Sunday, August 18, 2013

Landmark shareholder victory against Eagle Bulk management and directors for abusive and excessive executive compensation

Eagle Bulk Shipping has been one of the poorest performing shipping stocks in its peer group.  From lofty levels in excess of US$ 100 per share in its salad days, the stock crashed below US$ 20 in the fall of 2008.  From then on, it has been a slow attrition with charter party defaults, bank covenant violations and loan restructuring agreements with the stock presently trading at US$ 3,56.  Latest quarterly results were losses of US$ 3 million for the 2nd quarter 2013.  Yet its management sat at or near the top of shipping’s executive pay lists  for years.  Its directors who were earning more than their counterparts at large Fortune 500 companies without offering any oversight.  Shareholders who have lost literally their shirts appear to have succeeded to force Sophocles Zoullas and his management team to roll back their pay to more reasonable levels, albeit still quite high for such miserable value destruction and bad performance.

I have signaled Eagle Bulk at a very early stage back in January 2009 as a potentially problematic company: “EGLE: Conflicts between sound business principles and Wall Street 'value-building' concepts”

Its management followed an antiquated vessel provider business model with heavy dependency on third party charterer counter risk.  They scaled up their fleet at lofty values in large block deals, exposing the company to serious problems with loan to value covenants when the shipping markets crashed.  Eagle Bulk was badly exposed to the Korean Lines bankruptcy, with little transparency for years as to their charterers and counter party risk profile. 

If Eagle survives today as a zombie shipping company, this is by the mercy and desperation of their bankers, particularly the Royal Bank of Scotland, who did a trend-setting debt for equity swap last year to keep them alive.

Miraculously, tenacious shareholders managed to rebuff Eagle’s attempts to have their legal action thrown out by summary judgment in November 2011 and despite the high hurdles facing plaintiffs under Marshall Islands law. Eagle Bulk management executive pay practices were so abusive and egregious that facts suggested a “quid pro quo” arrangement may have existed between Eagle officers and directors, thus barring Eagle from using a so-called “business judgment” defense.  This has led to the present compromise agreement with Eagle management pending final court approval. 

The major bullet points are truly eye-opening in terms of the money and benefits that management had been extracting from the company despite its dire financial condition with its creditors and serious operating losses:

•    Cancellation of all stock options (180.704) granted to Eagle officers and directors between 2008 and 2011.
•    Shortening the expiration to five years from 10 for 1.4 million options granted to the Zoullas brothers in 2012, with an estimated US$ 1 million savings to Eagle.
•    Limiting average compensation to non-management directors to US$ 240.000 through 2015, compared to US$ 432.000 in 2011.
•    Limiting executive compensation through 2015 to the average paid by five peer companies — Dryships, Diana Shipping, Excel Maritime, Navios and Genco Shipping — rather than “prior practice of paying at the top of the industry”.
•    Requiring Eagle to bill Zoullas’ private Delphin Shipping US$ 237.000 for services it has rendered, and tightening dealings between the two “to ensure that Mr Zoullas does not derive an unfair advantage.”
•    Terminating the 2011 equity incentive plan and 4.3 million shares that could have been issued under it.

Among other practices in Eagle Bulk adding insult to injury is Zoullas appointing his brother Alexis as President making this listed company a family affair.

Lenders and other shareholders should rejoice, as Eagle still faces a difficult struggle to stay alive with continuing operating losses until dry bulk markets recover. 

Here below is a comparative graph of Eagle Bulk share performance with peer dry-bulk companies over the last five years:

Eagle is one of those at the bottom of the chart. 

This case reinforces my concerns about a competitiveness problem for Greek listed shipping companies compared to non-Greek peers in terms of return on investment.  Pacific Basin, for example, in Hong Kong makes Eagle management look rather ridiculous and amateurish, not even worth their revised remuneration levels.  The best performing Greek peer company is Angeliki Frangou’s Navios Holdings, one of the very bright exceptions in the Greek market.

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