Finance Analysis at the Safe Bulkers and Diana Shipping Inc - Case Study Example

Shipping Finance Your name Name of Assignment 22nd January, 2017 Table of Contents Introduction 2 Questions-Part A 2 Business overview and Fleet profile 2 Diana Shipping Inc. 2  Safe Bulkers 3 Past financial performance and risks 3 QUESTIONS-PART B: 10 Indicative term sheet 11 Cash flow projection 12 Recommendation 13 References 14 Introduction A marine cargo refers to any good or produce that is transported by sea for commercial gain; it involves watercraft transportation of both passengers and cargo. A 2015 CIA World Factbook data put the world’s number of merchant ships at over 35000 or over 1,200 Gross Register Tons. A cargo ship’s complement comprises of four departments which are the engineering department, deck department, steward department, and the miscellaneous department. A typical watercraft can be categorized under one of the following several ship categories: reefer ship, container ship, bulk carrier ship, tanker ship, coastal trading ship, roll-on/roll-off ship, cable layer ship, ocean liner ship, ferry ship, cruise ship, barge, tugboat, dredger, or general cargo ship (Wijnols & Wergeland 2009). The safe Bulkers and Diana shipping Inc. are mainly tanker and container ships, bulk carrier ships, roll-on/roll-off ships, and barges. Questions-Part A Business overview and Fleet profile Diana Shipping Inc. The company serves global communities from various corners of the globe, and is rated as among biggest shipping company within the US. In the October of 2015, records shows that the corporate had active staff of over 2,000 people globally that administered 48 fleet on a routine basis (Diana Shipping Inc, 2017).). At begining of 2017, the company had 48 dry bulk vessels, the specific fleets are “14 Capesize, 4 Newcastlemax, 3 Post-Panamax,  23 Panamax and 4 Kamsarmax with a capcity of  approximately 5.7 million dwt with a weighted average age of 7.64 years” (Diana Shipping Inc, 2017). Moreover, additional orders for fleet are scheduled for delivery in 2017, in a plan to retire the old vessels. Because the present company has gone through multiple joint ventures.  Safe Bulkers The Safe Bulkers is a conglomerate of containerized-freight shipping company which is a subsidiary of the Safe Bulkers. It is the among largest shipping company (with over 37 ships and shipping capacity of approximately 3,339,800 dwt and presence at over 20 ports) with activities mainly in shipping, container constructions and ships, engineering, port management, and real estate development. The company’s main fleets are 3 Capesize, 14 Panamax, 8 Kamsarmax and 12 Post-Panamax with capacity of 3,339,800 dwt with average age of 8.23 years (Safe bulkers, 2017). The company also has several active memorandum of understanding with various manufacturers, which includes; “Vessel sold and leased back on a net daily bareboat charter rate of $6,500, for a period of 10 years, with a purchase obligation at the end of the 10th year and purchase options in favor of the Company” (Safe bulkers, 2017). Past financial performance and risks Past financial performance and risks (Balance Sheet, Income Statement, Cash Flow statement, Debt evolution, uses of debt etc) and market prospects Liquidity Ratios Liquidity ratios would be the best place to start in order to explain the problems to the owners of the company as they are a gauge of the ability of the company to pay their outstanding current debt obligations. These ratios will help in determining the firm’s ability to meet short term obligation. These ratios include current ratio and Quick Ratio; Current Ratio- This is the ratio between the current assets and current liabilities and shows the same indicator of performance as working capital. It is calculated as shown below; Safe bulkers 2015 2014 2013 Total Current Assets 243,162 135,892 173,185 Total Current Liabilities 105,726 27,329 57,304 Current Ratio 2.3:1 5:1 3:1 Diana shipping Inc 2015 2014 2013 Total Current Assets 215,013 238,234 251,868 Total Current Liabilities 58,889 98,092 62,752 Current Ratio 3.7:1 2.4:1 4:1 The two companies are doing well in terms of Current Ratio since they all have ratios above recommended rate of 2:1 for the three years. However, there is a huge swing the ratio of Safe Bulker especially in the year 2015. This indicates that the business is in a