TRIS Rating has downgraded the company rating of Precious Shipping PLC (PSL) to “BBB-” from “BBB” and has also downgraded the rating of PSL’s senior unsecured debentures to “BB+” from “BBB-”. At the same time, TRIS Rating has revised the rating outlook from “stable” to “negative”. The ratings reflect PSL’s weakened earnings and financial profile pressured by protracted unfavorable market conditions. The existing demand-supply imbalance is expected to persist over the next 12-18 months, despite the high levels of newbuilding cancellations and scrapping. The oversupply situation is expected to keep charter rates at low levels, pressuring the operating performance of the company in the short-to medium term
The “negative” outlook reflects concern over the protracted depressed market conditions in the dry-bulk shipping industry which may cause PSL’s financial profile to weaken more than expected. PSL's ratings could be downgraded if the operating losses persist, eroding its liquidity and leaving smaller headroom for financial flexibility. The ratings could be revised upward if the company is able to withstand the down cycle and its operating performance improves to the level that enables the company to avoid breaching financial covenants.
PSL was established in 1989 and listed on the Stock Exchange of Thailand (SET) in 1993. PSL is a shipping company, owning and operating dry-bulk ships as a tramp shipper. As of 25 August 2016, PSL had 38 vessels with a total of 1.55 million deadweight tonnage (DWT) in its fleet, comprising six small handy vessels, 13 handymax vessels, four cement carriers, nine supramax vessels, and six ultramax vessels. As of June 2016, PSL’s major shareholders comprised Ms. Nishita Shah and group, holding 43.29% of PSL's shares, followed by Mr. Khalid Moinuddin Hashim, with 8.43% of shares.
The dry-bulk shipping industry is highly volatile and relies largely on world economic conditions. On the demand front, the fragile global economy especially the slowdown in China, the major player in commodities trading, put a pressure on the demand for dry-bulk shipping. The ongoing oversupply situation is another main negative factor leading to surplus capacity in the industry and constraining recovery of charter rates. These unfavorable market conditions reflect in the Baltic Dry Index (BDI) which is used as a reference for the time charter (TC) rate. The BDI was low at an average of 719 point in 2015 and reached the historically lowest point in February 2016 at 290 point. The BDI averaged at 489 point in the first half of 2016.
Along with the industry, PSL’s earnings were hit hard by the low charter rate. PSL’s average TC rate was at US$6,266 per ship per day in 2015 and declined to US$5,519 per ship per day in the first six months of 2016. PSL’s costs declined slightly, mainly from the sales of uneconomical ships. The average operating cost (opex) declined from US$4,652 per ship per day in 2015 to US$4,523 per ship per day in the first six months of 2016. The low TC rates resulted in losses from operations of US$37.5 million in 2015 and US$25.4 million the first half of 2016.
To facilitate liquidity and financial flexibility, PSL issued US$99.72 million of debentures in January 2016. PSL received three new ships between January and August 2016 totaling US$42.96 million which were funded mainly by bank loans. At the end of June 2016, PSL’s total debt was US$454.5 million. The ratio of debt to capitalization rose from 47.80% at the end of 2015 to 52.62% at the end of June 2016.
Over the next 12-18 months, TRIS Rating expects PSL to prudently manage liquidity as the depressed market conditions and low charter rates are expected to persist. Thanks to the interruption in PSL’s fleet rejuvenation program, the company has five new building contracts open, two of which are expected to be terminated. As a result, PSL is expected to receive two more ships this year which need funding of approximately US$20.32 million. Another ship contract worth US$18 million is expected to be delivered in 2018. PSL has scheduled debt repayment of US$12.09 million in the second half of 2016 and US$25.11 million in 2017. PSL's liquidity sources are expected mainly from cash on hand of US$45.51 million at the end of June 2016 and new borrowings. The company plans to issue up to US$100 million in debentures in the second half of 2016 to ensure adequate liquidity and provide more headroom for financial flexibility.
TRIS Rating believes that PSL will have sufficient sources of funds to meet its obligations over the next 12 months. However, if depressed market environment and weak earnings continue and further hurt the company's financial profile, PSL could breach some financial covenants. PSL received covenant waiver consents from lenders regarding earnings-related (EBITDA and DSCR) ratios until December 2016. However, PSL still has to comply with loan-to-value covenants which may trigger some debt prepayment. This could lessen its headroom for financial flexibility.
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