Following Hanjin Shipping's Bankruptcy, Could This Container Shipping Company Be Next?

Following Hanjin Shipping's Bankruptcy, Could This Container Shipping Company Be Next? https://seekingalpha.com/article/4013800?source=ansh $DCIX

James Caitlin
Oct 21 2016, 09:55
About: DCIX
Summary

The container shipping market has gone from bad to worse.
Charter rates have dropped significantly and things are not projected to get better anytime soon.
Owners are scrambling to find employment for their vessels to cover OPEX and financing, but for some, employment cannot be found.
Note: This article was originally published October 18th on Value Investor's Edge, a Seeking Alpha subscription service.

Overview

Diana Containerships (NASDAQ:DCIX) is a small company with 13 boxships that range in size from about 3,400 teu to 6,500 teu. In these days of ultra large liners, which have significant cost advantages based on economies of scale and following the opening of the new locks for the Panama Canal able to accommodate up to 14,000 teu, the small sizes are not in high demand.

I began writing about the upcoming market turmoil facing the container shipping industry back on June 3rd of 2015. In my article entitled Another Oversupply Problem In Shipping Developing I noted that the orderbook for large vessels was a growing concern.

In my conclusion I wrote that "if you find yourself invested in one of the companies that utilizes containerships it would be wise to check in frequently to see how the orderbook is progressing which could have a major impact on rates going forward."

This was followed up with several other articles which continued to outline the increasingly bearish outlook for the segment.

In October of 2015 I released Container Shipping Market Macro Outlook which confirmed "we are seeing a growing lack of demand coupled with a capacity overhang which is contributing to declining rates and increasing idle containership capacity."

In January of this year we saw the Container Shipping Market Macro Outlook For 2016 which noted that "TEU availability hitting the water as a result of this increased carrying capacity is unprecedented."

Finally, in my latest installment entitled Dramatic Slowing Of Global Trade To Impact An Already Struggling Container Shipping Segment I reported: "With approximately 3.5 million TEU's on order and set to hit the water in the coming years, competition will only become more fierce."

I have said many times before that shipping companies do not exist in a vacuum. They are subject to the macro environment in which they operate. The degree of which depends on their charter structure. Spot or short term charters are subjected to cyclical nature of this industry far more than owners with long term time charters.

While Diana Containerships operates on time charters, they are short term and therefore impacted significantly by the market at large. In fact, out of US listed companies they have the most exposure to market mood swings, and this latest temper tantrum is a doozy.

One quick look at the chart since the release of the first article detailing my concerns tells the whole story.

Source: Ycharts

The approximately 85% decline is a direct result of these market headwinds, and I fear that things may get far worse before they get any better.

Currently

Many companies that operate in this segment have fairly long term charters with staggered expirations that will mitigate some of the damage. However, Diana Containerships isn't so lucky. They have seen or will see very shortly all of their charters expire during this highly depressed period.

Those that are sailing are doing so at rates which are less than desirable to say the least. But, some are not sailing at all. In fact, their latest employment bar chart tells a of a dire situation.

(click to enlarge)

Source: Diana Containerships

Here we can see most of the charter rates are well below what they listed as daily operating expenses of $6,893, in the latest 6-K. But at first glance we see some exceptional rates specifically for the YM Los Angeles at $21,000, the New Jersey at $21,000, the Pucon at $17,000, and finally the Pamina at $15,325.

But here's the catch, three of those rates aren't in existence any longer and the remaining one is set to expire on October 19th.

In the updated fleet bar chart shown above which was current as of October 11th, one has to look at the fine print to see what is really happening with these vessels.

The Pucon has been laid up in Malaysia since July 27th 2016. Apparently Diana Containerships feels that since it has not negotiated a new charter they can leave up the previous charter numbers with just an asterisk denoting that this isn't the actual situation.

It goes on. While not one of the high priced legacy charters the Great has been on lay-up in Malaysia since September 27th.

Finally, with little fanfare they laid up Pamina on October 10th followed by the New Jersey on October 11th, both in Malaysia. As noted above these were some of the high price legacy charters.

It is likely that these admissions by way of fine print were the catalyst for the 10% slide in stock price (at the time of writing) since October 11th.

