UK-based and recently New York Listed dry bulk shipowner Britannia Bulk Holdings faces the prospect of, at best, an accommodation with it lenders that will leave its shareholders with virtually nothing or administration or bankruptcy.
The London-headquartered company appears to have been the victim of both the spectacular coillapse of the dry bulk market and also of unwise dealings in freight futures (FFAs), compounded by unlucky bunker price hedging.
Britannia owes Lloyd's TSB Bank and Nordea Bank Denmark about US$158m. The debt is secured on 22 vessels in the company's owned fleet. It says it will shortly not be in a position to service the debt. Britannia operates in the Baltic/Continent coal trade, and in areas such as Europe, South America, Far East and Australia, principally in the handy to panamax size.
In a statement issued yesterday ahead of a quarterly earnings statement Britannia said “While the Company has not yet concluded the review of its financial results for the three months ended 30 September, 2008, the Company expects to announce a significant net loss for the period compared to the net income achieved during the second quarter of 2008. The company believes that the expected loss will have resulted from the substantial decreases in dry bulk charter rates that occurred during the period, exacerbated by the company's increase in chartered-in capacity during the same period and its entry into the forward freight agreements and a bunker fuel hedge....”
Britannia says: “Historically the Company has chartered-in vessels to increase its overall dead weight tonnage capacity and enhance its service offering to customers. During the three months ended September 30, 2008 the Company increased its chartered-in capacity at a time when the demand for dry bulk shipping capacity decreased significantly. This decrease continued throughout the third quarter of 2008 and dry bulk charter rates fell substantially during the same period. As a result, the charter rates the Company achieved during the three months ended September 30, 2008 for its chartered-in vessels were less than the rates the Company paid to secure many of these vessels, resulting in significant losses.”
The statement also indicates that unauthorised FFA dealing could have could to light. It says: “The Company has historically entered into dry bulk FFAs as economic hedges relating to identifiable ship or cargo positions and as economic hedges of transactions expected to be carried out in the normal course of its shipping business. None of the company's FFA derivatives qualify for hedge accounting; therefore, the net changes in derivative assets and liabilities are reflected in current period operations. In the past, the company has entered into FFA contracts to provide a fixed number of theoretical voyages at fixed rates, with such contracts generally ranging from one month to one year and settling monthly based on a published index.”
Something seems to have gone wrong in Q3. The company says: “Since July 2008, the Company bought FFAs that appear not to have been purchased to hedge identifiable ship or cargo positions. This resulted in the Company being more exposed to the falling charter rates and reduced overall demand for dry bulk shipping services than it would have been if its historic practice of using FFAs as economic hedges had been followed. In marking these FFAs to market, the Company expects to recognize a significant realized loss for the three months ended September 30, 2008. Cash settlement of such FFAs is scheduled to commence in the fourth quarter of 2008 and continue into 2009.”
It adds: “An independent committee of the Company's Board of Directors has resolved to retain an external advisor to assist it in determining how the Company came to enter into these FFAs.” To add to Britannia woes it has also been caught out by the bunker market. It says: “In the three months ended September 30, 2008, the Company entered into a bunker fuel hedge which is currently uncompetitive because it is hedged to prices which are significantly above the current market price of bunker fuel. As a result, the Company currently estimates that its aggregate bunker fuel hedging losses for the three months ...will be significant.”
The statement continues: “In response to the severe financial difficulties the company is experiencing, the board [of directors] is currently conducting extensive discussions with the company's management team to identify and implement any necessary changes. While discussions and resulting changes are ongoing, the Board has recently imposed a number of cash conservation and cost reduction measures on the Company and has limited management's ability to conduct daily sales and purchases and hedging activities, including entering into any new FFAs or bunker fuel hedge arrangements, without specific Board approval.”
Britannia has engaged corporate advisory firm AlixPartners to assist in discussions and negotiations with its lenders and trade counterparties and to address its current financial and liquidity issues. IT says: “Representatives of AlixPartners are working with management to immediately implement measures to conserve cash and reduce costs. AlixPartners is expected to have an integral role in helping the company address key issues with its lenders and trade counterparties.”
