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Bankruptcy makes waves

Bankruptcy makes waves
Atlas Shipping's quest for cash is swamping some of the companies that do business with it.

Atlas Shipping's quest for cash is swamping some of the companies that do business with it.

Atlas Shipping's quest for cash is swamping some of the companies that do business with it. The privately held Danish company's bankruptcy filing this week is making waves for four publicly traded companies that leased their dry-bulk ships to it, and its dire financial straits are shared by its competitors. "We unfortunately have to recognize that the present freight rates and the charter-parties we have entered into before the crisis in the shipping business commenced will imply a liquidity loss of approximately $3.0 million a week if we continue our operations in the present form," said Chief Executive Bo Kristensen. "If we continue our operations, our present --and considerable-- liquidity, will be spent within three months unless the international freight rates increase dramatically within the same period."

Copenhagen-based Atlas is a privately held dry-bulk operator that charters 35 of its 41 vessels from other companies. Dry-bulk operators act as middle men, chartering ships from ship owners and then rechartering them to their customers as needed. When demand is strong and rates are high business is good. But as the global economic downturn has caused freight rates to tumble by as much as 99.0%, companies like Atlas have trouble making money. That's a problem for the companies that leased it ships, since at best they'll get their boats back but lose expected revenue.

Four public dry-bulk companies ? DryShips, Diana Shipping, Eagle Bulk Shipping, and Top Ships ? either chartered or subchartered vessels to Atlas.

Diana Shipping's shares slipped 1.5%, or 20 cents, to $13.25, at the close on Friday after tumbling 11.3% on Thursday. DryShips slid 8.6% on Friday, after sinking 9.2% the day before. Eagle plunged 15.9% on Friday, adding to its 6.0% loss on Thursday, and Top Ships lost 2.5% in addition to the 19.2% it declined the previous day.

Atlas' filing came after two dry-bulk operators with similar business plans -- Britannia Bulk Holdings and Industrial Carriers -- filed for bankruptcy.

Athens-based Star Bulk Carriers got burned by Ukraine-based Industrial Carriers bankruptcy filing after it lost a $106,500 long-term contract in October.

Oppenheimer analyst Scott Burk said that of the 35 vessels chartered by Atlas, five are owned by public companies: one ship from Diana Shipping, one from Cardiff Marine, which is related to DryShips, one from Top Ships, and two from Eagle Bulk. Burk said that Eagle told him that it did not have any deals directly with Atlas, which signals that a company to which Eagle chartered its vessels then subchartered them to Atlas. Either way Eagle will avoid feeling the pain because it is protected by charter insurance.

Burk pointed out that the charter to Diana also will have limited impact because it expires in January. Top Ships will be hurt more because its charter lasts until August 2009. Burk did know the terms of Cardiff's charter.

More bankruptcies will hit the industry

While Burk said he thinks there will be "minimal" revenue impact to public dry-bulk ship owners because of their limited charter duration or charter insurance coverage, the risk is that more bankruptcies will hit the industry increasing the chance of charter defaults.

The volatility of the dry-bulk market has turned once-reliable business partners into enemies. Some operators are even taking charterers to court to try to recoup money from defaults. Dry-bulk operator Noble Chartering sued South Korea-based operator STX Pan Ocean in October to recover about $8.0 million in charter income after STX broke a contract almost two months early.

Originally STX chartered the ship from Noble and then rechartered the vessel to Sinochart. Sinochart broke the contract two months early with STX, which then tried to return the ship back to Noble two months early. Noble Chartering is now facing substantial losses because of rock-bottom freight rates.

Maxim Group analyst Charles Rupinski said he's surprised that the industry hasn't seen more defaults, given the collapse of charter prices.

Separately on Friday, Eagle Bulk announced it reached an agreement with Yangzhou Dayang Shipbuilding to cancel $363.0 million worth of ships, which reduces its capital expenditures. It will be able to apply deposits made on the canceled craft to other ships later on, but will be forced to suspend dividends as the result of an adjustment of loan covenants with lenders.

?We see this as over $100.0 million of ?value added? by getting rid of underwater contracts,? said Rupinski, who thinks Friday"s moves will strengthen Eagle in the long term.

Chief Executive Sophocles Zoullas said the cancellations will increase its contract coverage in 2009 to 63.0% of its fleet and 43.0% in 2010.


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