second quarter of 2016 versus the same period last year marginally offset by the increase in the size of our fleet following the delivery of two Ultramax newbuilding vessels.

The average daily time charter equivalent, or TCE, rates obtained by the Company’s fleet was $4,618 per day for the three months ended June 30, 2016 as compared to $5,065 for the three months ended June 30, 2015. The decrease in TCE was primarily due to lower spot rates achieved by the vessels in our fleet during the second quarter of 2016 versus the second quarter of 2015. During the second quarter of 2016, the Baltic Dry Index increased from the all-time lows registered during the first three months of the year. Freight rates during the quarter were primarily supported by heightened demand for iron ore cargoes due to augmented Chinese steel production, increased coal shipments to China as the country continues to reduce domestic coal output and a strong South American grain season. Furthermore, the global drybulk fleet has expanded at the slowest rate in nearly two decades despite the recent slowdown in scrapping from the record pace set earlier in the year.

Total operating expenses were $132.6 million for the three months ended June 30, 2016 compared to $80.8 million for the three months ended June 30, 2015. During the three months ended June 30, 2016, a $67.6 million impairment loss was recorded in order to adjust the value of nine of our vessels to their estimated net realizable value as of June 30, 2016 as the Company determined that the sale or scrapping of these vessels was more likely than not based on the terms of the commitment letter of the $400 Million Credit Facility. During the three months ended June 30, 2015, a loss on sale of vessels of $1.2 million was recognized relating to the sale of the Baltic Tiger and the Baltic Lion in April 2015. Vessel operating expenses declined to $28.5 million for the three months ended June 30, 2016 compared to $29.9 million for the three months ended June 30, 2015. This was primarily due to lower expenses related to maintenance as well as crewing and insurance partially offset by the increase in the size of our fleet. General, administrative and technical management expenses were $13.9 million for the second quarter of 2016 compared to $26.5 million for the second quarter of 2015, primarily due to a decrease in compensation and merger related expenses partially offset by costs related to financing or refinancing activities. Included in general, administrative and technical management expenses for the three months ended June 30, 2016 and the three months ended June 30, 2015, are non-cash compensation expenses of $5.4 million and $12.5 million, respectively, arising from awards under the 2015 Equity Incentive Plan and the 2014 Management Incentive Plan, or MIP. Depreciation and amortization expenses increased to $19.7 million for the three months ended June 30, 2016 from $19.4 million for the three months ended June 30, 2015, primarily due to the increase in the size of our fleet as well as an increase in drydocking amortization expense.

Daily vessel operating expenses, or DVOE, decreased to $4,511 per vessel per day for the second quarter of 2016 compared to $4,836 per vessel per day for the same quarter of 2015 predominantly due to lower expenses related to maintenance as well as crewing and insurance. We believe daily vessel operating expenses are best measured for comparative purposes over a 12‑month period in order to take into account all of the expenses that each vessel in our fleet will incur over a full year of operation. Based on estimates provided by our technical managers and management’s views, our DVOE budget for 2016 is $4,820 per vessel per day on a weighted average basis for the entire year.

Apostolos Zafolias, Chief Financial Officer, commented, “We appreciate the strong and on-going support of our bank group. Under the commitment letter we signed for the $400 million senior secured loan facility, we received temporary relief for certain cash flow measurement and collateral maintenance covenants. In addition, the proposed new facility would have more favorable financial covenants which we believe would better position Genco to operate in a challenging drybulk environment.”

Financial Review: First Half 2016

The Company recorded a net loss attributable to Genco Shipping & Trading Limited of $165.1 million or $22.87 basic and diluted net loss per share for the six months ended June 30, 2016. This compares to a net loss attributable to Genco Shipping & Trading Limited of $78.8 million or $13.03 basic and diluted net loss per share for the six months ended June 30, 2015. Basic and diluted net loss per share for both periods has been adjusted for the one-for-ten reverse stock split of Genco’s common stock effected on July 7, 2016. Revenues decreased to $52.8 million for the six months ended June 30, 2016 compared to $69.0 million for the six months ended June 30, 2015 due to lower spot market rates achieved by the majority of our vessels partially offset by the increase in the size of our fleet. TCE rates obtained by the Company decreased to $3,622 per day for the six months ended June 30, 2016 from $5,021 per day for the six months ended June 30, 2015, due to lower rates achieved by the majority of the vessels in our fleet. Total operating expenses, excluding non-cash vessel impairment charges totaling $69.3 million relating to the revaluation of ten vessels to their estimated net realizable value, were $131.3 million for the six months ended June 30, 2016. This compares to total operating expenses, excluding a non-cash vessel impairment charge of $35.4 million relating to the sale of the Baltic Tiger and the Baltic Lion in April 2015, of $153.6 million for the six months ended June 30, 2015. Daily vessel operating expenses per vessel were $4,542 versus $4,762 in the comparative periods due to lower expenses related to crewing and maintenance.

