Will Eagle cut dividends?

Eagle has an ambitious newbuilding program ahead in a weakening freight markets and tight credit conditions. It has maintained a generous dividend policy, which is conditional to meeting its debt covenants. It should look to strengthen its balance sheet in current market conditions and the brewing world-wide recession. It should consider seriously cutting dividends until market conditions improve.

Eagle is a well managed group that specializes in the handymax/ supramax sector of the dry bulk market. It has a modern fleet and favorable break-even levels compared to competitors.

This sector of the market has less rate volatility than the larger Panamax and Capesizes. The vessels carry a wider spectrum of cargoes. They serve emerging economies, where growth is likely to remain relatively high.

The tonnage supply situation is more balanced here. The age profile of the world fleet in this size is the highest in the dry bulk sector. There is better potential for scrapping, especially in poorer markets. There are also better prospects for newbuilding cancellations. Many smaller 'Greenfields' yards service this sector. These yard may not have the financial capacity to delivery. There is a higher probability of order cancellations than the larger vessels.

Eagle's latest earnings report (5 November 2008) was very positive. Profits increased 50% over the second quarter with a growing fleet. On the other hand, cash was down from US$ 153 mio to 33 mio due investing activities (newbuilding tonnage).

Eagle is carrying a considerable amount of debit (US$ 858 mio revolving credit facility). It has heavy newbuilding obligations (34 Supramax vessels which will be delivered between 2008 and 2012). This is more than double the current fleet of 21 units. It has a conservative employment policy with period time-charters, but this is prone to risks of charter rate renegation and even possible Charterer defaults in bad shipping markets.

For this reasons, my view is that Eagle would be best served to reduce or even cut entirely its dividends, using its free cash flow to support its asset investing activities, until market conditions improve.