The London-headquartered company appears to have been the victim of both the spectacular coillapse of the dry bulk market and also of unwise dealings in freight futures (FFAs), compounded by unlucky bunker price hedging.
Britannia owes Lloyd's TSB Bank and Nordea Bank Denmark about US$158m. The debt is secured on 22 vessels in the company's owned fleet. It says it will shortly not be in a position to service the debt. Britannia operates in the Baltic/Continent coal trade, and in areas such as Europe, South America, Far East and Australia, principally in the handy to panamax size.
In a statement issued yesterday ahead of a quarterly earnings statement Britannia said “While the Company has not yet concluded the review of its financial results for the three months ended 30 September, 2008, the Company expects to announce a significant net loss for the period compared to the net income achieved during the second quarter of 2008. The company believes that the expected loss will have resulted from the substantial decreases in dry bulk charter rates that occurred during the period, exacerbated by the company's increase in chartered-in capacity during the same period and its entry into the forward freight agreements and a bunker fuel hedge....”
Britannia says: “Historically the Company has chartered-in vessels to increase its overall dead weight tonnage capacity and enhance its service offering to customers. During the three months ended September 30, 2008 the Company increased its chartered-in capacity at a time when the demand for dry bulk shipping capacity decreased significantly. This decrease continued throughout the third quarter of 2008 and dry bulk charter rates fell substantially during the same period. As a result, the charter rates the Company achieved during the three months ended September 30, 2008 for its chartered-in vessels were less than the rates the Company paid to secure many of these vessels, resulting in significant losses.”
The statement also indicates that unauthorised FFA dealing could have could to light. It says: “The Company has historically entered into dry bulk FFAs as economic hedges relating to identifiable ship or cargo positions and as economic hedges of transactions expected to be carried out in the normal course of its shipping business. None of the company's FFA derivatives qualify for hedge accounting; therefore, the net changes in derivative assets and liabilities are reflected in current period operations. In the past, the company has entered into FFA contracts to provide a fixed number of theoretical voyages at fixed rates, with such contracts generally ranging from one month to one year and settling monthly based on a published index.”
Something seems to have gone wrong in Q3. The company says: “Since July 2008, the Company bought FFAs that appear not to have been purchased to hedge identifiable ship or cargo positions. This resulted in the Company being more exposed to the falling charter rates and reduced overall demand for dry bulk shipping services than it would have been if its historic practice of using FFAs as economic hedges had been followed. In marking these FFAs to market, the Company expects to recognize a significant realized loss for the three months ended September 30, 2008. Cash settlement of such FFAs is scheduled to commence in the fourth quarter of 2008 and continue into 2009.”
It adds: “An independent committee of the Company's Board of Directors has resolved to retain an external advisor to assist it in determining how the Company came to enter into these FFAs.” To add to Britannia woes it has also been caught out by the bunker market. It says: “In the three months ended September 30, 2008, the Company entered into a bunker fuel hedge which is currently uncompetitive because it is hedged to prices which are significantly above the current market price of bunker fuel. As a result, the Company currently estimates that its aggregate bunker fuel hedging losses for the three months ...will be significant.”
The statement continues: “In response to the severe financial difficulties the company is experiencing, the board [of directors] is currently conducting extensive discussions with the company's management team to identify and implement any necessary changes. While discussions and resulting changes are ongoing, the Board has recently imposed a number of cash conservation and cost reduction measures on the Company and has limited management's ability to conduct daily sales and purchases and hedging activities, including entering into any new FFAs or bunker fuel hedge arrangements, without specific Board approval.”
Britannia has engaged corporate advisory firm AlixPartners to assist in discussions and negotiations with its lenders and trade counterparties and to address its current financial and liquidity issues. IT says: “Representatives of AlixPartners are working with management to immediately implement measures to conserve cash and reduce costs. AlixPartners is expected to have an integral role in helping the company address key issues with its lenders and trade counterparties.”