favorable position compared to industry standards for payments of its current debts. Quick Ratio- this ratio is more accurate measure of a firm’s ability to meet its current liabilities as it excludes stock. The Quick (or Acid Test) Ratio is a more effective indicator of liquidity as it only takes into account the most liquid assets and does not take into consideration current assets that are considered as less liquid including inventory and office supplies. Safe Bulkers 2015 2014 2013 Total Current Assets 243,162 135,892 173,185 Inventory 5,167 11,185 12,600 Total Current Liabilities 105,726 27,329 57,304 Quick Ratio 2.3:1 4.6:1 2.8:1 Diana shipping Inc. 2015 2014 2013 Total Current Assets 215,013 238,234 251,868 Inventory 6,251 7,313 5,959 Total Current Liabilities 58,889 98,092 62,752 Current Ratio 3.5:1 2.35:1 4:1 The ratios above indicate that Diana Shipping Inc. is doing better than Safe Bulkers. However, all the companies have ratios that shows that the companies are is able to meet its short-term financial obligations without going bankrupt since its current assets are more than its current liabilities. As such, the company would be a good investment option since its survival in terms of paying current obligations is secure. Solvency Ratios (or Leverage ratios) This is the other type of ratios that will show the riskiness of the company. This ratios are used to determine about the company’s financing methods, or the ability to meet the obligations. These ratios are indicator of the ability of a company to honor its interest payments and is calculated by dividing the Earnings before Interest and Taxes by the interest payment for the year. Interest coverage ratio This ratio is calculated as Where EBIT is Earnings Before Interest and Taxes and EBITDA is Earnings Before Interes,Taxes, Depreciation and Amortization Safe Bulkers 2015 2014 2013 Earnings Before Interest and Taxes (34,809) 25,244 91,594 Earnings Before Interest, Taxes, Depreciation and Amortization (32,016) 26,716 92,846 Interest 11,650 8,335 9,086 EBIT/Interest Ratio -3 3.0 10 EBITDA/Interest Ratio -2.7 3.2 10.2 Diana Shipping Inc. 2015 2014 2013 Earnings Before Interest and Taxes (47,177) (18,204) (8,653) Earnings Before Interest,Taxes, Depreciation and Amortization 29156 52,299 54,088 Interest 15,555 8,427 8,140 EBIT/Interest Ratio -3 -2.2 -1.1 EBITDA/Interest Ratio 1.9 6.2 6.9 The EBIT/Interest Ratio for Safe Bulkers is positive for 2013 and 2014 while in the year is 2015 is negative. This not comparable to Diana that has negatives for all the years which shows that the companies has an ability lesser than the industry to pay its interest. In meeting their obligations to the lenders, from whom the companies have borrowed funds, the companies are required to pay interest to the lender as also fixed charges. Dian Shipping Inc has an interest coverage ratio of 1.9, 6.2 and 6.9 times which makes the lender very secure in the knowledge that the company will be able to pay interest charges as and when they become due Total Net Debt / EBITDA This ratio measures the leverage, and shows how many years it would take for a company to pay back its debt. If a company has more cash than debt, the ratio can be negative and means that the company is underleveraged. It is calculated as Safe Bulkers 2015 2014 2013 Total debt 675,485 476,330 533,880 Minus Cash and cash equivalents 130,743 107,311 64,671 EBITDA (32,016) 26,716 92,846 Total Net Debt/EBITDA Ratio -17.0 13.8 5.1 Diana Shipping Inc. 2015 2014 2013 Total debt 618,599 504,896 448589 Minus Cash and cash equivalents 193,218 218,901 240,633 EBITDA 29156 52,299 54,088 Total Net Debt/EBITDA Ratio 14.58 5.5 3.8 Debt to Equity ratio The Debt to Equity ratio shows us the proportion of debt to shareholders funds and is an indicator of the riskiness of the business as well as the borrowing capacity. A high Debt to Equity ratio also means that the company is paying a sufficient amount of interest to pay for their loans. Safe Bulkers 2015 2014 2013 Total Liabilities 675,485 476,330 533,880 Total Debt 569,399 447,936 473,110 Equity 634,146 700,099 578,336 Total Liabilities/Equity 1.07 0.68 0.92 Total Debt/Equity 0.90 0.64 0.56 The analysis of the solvency position of the company indicates that the company is highly debt ridden with its total liabilities both short and long term exceeding its total equity. Although, the debt to