These four lay-ups represent approximately 30% of their overall fleet.

But let's now recall that the Los Angeles, their last high priced legacy charter is set to expire this month. Could this vessel also be headed for lay-up?

The current macro conditions suggest that even if it is able to find employment it will be at a mere fraction of what the vessel once commanded.

Fleet Age

Let's also remember that the fleet, which averages close to ten years in age faces stiff competition from much younger vessels. In fact, this competition has led to an increasingly disturbing trend for Diana Containerships - the scrapping of vessels at a younger and younger age.

On Sept. 20, The Loadstar reported:

The 4,546 teu 2006-built Viktoria Wulff (ex-MSC Firenze) has become the youngest containership to be sold for scrap as Panamax owners cut their losses and abandon employment hopes in a hopelessly depressed market.

This news comes on the heels of another early demolition, which at the time set a record at 13 years of age.

On Sept. 8, The Loadstar reported:

The 2003-built 4,646 teu Seaspan Excellence (was sold for scrap) for a sum reported by vesselsvalue.com as $280 LDT [light displacement tonne, the measure used by scrap buyers], equating to a total demolition value of $5.96m.

The deal gives a useful snapshot of the container chartering market - Seaspan bought the vessel from MOL in March 2013 for $17.2m, only to be forced to sell it for scrap for $11.25m less than it paid for it just three and half years later, and at least a decade before the end of its operating lifetime.

Adding to this trend, on October 18th, just hours after this article was originally published on Value Investor's Edge, Splash 24/7 reported:

Belgium's Bocimar has turned bearish about prospects for panamax container vessels, becoming the latest owner to scrap (two-twin 4,800 teu) 12-year-old boxships.

The fact that all these ships are of the Panamax class is noteworthy. Operators are seeking to capitalize on the efficiency of larger box ships through the expanded Panama Canal which can accommodate vessels known as Post-Panamax.

While some of Diana Containerships' vessels are of the Post-Panamax class they are just barely large enough to be considered as such. Their largest ships, at around 6,500 teu, will find difficulty competing with newer vessels approximately 120% larger that can also navigate the new locks.

Finally, on October 17th, The Journal Of Commerce noted:

The value of second-hand Panamax container ships has plunged by as much as 45 percent in a month.

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Looking Ahead

Six more charters are scheduled to expire before the year is out. This is not the time you want to be negotiating charter rates for older vessels of a smaller class. Even if employment is found they will be lucky to cover operating expenses, which does not include financing costs.

In Q2, they reported losses of $8 million. Though Q3 still benefited from the charters of the New Jersey and the Los Angeles that will vanish in Q4. They will now be left to the mercy of this increasingly difficult market and the market is looking anything but merciful.

In the latest 6-K they reported only $18,790,000 of cash and equivalents. Following the recent debt amendments in September, which bought a little time, but "prohibits the incurrence of additional indebtedness" the repayment schedule is concerning. The table below shows the before and after for debt maturity in millions of US dollars.

2016 Remaining

20172018201920202021Total
Existing Loan7.215.415.415.415.467.8136.5
Amended Loan7.64.112.219.819.873136.5
Source: Diana Containerships

The macro outlook for the container shipping segment isn't going to correct anytime soon. It is woefully oversupplied and rates will remain depressed for quite a while as a result. Some analysts are projecting weakness through 2018 at the minimum.

Banks are increasingly leery of supporting shipping companies, institutions have been fleeing the space in droves, and prospects for dilution to raise capital seem very tough at these levels, especially given the bearish outlook.

Additionally, asset values have been dropping as buyers for second-hand tonnage are scarce. Let's not forget that Hanjin's vessels will already be crowding the second hand space further making it anything but a seller's market.

Conclusion

The writing has been on the wall for quite some time that troubles were ahead for those in the container shipping market. Diana Containerships is one of the victims of this recent market turmoil and it looks like the negative impacts are now being felt in a big way.

Mounting losses, dwindling cash reserves, an aging fleet which is less desirable for employment while dropping in value, an inability to incur additional debt, principal repayments over the duration of this downturn, and finally increasing lay-ups all could lead one to believe that as this macro environment worsens bankruptcy could become an increasingly likely possibility going forward.