BALTIC TRADING LTD BALT S
September 20, 2010 - 8:18pm EST by
Shoe
2010 2011
Price: 11.40 EPS $0.27 $0.54
Shares Out. (in M): 23 P/E 20.9x 32.4x
Market Cap (in $M): 255 P/FCF 11.2x 13.8x
Net Debt (in $M): 10 EBIT 10 18
TEV ($): 219 TEV/EBIT 37.4x 20.0x
Borrow Cost: NA

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Description

 Overview / Summary
 
Short Baltic Trading (ticker: BALT).  BALT is a dry bulk shipping company whose strategy is to be 100% exposed to spot charter rates and operate with no leverage.  They own 9 vessels in total (2 capesize, 4 supramax, and 3 handysize).  In brief, dry bulk companies ship things like iron ore, grain, coal, etc. 
 
I expect spot freight rates to remain depressed for the next 3-4+ years due to oversupply in the industry that is near impossible to be offset from demand.  From the current price of $11.4, and my target of $7, that's 43% downside. 
 
Excel Maritime (EXM), and Genco (GNK) would also be good shorts because they have little long term time coverage (i.e. more spot exposure) and they both have relatively more exposure to the capesize vessels that I'm negative on.
 
Based on my projections for 2011-2013, the stock at $11.41 is trading around 10-13x EV/Forward EBITDA,  20-47x forward P/E, a dividend yield around 2-5%, and around 0.9x P/NAV (using aggressive NAV assumptions).  Though in a downturn, vessel values will have to plummet along with rates and the P/NAV will surely rise quickly.
 
The stock could fall to $7 if we stay in this low freight rate environment which could be similar to the 1995 - 2001 rate environment.  At that $7, the stock trades closer to 5.8-7 EV/forward EBITDA,  11.8-27.2x P/E, and a more reasonable 4%-8% dividend yield. 
 
In addition, Baltic needs to issue equity in order to pay down the $100mm that they drew on their revolver.  They have to pay it off within a year of drawing it.  I assume that they'd issue $100mm in new stock if the stock price gets close to their IPO price (of $14) or above 1x P/NAV (using consensus book value, which is closer to $13).
 
Regarding timing,  might be best to wait for a spike in the BDI if you want to short.  Perhaps when it's stronger seasonally like in Q4, which is what everyone is hoping for.  If it gets to $13-14, that's be a better area to think about shorting and the company will likely issue $100mm of equity (current $250mm market cap).   
 
The sell side community is still overly bullish on the sector as they seek banking deals.  Though the overcapacity in the industry isn't new news and is fairly well anticipated, I don't believe the dramatic effects of the overcapacity are priced in.  Dry bulk stocks are still trading as if everything is going to be OK and the rate environment will stay afloat from now and going forward, which is hard to believe. 
 
As rates stay low (perhaps even at or below cash breakeven), ship values will have to fall as well.  As ship values fall, this could cause a vicious cycle where companies breach maintenance covenants (like they did back in 2008), causing more bankruptcy fears and perhaps more forced sales of ships.  Then, banks would work with the companies to get through the weak environment; banks and financiers will have to lower amortization & interest costs (basically more extending and pretending).  Hence that will lower operating costs and also lower rates even more (and hence push down asset prices).  In turn, the rule of thumb breakeven rates that people have in their heads will be naturally pushed even lower and customers could demand lower rates.  Financing costs can be up to 50% of a vessel's cash operating costs (especially for expensive capes).  In other words, the debt fueled rise of the dry bulk market in recent years has also elevated rates, that could turn the other way. 
 
As a long-term, long holding, it'd likely be dead money for a while before you start to see hope of an upside.  But you would be clipping at least some dividend and most likely not at risk of a complete bankruptcy, while waiting for the upside when the market returns.  Even if rates go to $9,000 a day across their entire portfolio of ships, they'd still be at FCF breakeven.  So I don't see this as a bankruptcy candidate. 
 
On the other hand, Baltic has a low leverage, an extremely young fleet, high dividend policy, respected management,
 
Memories of a high rate environment and the money that can be made in this sector are still somewhat fresh in investors and management's minds.  Despite the large vessel supply coming, the orderbook actually grew earlier this year and has remained fairly steady.  This optimistic behavior could help worsen the downturn.
 
As a pair trade, one could go long a company with a high percentage of long-term fixed charter coverage, less exposure to capes, and low leverage.  Like Diana Shipping (DSX).  Diana's management is all gloom and doom about the prospects for the industry in the next few years (as opposed to chorus of cheerleaders out there).
 
 

Industry

Summary

Rates should remain low for an extended period of time, with some ships and ship classes operating near or perhaps below breakeven levels.   As the new ship deliveries continue, the newer fleet (likely financed by less debt given that financing is still somewhat tight), could have materially lower breakeven costs than older vessels, further hurting rates.
 
Capesize vessels rates will remain depressed and the rate differential between ship classes will narrow.  The supply could limit the rate spikes in Capesizes (that we've become used to) and other classes as well. 
 
China is clearly trying to slow down its economy and many of the new projects and construction will need time to be fully utilized.  China accounts for roughly 65% of iron ore demand (which will hurt capesize vessels more). Indian demand for coal is also growing, but the demand growth likely won't be enough to offset supply as it is growing from a small base. 
 
Even assuming 40% slippage rates, 20% cancellation rates, and 2.5% scrappage rates, the industry will remain oversupplied which will peak in 2012.  On the demand side, I took the most bullish sell side forecasts for each commodity that I could find and that still doesn't come close to filling all the ships that are expected to be built. 
 
Supply
The overall market is somewhere in the 90-95+% utilization range at the moment, where rates can be supported,  but that's slowly coming down now.
 
With an oversupply of ships, rates will likely stay at around the operating expenses of the least efficient ships that are still needed.  Rates will continue falling until scrappage and cancellations increase to offset the new supply and only then will we be at a new equilibrium.  Increased scrappage and cancellations will only happen after the environment worsens first.  In addition, roughly half the new orderbook (at Korean and Japanese shipyards) has large deposits of 15%-20% and committed financing in place as well.  Hence these will be tougher for shippers to get out of.  YTD, about 58% of the orderbook has been delivered in 2010 [corroborated with industry contacts].  In 2009, about 59% of the orderbook was delivered
 
We are likely already in an oversupplied environment already as can readily be seen with current cape rates bouncing around breakeven.  In 2011, supply will only get worse.  I project 14.2% fleet growth in 2010 and 10.6% growth in 2011.  On the other hand, demand will only grow 12.6% in 2010 and 6.6% in 2011 using some of the most bullish forecasts. 
 