Liquidity and Capital Resources

Cash Flow

Net cash used in operating activities for the six months ended June 30, 2016 and 2015 was $41.2 million and $29.8 million, respectively. Included in the net loss attributable to Genco during the six months ended June 30, 2016 and 2015 are $72.0 million and $35.4 million of non-cash impairment charges, respectively. Excluding the aforementioned non-cash charges for the six months ended June 30, 2016 and 2015, the loss would be less by $2.5 million. Also included in the net loss during the six months ended June 30, 2016 and 2015 was $10.9 million and $24.8 million, respectively, of non-cash amortization of non-vested stock compensation due to the vesting of restricted shares and warrants issued under the MIP. Additionally, the fluctuation in accounts payable and accrued expenses decreased by $11.4 million due to the timing of payments. The above changes in operating activities were partially offset by a $2.3 million increase in the fluctuation in prepaid expenses and other current assets and a $2.1 million increase in the fluctuation in due from charterers due to the timing of payments. Additionally, there was a $6.2 million decrease in deferred drydocking costs incurred because there were fewer vessels that completed drydocking during the six months ended June 30, 2016 as compared to the same period during 2015.

Net cash provided by investing activities was $3.7 million during the six months ended June 30, 2016 as compared to net cash used in investing activities of $5.4 million during the six months ended June 30, 2015. The fluctuation is primarily due to a $24.3 million decrease in the purchase of vessels, including deposits. The decrease is primarily due to the completion of the purchase of the Baltic Wasp on January 2, 2015. Additionally, there were $1.9 million of net proceeds from the sale of the Genco Marine which was scrapped during the six months ended June 30, 2016. The decrease in the purchase of vessels, including deposits and proceeds from the sale for the Genco Marine were partially offset by a $19.6 million decrease in deposits of restricted cash, representing the amount of restricted cash that was held in an escrow account as of December 31, 2014 for the purchase of the Baltic Wasp, which was released to the shipyard upon the vessel delivery on January 2, 2015.

Net cash used in financing activities was $26.9 million during the six months ended June 30, 2016 as compared to net cash provided by financing activities of $13.5 million. Net cash used in financing activities for the six months ended June 30, 2016 consisted primarily of the following: $10.2 million repayment of debt under the $253 Million Term Loan Facility, $6.0 million repayment of debt under the $148 Million Credit Facility, $3.8 million repayment of debt under the $100 Million Term Loan Facility, $3.3 million repayment of debt under the 2015 Revolving Credit Facility, $1.4 million repayment of debt under $44 Million Term Loan Facility, $1.4 million repayment of debt under the 2014 Term Loan Facilities, $0.8 million repayment of debt under the $22 Million Term Loan Facility, and $0.1 million cash settlement paid to non-accredited 5.00% Convertible Senior Note holders. Net cash provided by financing activities for the six months ended June 30, 2015 consisted primarily of $115.0 million of proceeds from the $148 Million Credit Facility and $25.0 million of proceeds from 2015 Revolving Credit Facility partially offset by the following: $102.3 million repayment of debt under the 2010 Credit Facility, $10.2 million repayment of debt under the $253 Million Term Loan Facility, $3.8 million repayment of debt under the $100 Million Term Loan Facility, $2.4 million repayment of debt under the $148 Million Term Loan Facility, $1.4 million repayment of debt under the $44 Million Term Loan Facility, $0.8 million repayment of debt under the $22 Million Term Loan Facility, $0.7 million repayment of debt under the 2014 Term Loan Facilities, $0.7 million cash settlement paid to non-accredited 5.00% Convertible Senior Note holders, and $4.3 million payment of deferred financing costs.

