Aug 7, 2021
Operator
Good morning, ladies and gentlemen, and welcome to the Genco Shipping & Trading Limited Second Quarter 2021 Earnings Conference Call and Presentation. Before we begin, please note that there will be a slide presentation accompanying today's conference call.
That presentation can be obtained from Genco's website at www.gencoshipping.com. To inform everyone today's conference is being recorded and is now being webcast at the Company's website at www.gencoshipping.com.
A replay of the conference will be accessible at any time during the next 2 weeks by dialing (888) 203-1112 or (719) 457-0820 and entering the passcode 8885406. At this time, I will turn the conference over to the Company.
Please go ahead.
Peter Allen
Good morning. Before we begin our presentation, I note that in this conference call, we will be making certain forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements use words such as anticipate, budget, estimate, expect, project, intend, plan, believe and other words and terms of similar meaning in connection with the discussion of potential future events, circumstances or future operating or financial performance. These forward-looking statements are based on management's current expectations and observations.
For a discussion of factors that could cause results to differ, please see the Company's press release that was issued yesterday, the materials relating to this call posted on the Company's website and the Company's filings with the Securities and Exchange Commission including, without limitation, the Company's annual report on Form 10-K for the year ended December 31, 2020, and the Company's reports on Form 10-Q and Form 8-K subsequently filed with the SEC. At this time, I would like to introduce John Wobensmith, Chief Executive Officer of Genco Shipping & Trading Limited.
John Wobensmith
Good morning, everyone. Welcome to Genco's Second Quarter 2021 Conference Call.
I will begin today's call by reviewing our year-to-date highlights, providing an update on the company's new comprehensive value strategy, financial results for the quarter and the industry's current fundamentals and then open the call up for questions. For additional information, please also refer to our earnings presentation posted on our website.
The second quarter of 2021 was a transformative period for Genco. In April, we announced our new comprehensive value strategy centered around growth, deleveraging and dividends.
Since then we have made notable progress working towards paying our first dividend under this strategy. Highlighting our strong progress in achieving growth objectives over the last 4 months, we have agreed to purchase 6 modern, fuel-efficient Ultramax vessels to build out this core portion of our fleet to 15 ships.
We believe that we are at a unique point in the drybulk cycle with freight rates at their highest levels in over a decade while values which have increased year-to-date have lagged the upward trajectory of earnings. This creates compelling return on capital opportunities.
To capitalize this and to derisk our latest purchase of 3 Ultramaxes, we secured 3 2-year charters at rates ranging from $23,375 to $25,500 per day locking in an unlevered cash-on-cash return of approximately 50% over this period on those 3 newly-acquired ships. In terms of our proactive deleveraging progress, during the first half of 2021, we repaid $82.2 million of debt or 18% at the beginning of the year debt balance.
This included the retirement of our scrubber facility as well as the prepayment of our revolver. Financial deleveraging is a key part of our value strategy.
Therefore, given the strong market, we believe it is prudent to accelerate debt repayments to further fortify our balance sheet as we position the company to distribute sizable dividends in diverse rate environments. At the end of this year, we are targeting a net loan-to-value of 20%, which we are currently on track towards achieving.
Ultimately, our medium-term goal is to reduce our net debt position to 0 through additional debt repayments over the coming years. Importantly, we have now achieved a foundational component of our corporate strategy and a key milestone towards full implementation.
Specifically, we are pleased to have entered into a new credit facility to complete the global refinancing of our existing credit facilities. We expect the new facility to significantly enhance our capital structure, improve key terms of our debt, reduce our cash flow breakeven rate and provide further optionality for the company.
Later in the call, Apostolos will elaborate on some of the details and features of this new credit facility. Regarding returning capital to shareholders and our current quarterly dividend for the second quarter, we increased our payout to $0.10 per share, our second consecutive quarterly increase.
We have now declared a total of $0.905 per share in dividends over the last 8 quarters. We are pleased with the progress we are making and continue to target Q4 2021 results for our anticipated first dividend under our new corporate strategy, which would be payable in Q1 2022.
In addition to the measures taken to execute our value strategy from an earnings perspective, the second quarter was our strongest in over a decade. Our net income of $32 million and our time charter equivalent rate of $21,137 per day, both marked our highest since 2010.
Additionally, our first half adjusted EBITDA was $70.9 million and is nearly identical to our full year 2020 adjusted EBITDA of $71.8 million. Looking ahead to the third quarter, our estimates point to continued strong results with a time chart equivalent over $27,000 per day based on fixtures to date across the fleet.
Moreover, we will have the majority of our Capesize vessels open for fixing in the coming weeks to take advantage of the meaningful increase in rates we have recently seen, highlighting our significant operating leverage in a robust and improving drybulk market. In addition to the current firm market conditions, we view the market outlook favorably.
The order book as a percentage of the fleet is at a historical low limiting net fleet growth, while unprecedented stimulus as well as the Brazilian iron ore export recovery have combined to create improving supply and demand dynamics. Our positive market outlook together with our robust balance sheet has positioned Genco well to implement our new comprehensive value strategy as we focus on unlocking shareholder value.