Supply already looks on pace to be +15% this year (already +7% at mid year).   Though more of the growth is in the capsizes and less for the smaller ships.
 
Dry bulk companies and management still remain bullish and are continuing to put money to work.  The orderbook has even grown this in Q2 despite all the negatives out there.   The orderbook at the end of Q2 was 297 mm DWT up from 290.3mm DWT at end of Q1.  In Q2, 23.7mm DWT of vessels were ordered.    I think managements are still drinking the kool-aid and convincing people to give them money.  The brief spike in rates got everyone all excited again.  This behavior will only worsen the rate environment as they continue to hope for the best.  Though some, like DSX, are more realistic and preparing for the worst with long term charters.
 
Even worse for the industry, most companies are still remembering the great environment experienced over the last 7-8 years (which is unfortunately long gone) and maybe not thinking of the downside.  Dry bulk shippers are like retail investors: they buy at the peaks and sell at the lows.  We've seen the peaks,  but we haven't seen the selling at the lows yet.
 
51% of the orderbook is in the Capesize fleet (by tonnage), which should offset any strong growth in iron ore into China.  52% of the world's Handysize fleet is over 20 years old, so there will likely be a lot of natural scrappage in that area even if rates don't stay low.   So I'm relatively more sanguine on shippers with more exposure to small ships and less on those with exposure to the large and specialized capes.
 

Demand

 
On the demand side, even with a very bullish increase in shipping tonnage overall (13.4% growth in 2010 and 6.6% in 2011), it's still not enough to offset the supply by 2011.  
 
- China slowdown - In addition, judging by Chinese policy actions and speaking with friends who do commercial real estate and infrastructure lending in China, there will be a slowdown in their real estate markets and construction.  My contacts admit that prices in some cities are way too high and that some large projects will not be able to service their debt.  But the overall economy will still grow at 8% GDP.  They are also afraid of the property mini-bubbles that are forming in addition to the policy measures taken to cool the economy.   Auto sales there are also starting to slow as well. 
52% of Chinese steel production is consumed by the property and construction industries. 
- CRE/resi construction are still in doldrums in the US and Europe.
 
More reasonable estimates of ton mile demand growth that I've seen are around 5-6% for the next 2 years.
 

History

-  In previous dry bulk downturns, freight rates stayed at low levels, at times below operating costs (including vessel, D&A, and capital costs). 
 
The shipping market, like the stock market, is full of untrained speculators who experience greed and fear.  So there is a tendency to buy high and sell low.   This amplifies the boom and bust nature of the market.
 
Historically, the downturns or oversupplied periods last for a few years.  Here are some historic downturns:

1958-1969

1975-1979

1981-1987

 
Leverage also helped inflate the most recent upswing in dry bulk.  From anecdotal stories, lenders were overly generous and the high rate environment gave everyone comfort that high vessel prices were here to stay given the ongoing EM development and buildout.  This debt fueled bubble will also slowly deflate, further depressing the industry and taking down freight rates as well.

Valuation

 
Most the dry bulk shipping stocks are trading at reasonable multiples (5.5-6.5x EBITDA, 1x NAV) assuming rates stay solidly profitable and/or rise.  In my opinion, we don't need the economy to tank in order for dry bulk shipping stocks to fall,  the oversupply by itself should be enough.
 
Multiples with the stock at 11.4
 
Ratios / Valuation     2010 2011 2012
           
Rates          
Handymax     18,682 16,500 16,000
Supramax     22,872 18,670 18,000
Panamax     25,956 20,625 19,000
Capesize     30,225 24,000 19,500
           
Market Cap       345,511,765   345,511,765   345,511,765
Enterprise Value       372,700,772   358,358,454   345,367,226
           
EV / LTM EBITDA     21.7x 11.0x 13.0x
EV / Forward EBITDA     11.5x 13.5x 15.0x
           
P / LTM Earnings     45.6x 20.9x 32.4x
P / Forward Earnings     20.9x 32.4x 48.7x
           
P / LTM FCF     23.1x 11.2x 13.8x
P / Forward FCF     11.2x 13.8x 16.0x
  

Stock at 14

Ratios / Valuation     2010 2011 2012
           
Rates          
Handymax     18,682 16,500 16,000
Supramax     22,872 18,670 18,000
Panamax     25,956 20,625 19,000
Capesize     30,225 24,000 19,500
           
Market Cap       424,312,694   424,312,694   424,312,694
Enterprise Value       451,501,701   437,159,383   424,168,155
           
EV / LTM EBITDA     26.3x 13.5x 15.9x
EV / Forward EBITDA     13.9x 16.4x 18.4x
           
P / LTM Earnings     56.0x 25.7x 39.8x
P / Forward Earnings     25.7x 39.8x 59.8x
           
P / LTM FCF     28.4x 13.7x 16.9x
P / Forward FCF     13.7x 16.9x 19.7x
 

Stock at 7

Ratios / Valuation     2010 2011 2012
           
Rates          
Handymax     18,682 16,500 16,000
Supramax     22,872 18,670 18,000
Panamax     25,956 20,625 19,000
Capesize     30,225 24,000 19,500
           
Market Cap       212,156,347   212,156,347   212,156,347
Enterprise Value       239,345,354   225,003,036   212,011,808
           
EV / LTM EBITDA     14.0x 6.9x 8.0x
EV / Forward EBITDA     7.4x 8.4x 9.2x
           
P / LTM Earnings     28.0x 12.9x 19.9x
P / Forward Earnings     12.9x 19.9x 29.9x
           
P / LTM FCF  

 

 
14.2x 6.9x 8.5x
P / Forward FCF     6.9x 8.5x 9.9x
 
As this new low freight rate environment continues, people will eventually get tired of waiting for the eventual rise and the stock should come down.   In addition, ship prices would also trend lower as well.  Using 5 year old ship resale values representative of the late 1990s (when rates were low), NAV would be closer to $6.8. 
 
