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No. of Recommendations: 5
My big three shipping positions currently are Navios Maritime Partners (NMM), Starbulk (SB) & Golden Ocean (GOGL). But more recently, another dry bulk shipper has caught my attention - Genco Shipping & Trading Ltd (GNK), and seems worthy of a little deeper dive. Genco Shipping has been around awhile (at least 17 years) and over the years have tried a couple of interesting endeavors. There was a joint venture involving some Cape vessels, an investment in a shipping rival (Jinhui Shipping), and the creation of a "more nimble" subsidiary, Baltic Trading. The latter was folded back in with the parent about 6 years ago.

What makes Genco Shipping a potentially interesting investment?
1. Reduced leverage: IMHO, currently at a good place, but GNK plan on reducing their debt further. When GNK reported Q2 2021 results debt was at $367M, early-mid Sept 2021 debt was at $350M, and by year-end the company have targeted $250M. For a company with 39 - 43 owned vessels, that's very good. Sure, the vessels range from a 2004-build to a 2017-build. But, it still means the debt per vessel average is less than $10M/vessel. And targeted to go down further.

2. More focused fleet -Own three types of vessels: Cape (major bulk), Supramax & Ultramax (minor bulk). An Ultramax is a vessel of 60K - 65K DWT, and a Supramax ranges from 48K - 60K. So, a larger Supramax is equivalent to a smaller-end Ultramax. Both types of vessels carry minor bulk - cement, fertilizer, steel, some agricultural products, etc. The Cape vessels handle iron ore and coal. That covers a majority of dry bulk types and also help Genco not worry too much about a vessel category squeeze.

3. New financing facility: In mid-2021, Genco simplified their financing and consolidated all their debt to one $450M facility consisting of a $150M loan, plus a $300M revolver. The facility has other nice features e.g. subject to documentation, there is an accordian-type expansion feature,and a vessel swap feature. The latter aspect is nice. Currently, Genco have 4-8 vessels unencumbered. If Genco are offered a nice deal for one of their vessels that is currently collateral under the loan, the company has the flexibility of swapping the vessel out with an unencumbered vessel.

Risks:
Three items of concern
1. Dry bulk market is roaring currently. But, the dry bulk shipping arena has always been volatile. Clear the congestion at a few of those ports, and will rates stay strong across all vessel categories? Not sure. However, GNK have hedged a little here and taken about 18 months coverage on each of 3 Ultramax vessels. At way above break-even rates too.

2. Aggressive target of 20%. Genco had $161M in cash balances at the end of Q2 2021. Mid-September 2021, it is down to $111M, and at the end of the year, the company expects to be down to $70M. First part I get. Genco paid around $53M in installments on three Ultramax vessels. Which means minimal debt added to Genco's books. The second part of cash consumption I don't quite get. In my mind, holding onto cash gives the company more flexibility. See #3.

3. Energy Efficiency Design Index (EEDI) is coming. In 2023, all shipping companies will be required to address Carbon emmissions. At this time, I think most shipping companies have pointed to slower sailing speeds as an answer. Will that meet the requirements in 99% of the cases? 90%? 75%? 50%? I don't know. But, for most ships, there will be some spending required. Genco have recently announced plans to explore Ammonia as a replacement fuel. Any additional costs to the vessel for such a switch? No idea.

I suppose, Genco management could argue that revolver availability of around $200M (if company is successful in trimming debt down to $250M by EOY) offers the company a good shield. That does provide Genco with near term options. I do think the company's pivot to the Ultramax category (Dec 2020 - 6 Ultramax, Feb 2022 - 15 Ultramax) is a blend of fleet replacement and better preparation for EEDI. In general, a newer vessel will require less spending to become EEDI compliant.

If calculated 6 months ago, I would have said the fleet value was about 5 - 10% too high. With the stronger spot and time-charter markets, I think there is probably some undervaluation on the fleet. Though GNK currents trades above NAV, I think the current market environment and the lower leverage affords the shares a higher multiple. My estimate is based on $425M full year revenue & 2.5X multiple.
I figure the shares have about 18-33% upside from here.

One other item. One has to dig deeper for this item. Genco enhance their fleet with charter-in vessels. It isn't discussed in investor presentations or even earnings slides. One finds the data in minutiae of the earnings release. On a full quarter basis (90 days), it is the equivalent of about 5 vessels, but it might be more vessels (chartered in for less than a quarter). In Q2 2021, only Supramax and Ultramax vessels were chartered-in. In general, this is typically a side bet. However, for the
charter-in company (GNK in this case), a chance to evaluate a vessel (possibly for a future purchase)

Recent Genco presentation:
http://s21.q4cdn.com/456963137/files/doc_presentations/2021/...

Genco Q2 2021 release:
http://investors.gencoshipping.com/investor-relations/press-...
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