Monday, February 16, 2009

EGLE: Expansion woes in a bear market

Eagle Bulk (EGLE) may continue to have good long term prospects, but it is clearly feeling the pain of its unfortunate timing decision to expand and leverage up at top of the market asset prices.

EGLE is now facing the consequences of its massive fleet expansion at the top of the dry bulk boom. It is suffering from reduced profitability and high debt. New charters appear to be ranging between $8,500 to $10,500 per day, which is reducing free cash flow and making it harder to service debt. General and administrative expenses have risen considerably on latest company estimates, impacting negatively on profitability.

Cantor Fitzgerald and DnB Nor Bank have recently downgraded the stock to 'sell'.

I have differed from other GLG analysts on EGLE, primarily out of my concerns over the consequences of their massive US$ 1.1 billion deal with Alba. This ambitious expansion prior to the substantial fall in rates is causing them a lot of grief. Order cancelations expose them to forfeiture of deposits and losses.

On a positive note, however, EGLE still appears to hold a significant part of a large financing facility and its financing needs appear covered in 2009 and 2010 for its order book. On the other hand, steel prices have fallen considerable and is likely to lower future replacement cost of new tonnage and impact negatively vessel values.

Of course, EGLE is not alone. Many of its peers are suffering from similar problems or worse.

The outlook ahead depends on the efficacy of various government 'stimulus' plans on the dry bulk market, particularly infrastructure projects.

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