$7 is my DCF value using 14% WACC, 1.4 beta, and a 1% growth rate.  Not that I rely on DCFs much.  
 To get to the valuations that are implied by the stock now, you need rates to be much higher than what I'm projecting and sustainably higher than where the market is now.  For example, these rates can justify the current stock price (similar to rates some sell side shops are using):  
 
Handysize 16,900
Handymax 19,695

Supramax 22,490

Panamax 26,000

Capesize 40,000

 
which is way more optimistic than what we're seeing in the market right now, which seems unreasonable given the huge supply (the orderbook is about 61% of the total deadweight tons outstanding).
 Historically, these have traded between 8-9x EBITDA,  though 6-7x or lower is likely more reasonable in this upcoming environment.
 

Catalysts - for the short 

- Dilutive equity raise - BALT has to pay down its revolver.  If they don't take out the revolver in Q2 2011, it matures 1 year later, which goes against the zero leverage policy of the company.  The equity follow on is almost guaranteed to happen within the next year (they filed a $110mm follow on offering), so it's not new news.  Could be rather dilutive if the stock doesn't rebound much and they have to sell stock below NAV or the IPO price.   Given that the stock is perhaps reasonable at current levels ($11.4, is 6x EBITDA derived off of somewhat bullish rate forecasts) I don't think it'll get to $13 current NAV nor the $14 IPO price, so the financing could appear dilutive. 
If they don't raise the equity, then the company would become a levered dry bulk company operating on the spot market, which would be even riskier for them in the upcoming weak dry bulk market.  Mgmt has said that it's an option, which would concern me if I were long .
 
- Freight rates going lower / staying low
- Ship values falling - could likely happen given the low rate environment and oversupply.   Could then perhaps hit covenants (collateral maintenance).  Asset values are still quite high on a historical basis and there's no reason that they can't fall lower.  Those who point to replacement value as a floor forget that something is only worth the earnings it can generate.  People who were holding out on selling or waiting for a better charter rates may start to panic and dump into the selling.  All these cancellations may leave shipbuilders with ships on their hands that they might also try to dump in a depressed market (and the vicious circle will continue)
 
- Earnings / results worse than expectations (seems likely as the street is overly bullish and almost dismissive of the risks and some of the expenses)
 
- Problems to work out before their business gets totally up and running / delays / other problems.  Baltic is a new company that IPOed earlier this year
 
- Chinese demand / global economy slowing -  given the Chinese policy tightening and the massive run up in overbuilding, could see a short term correction at least.
 
- Problems with the European financial system - European banks are the largest source of financing for the dry bulk shipping industry.  If something were to happen, that may disrupt the shipping industry.  However, on the positive side, it may cause more orderbook cancellations as well. 
 
- Lower port congestion - adds capacity

 

Risks to being short

- Cancellations higher than expected - already very high though and given the way the majority of shipbuilders have already secured large deposits and forced buyers to obtain financing, it's less likely.  Though if new ship values fall enough, it could make economic sense to walk away from the new build, forfeit the deposit, and buy a new ship cheaper on the secondary market.  But for that to happen, ship values have to really tank first and the stock would fall.
- Slippage higher than expected (which is hard to envision as it's already in the 30-40% range) - I believe roughly 50% of the orderbook already has secured 15-20% deposits and financing.
- Other shippers going into bankruptcy - reduces supply
 
 The above 3 issues though won't get solved in a meaningful way unless rates fall to levels that force ships to be laid up and conditions become unbearable for most operators.  The industry has to go through a cleansing first. 
 
- Political risks - e.g. not being able to use a canal
- Spikes in the BDI can happen if supply gets curtailed or demand increases suddenly. 
 
- Potential spike in the stock when they issue a meaningful dividend
- Policy - environmental regulations, CO2 emissions, and low sulfur regulations,  cost $1-1.5mm vessels to upgrade the ship.  20+ year old ship may not be welcome at a US, Canadian, European port.  Or maybe governments mandate scrapping for older vessels and more strict rules on the seaworthiness of those vessels.
 

Sell side

Of course, the sell side remains overly bullish on the sector and is trying to paint the picture that demand is going to narrowly outweigh supply (and so everything will be OK).  Or they point to a Q4 momentary jump in rates given the seasonally strong quarter.  They clearly want to get more banking deals / IPOs done.   Hence their estimates are overly optimistic for the next few quarters & years on both the top line and the bottom line.  BALT will probably miss consensus numbers continually.
 
Many of them ignore some fees and expenses e.g. dry docking expenses / costs,  capex, fees paid to Genco for the new ship purchases, etc.  When asked about it, they merely said that it would be one time, small, or way out in the future.  Some weren't factoring in the commissions that Baltic has to pay; others don't include some of Genco's management fees, etc.
 
Most are projecting fairly solid rates where these companies can still make a decent return,  but as we've seen in 1H, it's fairly easy for spot freight rates to go below breakeven costs in this environment.  Given Baltic uses a pure spot strategy, has low leverage, and has a young fleet, they're still generating around 4% ROE in a low rate environment. 
 
The sell side is also updating their projections marginally and slowly.  When rates are whipping around by 60%, they update their forecasts by 6% (e.g. JPM).  It's pretty clear that rates move a lot more than that.  I've seen some even increase their ship rates contrary to what's going on out there.
 Most management's seem to be overly bullish on the industry as well.  Except for some, like Diana Shipping, who shares my view.
 

Company Overview

Baltic Trading is a newly formed dry bulk shipping company that owns 2 capes, 4 supramaxes, and 3 handysizes that will operate in the spot market.  They have an extremely young fleet (around 1 year old). They will pay out the majority of their earnings in dividends.
They employ only 21 people on land and 770 on ships  (20-24 per vessel).
Dry bulk shipping executives are incentivized to buy a lot of ships, give themselves a bunch of stock & options, and then swing for the fences.

Positives for the company

- No debt strategy + young fleet - So they can still operate at breakeven even with rates as low as they are currently.   I think they will be able to weather the a severe downturn: even if rates tank to $9,000 across all their ships,  they'll still be FCF breakeven.
- Mgmt - people generally like GNK's & Baltic's management. They aren't as sleazy as some of the other ones out there.  Though that isn't saying too much
 
 Negatives for the company
- Tied to spot rates, hence volatile earnings

- Needs to issue equity

- Pays a lot of fees to Genco
 
 

Freight Rate Analysis / Forecast - more details

I went through a supply demand analysis using some of the bullish demand projections and very high supply curtailments.  I still find that supply will continue to dwarf demand. 
I expect rates to remain compressed across the various dry bulk ship categories with the large increased supply in capes (and to a lesser extent in other vessels).  Also, given that capes & panamaxes are heavily tied to iron ore and coal,  there will probably be more volatility in freight rates for those and potentially more downside pressure.  
Also, much of the existing/current fleet was purchased or built when vessel prices were much lower, and the majority of the fleet has already paid down all the debt on their ships. So financing costs and breakeven costs for older ships are much lower.  Could very well see rates that people are not used to, more similar to those witnessed in the late 90s when rates for capes were in the teens.   
 
