While New York-listed Diana says itintends to pursue a wrongful termination case against Shagang Shipping of China, many believe theloss of such a lucrative fixture is going to take a toll on its bottom line inthe near term and fear damages will be tough to collect.
Equityanalysts who follow the Athens-based bulker operator, like Benjamin Nolan of USinvestment bank Stifel, are telling investors to be prepared to see a “substantialloss of cash flow” since the 177,700-dwt Houston(built 2009) was generating such a high return.
In anote to clients the Wall Street shipping researcher pointed out that the immediateimpact of the terminated contract “is material” since it is unlikely to find acharterer that will be willing to pay a premium of $55,000 per day in today’smarket.
“Withten months remaining under the duration of the contract and current one-yeartime charter rates of $18,000 per day, we estimate un-discounted lost cash flowof over $11m,” Nolan continued in a report that included reduced earningsforecasts.
SinceDiana ended the third quarter with a cash balance of $316m, however, theanalyst believes the company’s balance sheet will be able to absorb the loss withoutthreatening plans to pursue further fleet growth despite capital commitments of$108m through 2015.
“Webelieve any lost cash flow associated from the contract terminations, we stillunpleasant, should be immaterial to the financial health of Diana, which is inour opinion has easily the most robust balance sheet among the US-listed drybulk operators,” he explained.
Blame game
Wall Street veteran Justin Yagerman, an equityanalyst at Deutsche Bank, told his clients that he believes the “above marketnature” of the contract was “a key motivator” behind the termination eventhough Shagang pointed the finger at Diana.
“Given the young age ofthe vessel, the well-above-market nature of the contract and the strongreputation of Diana, we have a hard time believing this is not just about themoney for Shagang,” he said. “However, time and potentially courts will likelydecide this case.”
The first dispute between Diana andShagang over the Houston made TradeWinds headlines in December of 2011 when theowner launched a campaign to claw back approximately $4.8m in overdue charterhire. A resolution was ultimately reached butfew details ever became public.
At the time, many industry observersaccused the Chinese company of resorting to strong-arm tactics with the owners ofvessels it had chartered at the height of the market. Some, like Golden Ocean,agreed to slash rates to minimise the risk of losing contracts altogether.
More recently, Shagang capturedinternationalmedia attention when it arrested the 47,678-gt cruiseshipHenna (built 1986), which left 1,600 passengers stranded off South Korea fortwo days, inresponse to a $58m charter row with HNA Group.
Aftermath
According to Diana’s most recent annualreport, the operator took out a loan to partially finance the acquisition of theHouston back in 2009. At last check, the facility was secured by a firstpreferred ship mortgage on the same vessel.
The loan, which is backed by BremerLandesbank and matures in 2019, includes clauses that were designed to providethe lender with added protections in the event of a premature termination ofthe charter that was attached to the ship at the time of inception.
According to filings with the US Securities& Exchange Commission, the facility includes specific restrictions thatrelate to the appointment of a substitute charterer but it’s unclear if thesewill have a material impact on the terms of the loan or efforts to find a new fixture.
