There's no doubt the shipping industry is hitting choppy waters so far in 2016.
Dry-bulk-cargo transporter Paragon Shipping (PRGN), whose stock price has been plagued for the past two years, is the latest company to cause panicked investors to jump ship. Shares of the Greek shipper tanked 29% this week on news the company will be unable to make a $500 million payment on senior unsecured notes due February to creditors, which pays a hefty 8.375% interest annually.
And revenue over the past four reported quarters of about $38 million is down 24% from roughly $50 million in 2013, making it increasingly difficult for Paragon to service its roughly $157 million in debt.
One means of handling the distressed situation for Paragon is selling at least six of its core vessels to make good on an outstanding credit facily. The company also will be issuing a debt-for-equity stock in order to lift itself out of over-leveraged waters.
"The company has already announced an offer, as further amended and extended, to exchange all properly delivered and accepted unsecured notes for shares of Paragon's common stock by 5 p.m. E.S.T. on March 18, 2016," the company said in a statement with the SEC on Wednesday.
CFO Nikolas Arachovas pointed to the devaluation of the Chinese yuan and the cooling global economy for the company's weak third-quarter results in September, namely reduced orders among market participants. (The company's next update for investors is slated for Tuesday.)
"Although we are still far below historical averages, scrapping activity dropped suddenly from the alleviated level witnessed in the second quarter of 2015," Arachovas told analysts on the September call. "Most recently, the Chinese surprised the world by devaluing the currency, which has created a turbulence in the various financial markets, including the trading of commodities.This recent development is expected to support exports and hinder imports, especially commodities going forward and our view is that that the valuation will only have a marginal effect on the dry-bulk sectors, as China cannot produce enough commodities internally to meet its needs.
Now, it appears investors can take no comfort in a Chinese economy that has begun to show further cracks in 2016, especially among dismal reports on industrial growth.
The rising storm over the shipping landscape has been further clouded by the plunging Baltic Dry Index, a measure of raw shipping materials, as Real Money's Carleton English noted in a February report. The index hit a low in mid-February, down 76% from its August peak last year, but has climbed 30% since as of morning trading Tuesday.
"The time to construct a vessel can take more than two years, so the index tends to be more sensitive to changes in demand for goods, than changes in the supply of ships," English wrote. "That said, global fleets increased rapidly while China's GDP growth hit double digits."
Aside from Paragon, Navios Maritime Partners (NMM) appears to be in too deep with debt, as seen in a peek of into its fourth-quarter earnings February, which also revealed plans to suspend distribution. Navios shares are down about 91% over the past 12 months.
"Shipping companies funded the growth of their fleet with debt, which may now be unsustainable amid low shipping prices," English wrote in a separate February article. "Several shipping companies are already feeling the pain."