equity ratio value has improved over the last three years but the condition is still severe. This could lead to major solvency issues and the company should strive to cut down its debt by paying off the principal amount earlier than its due period. A positive sign of the company’s ability to meet its interest obligations is reflected from times interest earned which clearly suggest that the company is able to generate ample earnings before interest from its operations to meet all interest requirements. Diana Shipping Inc. The Debt Ratio of Diana shipping is below 0.5 for three years as compared to more than 0.5 for safe Bulkers. In this the debt to equity of the company is increasing at a slow rate from 2013-2013 which shows the equity of the company is basically being financed through the 67% equity and 33% through the debt but when looking on to the Safe Bulkers it is slowly increasing from 2013-2015 in which it will be facing a higher risk especially when the interest rate is increasing in the market. SHARE PRICES AND FREIGHT RATES: THE RELATIONSHIP A review of Diana shipping Inc’s daily share prices from 13th of January, 2017, showed that the share prices have traversed a typical sinusoidal pattern. The share value opened at $18.40 and closed at $18.77. This closing price was maintained for every day till 20th of January, 2017. However, it was the $18.20 share value that served as the threshold for most trading days and retained its dominance till 20th of January, 2017; then share value appreciated to $0.37. The shares of Safe Bulkers value then appreciated slightly to $18.42 per share the day after that, but a further depreciation was recorded on 20th of January, as share value tumbled to $0.54 per share. The relationship between the share value and performance can be shown by observing the 2016 fiscal year. Shareholder value (maximization, optimization or model) refers to the conclusive measure of success of a company with regards to the enrichments and benefits the shareholders derive. Bender & Ruth (2008) highlighted a seven model driver of shareholder value that discussed ways by which shareholders optimization could be reached. These seven drivers are revenue, operating margin, cash tax rate, incremental capital expenditure, investment in working capital, cost of capital, and the competitive advantage period (Bender & Ruth 2008). These seven optimization models complement each other. Though it is necessary that a company for instance cut back on operating margin, it should not do so to the detriment of quality delivery so as not to lose in the competitive advantage period when name brand becomes important to clients. QUESTIONS-PART B: he prevailing market conditions, Diana’s credit profile, Assuming optimum capital structure and the debt ratio of Diana Shipping and prevailing market conditions optimum level/range of debt that the bank can provide for such vessel is 0.69 x12million = $8.28 million. The rest should be provided by the company. The aim should not be increasing the riskiness of the company. From the times interest earned ratio, the company can meet its fixed interest commitments. This implies Diana shipping Inc is in no danger of reneging on its fixed commitments. Diana shipping Inc carried a large portion of interest bearing debt, the times interest earned ratio might still look fine because of Diana shipping Inc healthy earnings level. This ratio is important in indicating whether accompany has sufficient cash to finance its debts. Thus higher interest coverage is desirable to interested investors. This ratio is however limited in that it does not guarantee that the cash flow from operating activities will increase and this is the main concern for the investor. Based on the ratios determined for debt ratio and times interest earned, the debt management of the company has been an area of concern. Increase in company’s borrowings has resulted in a significant increase debt ratio. On the other hand, times interest earned ratio indicates that the company’s ability to cover its interest expenses has reduced, as borrowing cost has climbed up. B) Level debt for Safe Bulker If the Safe Bulker was the borrower instead of Diana, the level of debt will reduce. Looking at the debt ratio of Safe Bulkers and prevailing market conditions optimum level/range of debt that the bank can provide for such vessel is 0.46 