Ship-owners can't easily keep the vessels idle.  They have to pay the debt and operating costs.  Some vessels that were recently ordered for a few hundred million may have $28,000 in operating + debt costs per day.  Just barely supportable even now.
 
At current new build prices and resale values, rates could easily remain where they are and shipowners could still make a decent high single digit return, unlevered.  At the moment, reported ship values are inline with rates as current 1 year TC rates provide approximately 7% return on capital unlevered and 9% levered.   Hence there is still room for rates to compress.  
 
 Q4
Potential iron ore trade improvement as Q4 10 iron ore contract prices are settled at a lower price, the seasonal grain trade starts.  Most are expecting a bounce
 

Capes

Capesize rates are currently near breakeven costs
By my estimates, perhaps 50% of the capesize fleet has a cash flow breakeven of around $12,000-13,000+ (which is close to where rates were at the low earlier this year).  Shipments of iron ore and coal to China employ nearly half the world's bulk carrier fleet.
The general rule of thumb is that most the capesize fleet is at cash flow breakeven around $15,000
 
A 150,000 dwt Capesize vessel under a one year time charter earned on average about $14,000 per day between 1996 and 2001, $ 30,000 per day between 2001 and 2005, and $50,000 in September 2006.   
Also, even with cape rates around $19,000, one can still make a 9% return with some leverage if they buy the ship at $57mm (current capesize 5 yr vessl price).  So clearly rates have room to go lower with added competition as returns get squeezed.
 
Daily bareboat breakeven rates for modern, secondhand capesize vessels are at $11,500, and just over $8,000 per day for a panamax vessel, according to ICAP Shipping.  As we've seen earlier this year, capes are taking on rates below their breakeven cash costs just to get some work to pay some of their vessel operating costs.   I believe that this could continue and that rates for larger ships could remain lower than other smaller vessels.  
 
Again, the problem is a combination of new supply, the young age of the capesize fleet, and the fact that many other ships out there may have a competitive advantage from low debt levels.  As capesize ships are really only used for iron ore + coal, their limited usefulness could cause them to sit around for a while if/when Chinese demand falters.   Seasonal lulls, policy interventions would exacerbate the moves.
 
Shipowners loved ordering capes because they have the most volatility and are the best way to gamble on the dry bulk market.  Because they used debt and other people's money, they'll just walk away when it doesn't work.

Panamax

Panamax ships will likely suffer the same problems as capes to a slightly lessser extend given that the fleet is rising 33% for the next 5 years, far less than capes. And these are more versatile vessels.
 
The average daily revenues of a 70,000 dwt Panamax were about $ 10,000 between 1996 and 2000, rose to $ 20,000 between 2001 and 2005 and to $ 30,000 in September 2006.
At the low, this was only around $1,000 higher than breakeven costs.
 
Supramax / Handymax
 Since these ships have more versatility, they should remain a bit better utilized,  but will still suffer from overcapacity as Handymax DWT will increase 31% over the next 5 years.
 
Handysize
The Handysize fleet is very old and scrappage can easily offset the new building.  Given that they're also more versatile, rates could remain steady and profitable since the fleet is old and likely doesn't have much debt on them anymore.  Most of the scrappage is likely to come from the handysize fleet than the other ship classes.
 
            Fleet Age          Total DWT         0-4        5-9        10-14    15-19    20-24    '25+
                                                                                                                       
Capesize           10.1      184.6                78.6      26.7      27.6      30         17.1      4.5
                                                            42.6%   14.5%   15.0%   16.3%   9.3%     2.4%
Panamax          12.3      126.1                40.8      25.9      22.4      11.3      9.2        16.3
                                                            32.4%   20.5%   17.8%   9.0%     7.3%     12.9%
Handymax         11.1      98.8                  39.3      19         16.5      6.4        9.1        8.4
                                                            39.8%   19.2%   16.7%   6.5%     9.2%     8.5%
Handysize         18.2      78.5                  16.3      7.7        10.2      3.9        10.8      29.5
                                                            20.8%   9.8%     13.0%   5.0%     13.8%   37.6%
Total                 12.3      487.9                175.20  79.30    76.80    51.70    46.10    58.80
                                                            35.9%   16.3%   15.7%   10.6%   9.4%     12.1%
 

Catalyst

- Dilutive equity raise - BALT has to pay down its revolver.  If they don't take out the revolver in Q2 2011, it matures 1 year later, which goes against the zero leverage policy of the company.  The equity follow on is almost guaranteed to happen within the next year (they filed a $110mm follow on offering), so it's not new news.  Could be rather dilutive if the stock doesn't rebound much and they have to sell stock below NAV or the IPO price.   Given that the stock is perhaps reasonable at current levels ($11.4, is 6x EBITDA derived off of somewhat bullish rate forecasts) I don't think it'll get to $13 current NAV nor the $14 IPO price, so the financing could appear dilutive. 

If they don't raise the equity, then the company would become a levered dry bulk company operating on the spot market, which would be even riskier for them in the upcoming weak dry bulk market.  Mgmt has said that it's an option, which would concern me if I were long .

- Freight rates going lower / staying low

- Ship values falling - could likely happen given the low rate environment and oversupply.   Could then perhaps hit covenants (collateral maintenance).  Asset values are still quite high on a historical basis and there's no reason that they can't fall lower.  Those who point to replacement value as a floor forget that something is only worth the earnings it can generate.  People who were holding out on selling or waiting for a better charter rates may start to panic and dump into the selling.  All these cancellations may leave shipbuilders with ships on their hands that they might also try to dump in a depressed market (and the vicious circle will continue)

- Earnings / results worse than expectations (seems likely as the street is overly bullish and almost dismissive of the risks and some of the expenses)

- Problems to work out before their business gets totally up and running / delays / other problems.  Baltic is a new company that IPOed earlier this year

- Chinese demand / global economy slowing -  given the Chinese policy tightening and the massive run up in overbuilding, could see a short term correction at least.

- Problems with the European financial system - European banks are the largest source of financing for the dry bulk shipping industry.  If something were to happen, that may disrupt the shipping industry.  However, on the positive side, it may cause more orderbook cancellations as well. 