Capital Expenditures

We make capital expenditures from time to time in connection with vessel acquisitions. Currently, our fleet consists of 13 Capesize, eight Panamax, four Ultramax, 21 Supramax, five Handymax and 18 Handysize vessels with an aggregate capacity of approximately 5,113,000 dwt.

In addition to acquisitions that we may undertake in future periods, we will incur additional capital expenditures due to special surveys and drydockings for our fleet. Two of our vessels were drydocked during the second quarter of 2016. We currently expect eight of our vessels to be drydocked during the remainder of 2016.

As previously announced, we have initiated a fuel efficiency upgrade program for certain of our vessels. We believe this program will generate considerable fuel savings going forward and increase the future earnings potential for these vessels. The upgrades have been successfully installed on 16 of our vessels, which completed their respective planned drydocking during 2014 and 2015. Currently, we do not expect to install fuel efficiency upgrades on any of the vessels scheduled to drydock in 2016.

Credit Facility Waivers/New Facility

As previously announced, the Company entered into agreements for waivers of the collateral maintenance covenants under its $253 Million Term Loan Facility, its $100 Million Credit Facility, and its $148 Million Credit Facility, which were extended by the commitment letter for the Company’s $400 Million Credit Facility, as amended. The $400 Million Credit Facility is intended to address the Company’s liquidity and covenant compliance issues and to refinance the Company’s $100 Million Term Loan Facility, $253 Million Term Loan Facility, $148 Million Credit Facility, $22 Million Term Loan Facility, $44 Million Term Loan Facility, and 2015 Revolving Credit Facility (the “Prior Facilities”). Under the amended commitment letter, collateral maintenance waivers have been implemented or extended for the Prior Facilities through September 30, 2016. Our credit facilities contain minimum cash covenants measured on a company-wide basis and on the basis of the number of vessels pledged by obligors under each such credit facility. The amended commitment letter also provides waivers of the Company’s minimum cash covenants under the Prior Facilities that are applicable on a company-wide basis, so long as cash and cash equivalents of the Company are at least $25 million, and of the Company’s maximum leverage ratio through September 30, 2016. Additionally, we have obtained collateral maintenance waivers under the 2014 Term Loan Facilities through September 30, 2016. Moreover, under the amended commitment letter, from August 31 through September 30, 2016, the amount of cash we would need to maintain under our minimum cash covenants applicable only to obligors in each facility to be refinanced under the Amended Commitment Letter would be reduced by up to $0.25 million per vessel, subject to an overall maximum cash withdrawal of $10.0 million to pay expenses and additional conditions.

As also previously announced, the Company entered into a commitment letter for certain amendments to its $98 Million Facility. This commitment letter provides for certain covenant relief through September 30, 2016. For such period, compliance with the company-wide minimum cash covenant has been waived so long as cash and cash equivalents of the Company are at least $25 million; compliance with the maximum leverage ratio has been waived; and the ratio required to be maintained under the Company’s collateral maintenance covenant will be 120% rather than 140%.

The foregoing waivers, amendments, and the $400 Million Credit Facility are subject to conditions that the Company must fulfill, including entry into a definitive purchase agreement or filing of a registration statement for an equity financing by August 15, 2016.

NYSE Compliance

Based on a notice the Company received from the New York Stock Exchange (the “NYSE”), we are once again in compliance with the NYSE’s continued listing requirement of a minimum average closing price of $1.00 per share over the previous 30 trading-day period. On February 23, 2016, we had been notified by the NYSE that we were not in compliance with such requirement.

Financial Statement Presentation

As previously announced, we completed our merger with Baltic Trading on July 17, 2015. Prior to the completion of the Genco and Baltic Trading merger, Genco consolidated Baltic Trading and the Baltic Trading common shares that Genco acquired in the merger were recognized as a noncontrolling interest in the consolidated financial statements of Genco. Under U.S. GAAP, changes in a parent’s ownership interest in a subsidiary that do not result in the parent losing control of the subsidiary are considered equity transactions (i.e. transactions with owners in their capacity as owners) with any difference between the amount by which the noncontrolling interest is adjusted and the fair value of the consideration paid attributed to the equity of the parent. Accordingly, upon completion of the merger, any difference between the fair value of the Genco common shares issued in exchange for Baltic Trading common shares was reflected as an adjustment to the equity in Genco. No gain or loss was reorganized in Genco’s consolidated statement of comprehensive income upon completion of the transaction.

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