Tuesday, November 11, 2008

Britannia Bulk: Perils of leverage, COA's and chartered in vessels

Britannia was one of a very few shipping IPO's this year. It had a rocky start from inception. The original purpose of the IPO was to refinance existing corporate debt. The initial issue did not go well and it has been a downwards trajectory every since. Presently it is caught in a potential liquidity bind with falling fleet utilization, falling charter rates in the spot market, and operating losses in the face of high leverage and ambitious fleet expansion plans. The company has a fleet of mainly older handy-sized bulk carriers and a fleet of five iced-class Panamax units on order for which it has leveraged up its balance sheet to finance.

Britannia specializes in the transport of coal in Europe, trading heavily in the Baltic where ice-classed units are important in the winter. Its employment portfolio is mainly COA's. In addition the company has significant time chartered in tonnage (45 units as opposed to owned fleet of 22 units as per its share prospectus) to service these COA's.

It is fundamentally a logistics operation that is a margin-based business on turnover. They appear to have made a bad timing decision to leverage up and expand the shipowning aspect so late in the game.

The company is exposed to margin compression (and even potential cash deficits) in its chartering business, where it needs to restructure its chartered-in fleet. It is overleveraged in its owned fleet in a falling market. Many of its units are advanced in age with vessel values severely impaired due the precipitous drop in the dry cargo freight rates. It will struggle to take delivery of the new units in the future.

With its shares currently trading at 25 cents to the dollar, Britannia is in a distress situation. If the employment portfolio has any value, it could be a take-over candidate in a merger deal for the contract book. Britannia is in a fight for survival.

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