- Sell side throwing in the towel

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    Description

     Overview / Summary
     
    Short Baltic Trading (ticker: BALT).  BALT is a dry bulk shipping company whose strategy is to be 100% exposed to spot charter rates and operate with no leverage.  They own 9 vessels in total (2 capesize, 4 supramax, and 3 handysize).  In brief, dry bulk companies ship things like iron ore, grain, coal, etc. 
     
    I expect spot freight rates to remain depressed for the next 3-4+ years due to oversupply in the industry that is near impossible to be offset from demand.  From the current price of $11.4, and my target of $7, that's 43% downside. 
     
    Excel Maritime (EXM), and Genco (GNK) would also be good shorts because they have little long term time coverage (i.e. more spot exposure) and they both have relatively more exposure to the capesize vessels that I'm negative on.
     
    Based on my projections for 2011-2013, the stock at $11.41 is trading around 10-13x EV/Forward EBITDA,  20-47x forward P/E, a dividend yield around 2-5%, and around 0.9x P/NAV (using aggressive NAV assumptions).  Though in a downturn, vessel values will have to plummet along with rates and the P/NAV will surely rise quickly.
     
    The stock could fall to $7 if we stay in this low freight rate environment which could be similar to the 1995 - 2001 rate environment.  At that $7, the stock trades closer to 5.8-7 EV/forward EBITDA,  11.8-27.2x P/E, and a more reasonable 4%-8% dividend yield. 
     
    In addition, Baltic needs to issue equity in order to pay down the $100mm that they drew on their revolver.  They have to pay it off within a year of drawing it.  I assume that they'd issue $100mm in new stock if the stock price gets close to their IPO price (of $14) or above 1x P/NAV (using consensus book value, which is closer to $13).
     
    Regarding timing,  might be best to wait for a spike in the BDI if you want to short.  Perhaps when it's stronger seasonally like in Q4, which is what everyone is hoping for.  If it gets to $13-14, that's be a better area to think about shorting and the company will likely issue $100mm of equity (current $250mm market cap).   
     
    The sell side community is still overly bullish on the sector as they seek banking deals.  Though the overcapacity in the industry isn't new news and is fairly well anticipated, I don't believe the dramatic effects of the overcapacity are priced in.  Dry bulk stocks are still trading as if everything is going to be OK and the rate environment will stay afloat from now and going forward, which is hard to believe. 
     
    As rates stay low (perhaps even at or below cash breakeven), ship values will have to fall as well.  As ship values fall, this could cause a vicious cycle where companies breach maintenance covenants (like they did back in 2008), causing more bankruptcy fears and perhaps more forced sales of ships.  Then, banks would work with the companies to get through the weak environment; banks and financiers will have to lower amortization & interest costs (basically more extending and pretending).  Hence that will lower operating costs and also lower rates even more (and hence push down asset prices).  In turn, the rule of thumb breakeven rates that people have in their heads will be naturally pushed even lower and customers could demand lower rates.  Financing costs can be up to 50% of a vessel's cash operating costs (especially for expensive capes).  In other words, the debt fueled rise of the dry bulk market in recent years has also elevated rates, that could turn the other way. 
     
    As a long-term, long holding, it'd likely be dead money for a while before you start to see hope of an upside.  But you would be clipping at least some dividend and most likely not at risk of a complete bankruptcy, while waiting for the upside when the market returns.  Even if rates go to $9,000 a day across their entire portfolio of ships, they'd still be at FCF breakeven.  So I don't see this as a bankruptcy candidate. 
     
    On the other hand, Baltic has a low leverage, an extremely young fleet, high dividend policy, respected management,
     
    Memories of a high rate environment and the money that can be made in this sector are still somewhat fresh in investors and management's minds.  Despite the large vessel supply coming, the orderbook actually grew earlier this year and has remained fairly steady.  This optimistic behavior could help worsen the downturn.
     
    As a pair trade, one could go long a company with a high percentage of long-term fixed charter coverage, less exposure to capes, and low leverage.  Like Diana Shipping (DSX).  Diana's management is all gloom and doom about the prospects for the industry in the next few years (as opposed to chorus of cheerleaders out there).
     
     

    Industry

    Summary

    Rates should remain low for an extended period of time, with some ships and ship classes operating near or perhaps below breakeven levels.   As the new ship deliveries continue, the newer fleet (likely financed by less debt given that financing is still somewhat tight), could have materially lower breakeven costs than older vessels, further hurting rates.
     
    Capesize vessels rates will remain depressed and the rate differential between ship classes will narrow.  The supply could limit the rate spikes in Capesizes (that we've become used to) and other classes as well. 
     
    China is clearly trying to slow down its economy and many of the new projects and construction will need time to be fully utilized.  China accounts for roughly 65% of iron ore demand (which will hurt capesize vessels more). Indian demand for coal is also growing, but the demand growth likely won't be enough to offset supply as it is growing from a small base. 
     
    Even assuming 40% slippage rates, 20% cancellation rates, and 2.5% scrappage rates, the industry will remain oversupplied which will peak in 2012.  On the demand side, I took the most bullish sell side forecasts for each commodity that I could find and that still doesn't come close to filling all the ships that are expected to be built. 
     
    Supply
    The overall market is somewhere in the 90-95+% utilization range at the moment, where rates can be supported,  but that's slowly coming down now.
     
    With an oversupply of ships, rates will likely stay at around the operating expenses of the least efficient ships that are still needed.  Rates will continue falling until scrappage and cancellations increase to offset the new supply and only then will we be at a new equilibrium.  Increased scrappage and cancellations will only happen after the environment worsens first.  In addition, roughly half the new orderbook (at Korean and Japanese shipyards) has large deposits of 15%-20% and committed financing in place as well.  Hence these will be tougher for shippers to get out of.  YTD, about 58% of the orderbook has been delivered in 2010 [corroborated with industry contacts].  In 2009, about 59% of the orderbook was delivered
     
    We are likely already in an oversupplied environment already as can readily be seen with current cape rates bouncing around breakeven.  In 2011, supply will only get worse.  I project 14.2% fleet growth in 2010 and 10.6% growth in 2011.  On the other hand, demand will only grow 12.6% in 2010 and 6.6% in 2011 using some of the most bullish forecasts. 
     
    Supply already looks on pace to be +15% this year (already +7% at mid year).   Though more of the growth is in the capsizes and less for the smaller ships.
     
