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No. of Recommendations: 6
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.

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:

Genco Q2 2021 release:
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