x12million = $5.52million. The company is riskier than Diana shipping The debt ratio is high for this company meaning that it’s risk (Rich, Jones, Mowen and Hansen, 2009). The debt to equity ratios demonstrates that the company does not have enough equity to cover for potential insolvency to cover its debt sufficiently. These two ratios suggest some degree of solvency risk given the relatively large amount of creditor financing in company`s capital structure. Indicative term sheet An indicative term sheet/offer letter mentioning the key terms and conditions of the envisaged financing (amount, tenor, repayment schedule, spread/margin, fees, security package, covenants, major clauses etc). Our Ref: XCRL123 Date: 22nd January, 2017. To: Diana shipping Inc. Dear Sirs CREDIT FACILITIES After evaluating your creditworthiness, we pleased to set out key terms and conditions for providing credit to you. LIMITS/QUANTUM Limit Maximum loan amount S$ 8,280,000 Terms Loan 5 years (Tenor : 5 years) spread/margin 6.00% LIBOR p.a 0.5% legal fees 0.2% Payment schedule PERIOD Amount Payment Interest Balance b/d 1 8,280,000 1,709,820 53,820 6,624,000 2 6,624,000 1,709,820 53,820 4,968,000 3 4,968,000 1,709,820 53,820 3,312,000 4 3,312,000 1,709,820 53,820 1,656,000 5 1,656,000 1,709,820 53,820 0 Cash flow projection The main predictions for the future about t the cash outflows is predicted through financial forecasts. When devising a financing plan, there are five considerations including the legal fees, cost of development of the product, promotional costs and cost for distribution. The legal fees include all the expenditure while acquiring loan which is important in gaining loan. 2017 2018 2019 2020 2021 balloon 3,900,000 Installments 780,000 780,000 780,000 780,000 780,000 Employment 3,850,000 3,850,000 4,200,000 4,200,000 4,200,000 pexes 2,160,000 2,160,000 2,160,000 2,160,000 2,160,000 LIBOR 39,000 39,000 39,000 39, 000 39,000 Interest 468,000 468,000 468,000 468,000 468,000 Cash outflow 7,297,000 7,297,000 7,647,000 7,647,000 11,547,000 Workings Vessel amount = 65% of 12million Employment 2017 and 2018- 350 x11000 = 3850,000 2019 onwards 350 x12000 = 4,200,000 opex 360 x 6000 = 2,160,000 Evaluation of the vessel’s cash flow position involves deriving value of free cash flow which indicates how much cash will be spent for meeting budget. The results presented in the above table suggest that although the vessel will is generate healthy positive net cash inflows from its operating activities its outflows will be very high. Upon examination of the values that constitute this figure it clearly indicate that the company is investing heavily in vessel. Cash flow statement analysis can be a good evaluative tool to judge the potency of a business to pay the monthly bills by explaining the sources and uses of cash and explaining the changes in cash balance. Since it is divided and organized into operational, investing and financing activities, the cash flow statements can help the internal managers as well as the investors with the data it provides. Recommendation Diana shipping Inc had an operating loss as shown in the case study and had outstanding long-term debt and combined with its decrease in revenues and margins, there is doubt that the company will be able to pay its interest and maturing principal debts in the near future. Because of this, the company is at high risk because its cash flows will have to be allocated for those principal and interest payments. Diana shipping Inc has several options to manage this debt including divestment of certain vessels of which they have plenty. Capital is the combination of debt and equity used to finance a company. In light of these, the company needs to have a low or medium debt equity ratio. Moreover, future financing should be short to medium term because it is currently sensitive to factors like market conditions and inability to meet its debt covenant requirements. References Bender, R & Ward, K 2008, Corporate Financial Strategy, Burlington, MA: Elsevier Butterworth-Heinemann. Diana Shipping Inc, 2017. Our Fleet. < http://www.dianashippinginc.com/#///our-fleet> Rich, J., Jones, P., Mowen, M., & Hansen, D., 2009. Cornerstones of financial accounting. Mason, Ohio: Cengage learning. Safe bulkers. 2017. Fleet Profile. Wijnolst, N. & Wergeland, T 2009, Shipping innovation, Amsterdam: IOS Press. Read More