    Dry bulk companies and management still remain bullish and are continuing to put money to work.  The orderbook has even grown this in Q2 despite all the negatives out there.   The orderbook at the end of Q2 was 297 mm DWT up from 290.3mm DWT at end of Q1.  In Q2, 23.7mm DWT of vessels were ordered.    I think managements are still drinking the kool-aid and convincing people to give them money.  The brief spike in rates got everyone all excited again.  This behavior will only worsen the rate environment as they continue to hope for the best.  Though some, like DSX, are more realistic and preparing for the worst with long term charters.
     
    Even worse for the industry, most companies are still remembering the great environment experienced over the last 7-8 years (which is unfortunately long gone) and maybe not thinking of the downside.  Dry bulk shippers are like retail investors: they buy at the peaks and sell at the lows.  We've seen the peaks,  but we haven't seen the selling at the lows yet.
     
    51% of the orderbook is in the Capesize fleet (by tonnage), which should offset any strong growth in iron ore into China.  52% of the world's Handysize fleet is over 20 years old, so there will likely be a lot of natural scrappage in that area even if rates don't stay low.   So I'm relatively more sanguine on shippers with more exposure to small ships and less on those with exposure to the large and specialized capes.
     

    Demand

     
    On the demand side, even with a very bullish increase in shipping tonnage overall (13.4% growth in 2010 and 6.6% in 2011), it's still not enough to offset the supply by 2011.  
     
    - China slowdown - In addition, judging by Chinese policy actions and speaking with friends who do commercial real estate and infrastructure lending in China, there will be a slowdown in their real estate markets and construction.  My contacts admit that prices in some cities are way too high and that some large projects will not be able to service their debt.  But the overall economy will still grow at 8% GDP.  They are also afraid of the property mini-bubbles that are forming in addition to the policy measures taken to cool the economy.   Auto sales there are also starting to slow as well. 
    52% of Chinese steel production is consumed by the property and construction industries. 
    - CRE/resi construction are still in doldrums in the US and Europe.
     
    More reasonable estimates of ton mile demand growth that I've seen are around 5-6% for the next 2 years.
     

    History

    -  In previous dry bulk downturns, freight rates stayed at low levels, at times below operating costs (including vessel, D&A, and capital costs). 
     
    The shipping market, like the stock market, is full of untrained speculators who experience greed and fear.  So there is a tendency to buy high and sell low.   This amplifies the boom and bust nature of the market.
     
    Historically, the downturns or oversupplied periods last for a few years.  Here are some historic downturns:

    1958-1969

    1975-1979

    1981-1987

     
    Leverage also helped inflate the most recent upswing in dry bulk.  From anecdotal stories, lenders were overly generous and the high rate environment gave everyone comfort that high vessel prices were here to stay given the ongoing EM development and buildout.  This debt fueled bubble will also slowly deflate, further depressing the industry and taking down freight rates as well.

    Valuation

     
    Most the dry bulk shipping stocks are trading at reasonable multiples (5.5-6.5x EBITDA, 1x NAV) assuming rates stay solidly profitable and/or rise.  In my opinion, we don't need the economy to tank in order for dry bulk shipping stocks to fall,  the oversupply by itself should be enough.
     
    Multiples with the stock at 11.4
     
    Ratios / Valuation     2010 2011 2012
               
    Rates          
    Handymax     18,682 16,500 16,000
    Supramax     22,872 18,670 18,000
    Panamax     25,956 20,625 19,000
    Capesize     30,225 24,000 19,500
               
    Market Cap       345,511,765   345,511,765   345,511,765
    Enterprise Value       372,700,772   358,358,454   345,367,226
               
    EV / LTM EBITDA     21.7x 11.0x 13.0x
    EV / Forward EBITDA     11.5x 13.5x 15.0x
               
    P / LTM Earnings     45.6x 20.9x 32.4x
    P / Forward Earnings     20.9x 32.4x 48.7x
               
    P / LTM FCF     23.1x 11.2x 13.8x
    P / Forward FCF     11.2x 13.8x 16.0x
      

    Stock at 14

    Ratios / Valuation     2010 2011 2012
               
    Rates          
    Handymax     18,682 16,500 16,000
    Supramax     22,872 18,670 18,000
    Panamax     25,956 20,625 19,000
    Capesize     30,225 24,000 19,500
               
    Market Cap       424,312,694   424,312,694   424,312,694
    Enterprise Value       451,501,701   437,159,383   424,168,155
               
    EV / LTM EBITDA     26.3x 13.5x 15.9x
    EV / Forward EBITDA     13.9x 16.4x 18.4x
               
    P / LTM Earnings     56.0x 25.7x 39.8x
    P / Forward Earnings     25.7x 39.8x 59.8x
               
    P / LTM FCF     28.4x 13.7x 16.9x
    P / Forward FCF     13.7x 16.9x 19.7x
     

    Stock at 7

    Ratios / Valuation     2010 2011 2012
               
    Rates          
    Handymax     18,682 16,500 16,000
    Supramax     22,872 18,670 18,000
    Panamax     25,956 20,625 19,000
    Capesize     30,225 24,000 19,500
               
    Market Cap       212,156,347   212,156,347   212,156,347
    Enterprise Value       239,345,354   225,003,036   212,011,808
               
    EV / LTM EBITDA     14.0x 6.9x 8.0x
    EV / Forward EBITDA     7.4x 8.4x 9.2x
               
    P / LTM Earnings     28.0x 12.9x 19.9x
    P / Forward Earnings     12.9x 19.9x 29.9x
               
    P / LTM FCF  

     

     
    14.2x 6.9x 8.5x
    P / Forward FCF     6.9x 8.5x 9.9x
     
    As this new low freight rate environment continues, people will eventually get tired of waiting for the eventual rise and the stock should come down.   In addition, ship prices would also trend lower as well.  Using 5 year old ship resale values representative of the late 1990s (when rates were low), NAV would be closer to $6.8. 
     
    $7 is my DCF value using 14% WACC, 1.4 beta, and a 1% growth rate.  Not that I rely on DCFs much.  
     To get to the valuations that are implied by the stock now, you need rates to be much higher than what I'm projecting and sustainably higher than where the market is now.  For example, these rates can justify the current stock price (similar to rates some sell side shops are using):  
     
    Handysize 16,900
    Handymax 19,695

    Supramax 22,490

    Panamax 26,000

    Capesize 40,000

     
    which is way more optimistic than what we're seeing in the market right now, which seems unreasonable given the huge supply (the orderbook is about 61% of the total deadweight tons outstanding).
     Historically, these have traded between 8-9x EBITDA,  though 6-7x or lower is likely more reasonable in this upcoming environment.
     

    Catalysts - for the short 

    - Dilutive equity raise - BALT has to pay down its revolver.  If they don't take out the revolver in Q2 2011, it matures 1 year later, which goes against the zero leverage policy of the company.  The equity follow on is almost guaranteed to happen within the next year (they filed a $110mm follow on offering), so it's not new news.  Could be rather dilutive if the stock doesn't rebound much and they have to sell stock below NAV or the IPO price.   Given that the stock is perhaps reasonable at current levels ($11.4, is 6x EBITDA derived off of somewhat bullish rate forecasts) I don't think it'll get to $13 current NAV nor the $14 IPO price, so the financing could appear dilutive. 
    If they don't raise the equity, then the company would become a levered dry bulk company operating on the spot market, which would be even riskier for them in the upcoming weak dry bulk market.  Mgmt has said that it's an option, which would concern me if I were long .
     
    - Freight rates going lower / staying low
    - Ship values falling - could likely happen given the low rate environment and oversupply.   Could then perhaps hit covenants (collateral maintenance).  Asset values are still quite high on a historical basis and there's no reason that they can't fall lower.  Those who point to replacement value as a floor forget that something is only worth the earnings it can generate.  People who were holding out on selling or waiting for a better charter rates may start to panic and dump into the selling.  All these cancellations may leave shipbuilders with ships on their hands that they might also try to dump in a depressed market (and the vicious circle will continue)
     
    - Earnings / results worse than expectations (seems likely as the street is overly bullish and almost dismissive of the risks and some of the expenses)
     
    - Problems to work out before their business gets totally up and running / delays / other problems.  Baltic is a new company that IPOed earlier this year
     
    - Chinese demand / global economy slowing -  given the Chinese policy tightening and the massive run up in overbuilding, could see a short term correction at least.
     
    - Problems with the European financial system - European banks are the largest source of financing for the dry bulk shipping industry.  If something were to happen, that may disrupt the shipping industry.  However, on the positive side, it may cause more orderbook cancellations as well. 
     
    - Lower port congestion - adds capacity

     

    Risks to being short

    - Cancellations higher than expected - already very high though and given the way the majority of shipbuilders have already secured large deposits and forced buyers to obtain financing, it's less likely.  Though if new ship values fall enough, it could make economic sense to walk away from the new build, forfeit the deposit, and buy a new ship cheaper on the secondary market.  But for that to happen, ship values have to really tank first and the stock would fall.
    - Slippage higher than expected (which is hard to envision as it's already in the 30-40% range) - I believe roughly 50% of the orderbook already has secured 15-20% deposits and financing.
    - Other shippers going into bankruptcy - reduces supply
     
     The above 3 issues though won't get solved in a meaningful way unless rates fall to levels that force ships to be laid up and conditions become unbearable for most operators.  The industry has to go through a cleansing first. 
     
    - Political risks - e.g. not being able to use a canal
    - Spikes in the BDI can happen if supply gets curtailed or demand increases suddenly. 
     
    - Potential spike in the stock when they issue a meaningful dividend
    - Policy - environmental regulations, CO2 emissions, and low sulfur regulations,  cost $1-1.5mm vessels to upgrade the ship.  20+ year old ship may not be welcome at a US, Canadian, European port.  Or maybe governments mandate scrapping for older vessels and more strict rules on the seaworthiness of those vessels.
     

    Sell side

    Of course, the sell side remains overly bullish on the sector and is trying to paint the picture that demand is going to narrowly outweigh supply (and so everything will be OK).  Or they point to a Q4 momentary jump in rates given the seasonally strong quarter.  They clearly want to get more banking deals / IPOs done.   Hence their estimates are overly optimistic for the next few quarters & years on both the top line and the bottom line.  BALT will probably miss consensus numbers continually.
     
    Many of them ignore some fees and expenses e.g. dry docking expenses / costs,  capex, fees paid to Genco for the new ship purchases, etc.  When asked about it, they merely said that it would be one time, small, or way out in the future.  Some weren't factoring in the commissions that Baltic has to pay; others don't include some of Genco's management fees, etc.
     
    Most are projecting fairly solid rates where these companies can still make a decent return,  but as we've seen in 1H, it's fairly easy for spot freight rates to go below breakeven costs in this environment.  Given Baltic uses a pure spot strategy, has low leverage, and has a young fleet, they're still generating around 4% ROE in a low rate environment. 
     
    The sell side is also updating their projections marginally and slowly.  When rates are whipping around by 60%, they update their forecasts by 6% (e.g. JPM).  It's pretty clear that rates move a lot more than that.  I've seen some even increase their ship rates contrary to what's going on out there.
     Most management's seem to be overly bullish on the industry as well.  Except for some, like Diana Shipping, who shares my view.
     

    Company Overview

    Baltic Trading is a newly formed dry bulk shipping company that owns 2 capes, 4 supramaxes, and 3 handysizes that will operate in the spot market.  They have an extremely young fleet (around 1 year old). They will pay out the majority of their earnings in dividends.
    They employ only 21 people on land and 770 on ships  (20-24 per vessel).
    Dry bulk shipping executives are incentivized to buy a lot of ships, give themselves a bunch of stock & options, and then swing for the fences.

    Positives for the company

    - No debt strategy + young fleet - So they can still operate at breakeven even with rates as low as they are currently.   I think they will be able to weather the a severe downturn: even if rates tank to $9,000 across all their ships,  they'll still be FCF breakeven.
    - Mgmt - people generally like GNK's & Baltic's management. They aren't as sleazy as some of the other ones out there.  Though that isn't saying too much
     
     Negatives for the company
    - Tied to spot rates, hence volatile earnings

    - Needs to issue equity

    - Pays a lot of fees to Genco
     
     

    Freight Rate Analysis / Forecast - more details

    I went through a supply demand analysis using some of the bullish demand projections and very high supply curtailments.  I still find that supply will continue to dwarf demand. 
    I expect rates to remain compressed across the various dry bulk ship categories with the large increased supply in capes (and to a lesser extent in other vessels).  Also, given that capes & panamaxes are heavily tied to iron ore and coal,  there will probably be more volatility in freight rates for those and potentially more downside pressure.  
    Also, much of the existing/current fleet was purchased or built when vessel prices were much lower, and the majority of the fleet has already paid down all the debt on their ships. So financing costs and breakeven costs for older ships are much lower.  Could very well see rates that people are not used to, more similar to those witnessed in the late 90s when rates for capes were in the teens.   
     
    Ship-owners can't easily keep the vessels idle.  They have to pay the debt and operating costs.  Some vessels that were recently ordered for a few hundred million may have $28,000 in operating + debt costs per day.  Just barely supportable even now.
     
    At current new build prices and resale values, rates could easily remain where they are and shipowners could still make a decent high single digit return, unlevered.  At the moment, reported ship values are inline with rates as current 1 year TC rates provide approximately 7% return on capital unlevered and 9% levered.   Hence there is still room for rates to compress.  
     
     Q4
    Potential iron ore trade improvement as Q4 10 iron ore contract prices are settled at a lower price, the seasonal grain trade starts.  Most are expecting a bounce
     

    Capes

    Capesize rates are currently near breakeven costs
    By my estimates, perhaps 50% of the capesize fleet has a cash flow breakeven of around $12,000-13,000+ (which is close to where rates were at the low earlier this year).  Shipments of iron ore and coal to China employ nearly half the world's bulk carrier fleet.
    The general rule of thumb is that most the capesize fleet is at cash flow breakeven around $15,000
     
    A 150,000 dwt Capesize vessel under a one year time charter earned on average about $14,000 per day between 1996 and 2001, $ 30,000 per day between 2001 and 2005, and $50,000 in September 2006.   
    Also, even with cape rates around $19,000, one can still make a 9% return with some leverage if they buy the ship at $57mm (current capesize 5 yr vessl price).  So clearly rates have room to go lower with added competition as returns get squeezed.
     
    Daily bareboat breakeven rates for modern, secondhand capesize vessels are at $11,500, and just over $8,000 per day for a panamax vessel, according to ICAP Shipping.  As we've seen earlier this year, capes are taking on rates below their breakeven cash costs just to get some work to pay some of their vessel operating costs.   I believe that this could continue and that rates for larger ships could remain lower than other smaller vessels.  
     
    Again, the problem is a combination of new supply, the young age of the capesize fleet, and the fact that many other ships out there may have a competitive advantage from low debt levels.  As capesize ships are really only used for iron ore + coal, their limited usefulness could cause them to sit around for a while if/when Chinese demand falters.   Seasonal lulls, policy interventions would exacerbate the moves.
     
    Shipowners loved ordering capes because they have the most volatility and are the best way to gamble on the dry bulk market.  Because they used debt and other people's money, they'll just walk away when it doesn't work.

    Panamax

    Panamax ships will likely suffer the same problems as capes to a slightly lessser extend given that the fleet is rising 33% for the next 5 years, far less than capes. And these are more versatile vessels.
     
    The average daily revenues of a 70,000 dwt Panamax were about $ 10,000 between 1996 and 2000, rose to $ 20,000 between 2001 and 2005 and to $ 30,000 in September 2006.
    At the low, this was only around $1,000 higher than breakeven costs.
     
    Supramax / Handymax
     Since these ships have more versatility, they should remain a bit better utilized,  but will still suffer from overcapacity as Handymax DWT will increase 31% over the next 5 years.
     
    Handysize
    The Handysize fleet is very old and scrappage can easily offset the new building.  Given that they're also more versatile, rates could remain steady and profitable since the fleet is old and likely doesn't have much debt on them anymore.  Most of the scrappage is likely to come from the handysize fleet than the other ship classes.
     
                Fleet Age          Total DWT         0-4        5-9        10-14    15-19    20-24    '25+
                                                                                                                           
    Capesize           10.1      184.6                78.6      26.7      27.6      30         17.1      4.5
                                                                42.6%   14.5%   15.0%   16.3%   9.3%     2.4%
    Panamax          12.3      126.1                40.8      25.9      22.4      11.3      9.2        16.3
                                                                32.4%   20.5%   17.8%   9.0%     7.3%     12.9%
    Handymax         11.1      98.8                  39.3      19         16.5      6.4        9.1        8.4
                                                                39.8%   19.2%   16.7%   6.5%     9.2%     8.5%
    Handysize         18.2      78.5                  16.3      7.7        10.2      3.9        10.8      29.5
                                                                20.8%   9.8%     13.0%   5.0%     13.8%   37.6%
    Total                 12.3      487.9                175.20  79.30    76.80    51.70    46.10    58.80
                                                                35.9%   16.3%   15.7%   10.6%   9.4%     12.1%
     

    Catalyst

    - Dilutive equity raise - BALT has to pay down its revolver.  If they don't take out the revolver in Q2 2011, it matures 1 year later, which goes against the zero leverage policy of the company.  The equity follow on is almost guaranteed to happen within the next year (they filed a $110mm follow on offering), so it's not new news.  Could be rather dilutive if the stock doesn't rebound much and they have to sell stock below NAV or the IPO price.   Given that the stock is perhaps reasonable at current levels ($11.4, is 6x EBITDA derived off of somewhat bullish rate forecasts) I don't think it'll get to $13 current NAV nor the $14 IPO price, so the financing could appear dilutive. 

    If they don't raise the equity, then the company would become a levered dry bulk company operating on the spot market, which would be even riskier for them in the upcoming weak dry bulk market.  Mgmt has said that it's an option, which would concern me if I were long .

    - Freight rates going lower / staying low

    - Ship values falling - could likely happen given the low rate environment and oversupply.   Could then perhaps hit covenants (collateral maintenance).  Asset values are still quite high on a historical basis and there's no reason that they can't fall lower.  Those who point to replacement value as a floor forget that something is only worth the earnings it can generate.  People who were holding out on selling or waiting for a better charter rates may start to panic and dump into the selling.  All these cancellations may leave shipbuilders with ships on their hands that they might also try to dump in a depressed market (and the vicious circle will continue)

    - Earnings / results worse than expectations (seems likely as the street is overly bullish and almost dismissive of the risks and some of the expenses)

    - Problems to work out before their business gets totally up and running / delays / other problems.  Baltic is a new company that IPOed earlier this year

    - Chinese demand / global economy slowing -  given the Chinese policy tightening and the massive run up in overbuilding, could see a short term correction at least.

    - Problems with the European financial system - European banks are the largest source of financing for the dry bulk shipping industry.  If something were to happen, that may disrupt the shipping industry.  However, on the positive side, it may cause more orderbook cancellations as well. 

    - Sell side throwing in the towel

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