Not to be overshadowed by the measures we have taken on the value strategy, there were several other key corporate updates that occurred in the recent months. Genco was ranked #1 out of 52 public shipping companies in the Webber Research 2021 ESG scorecard.
To that end, on the environmental side, we joined a working group alongside 33 other participants across the maritime value chain to study the feasibility of ammonia as an alternative fuel as part of the long-term goal to decarbonize shipping. Additionally, we plan to enter into a new joint venture, GS Shipmanagement with The Synergy Group for the technical management of our fleet.
We expect the creation of this joint venture will provide a unique and transparent service to the management of our vessels and resolve in increased visibility and control over vessel operations, increased fleet-wide fuel efficiency to lower our carbon footprint and potentially unlock further vessel operating expense savings. At this point, I will now turn the call over to Apostolos Zafolias, our Chief Financial Officer.
Apostolos Zafolias
Thank you, John. For the second quarter of 2021, the company recorded net income of $32 million or $0.76 and $0.75 diluted earnings per share.
A 216% year-over-year increase in our fleet-wide TCE to $21,137 per day was a primary driver resulting in increased adjusted EBITDA of $50.2 million. During the quarter, we continued to further strengthen our balance sheet through operating cash flows from fair market conditions together with opportunistic vessel sales bringing our cash position to $161.2 million including $44.9 million of restricted cash as of June 30, 2021.
We also reduced our debt balance in the year-to-date by 18% through a combination of scheduled debt amortization as well as the prepayment of our scrubber and revolving credit facilities. As a result, our debt outstanding is $367 million as of the end of the second quarter, which after considering our cash position resulted in net debt of $206 million.
Genco's already low leverage position and strong freight rate environment have enabled us to enter into a new global refinancing of our debt. We appreciate the strong and ongoing support from our leading banking group.
As a key step towards implementing our comprehensive value strategy, we have entered into an agreement with our lenders for the $450 million credit facility, which consists of a 5 year term loan together with a sizable revolver that can be used for growth. This new debt structure will provide improved capital allocation flexibility and significantly reduce our cash flow breakeven rate, which combined with the strength of our balance sheet provides a solid foundation for our value strategy and our goal to distribute sizable dividends to shareholders.
The $450 million credit facility provides for a $150 million term loan and a revolving line of up to $300 million, which can be used for acquisitions and general corporate purposes. Based on current market conditions and management estimates, we are targeting a year-end debt balance of approximately $250 million following targeted debt paydowns of approximately $117 million over the second half of the year.
If we make these targeted paydowns, we will have no mandatory debt amortization payments until December 2025. Regardless of this favorable mandatory debt amortization schedule, we plan to continue to voluntarily pay down debt with a medium-term objective of reducing our net debt to zero.
Key terms of the new facility include competitive pricing of LIBOR+ 215 basis points to 275 basis points, and we expect to be on the low end of that range after the first measurement date in relation to September 30 results. A favorable covenant package, including a lower minimum liquidity covenant as compared to our existing facilities and other customary covenants including a minimum collateral maintenance covenant, minimum working capital and net debt to capitalization covenants.
In addition, there are no restrictions on dividends other than customary event of default and pro forma financial covenant compliance provisions. Importantly, 5 of our vessels to be acquired will remain unencumbered and not pledged as collateral for this new facility.
This will provide Genco with further flexibility and optionality on a go-forward basis. On Slide 17, we have provided estimated expense levels on a per vessel per day basis for you.
With regard to dry docking, we anticipate 2 vessels to enter dry dock this quarter resulting in approximately 40 days of offhire, estimated offhire during the third quarter. In terms of vessel sale and purchase activity, we anticipate taking delivery of 4 of the 6 Ultramaxes that we have agreed to acquire during the third quarter, and we also completed the sale of our last 53,000 deadweight ton Supramax vessel, the Genco Lorraine, in July.
Furthermore, we agreed to sell the Genco Provence, a 2004 built Supramax vessel and the oldest ship in our fleet for $13.25 million with expected delivery in the fourth quarter of 2021. Importantly, with this sale, we will be avoiding budgeted dry docking CapEx of approximately $800,000 in next year in 2022.
I will now turn the call over to Peter Allen, our SVP of Strategy, to discuss the industry fundamentals.
Peter Allen
Thank you, Apostolos. During the second quarter of this year, freight rates continued to increase to 10 year plus highs driven by a resurgence of global economic activity leading to augmented demand for raw materials.
Spot freight rates for both Capesize and Supramax vessels currently stand at over $30,000 per day. During the first half of the year, global steel production rose by 14% year-over-year supporting the iron ore trade and Capesize rates.
While China's output rose by 12%, ex-China has seen a notable rebound rising by 18% year-over-year led by India, the EU and Japan. We have also seen a recovery in the Brazilian iron ore trade, which is up by 11% year-over-year.
There is a highly seasonal weighting towards the second half of the year for Brazilian iron ore exports, which historically rise approximately 20% from July to December versus January to June. On the minor bulks, rates have been driven by strong grain demand from China.
Additionally, we continue to see increased shipments in minor bulk commodities closely linked to global GDP growth and economic activity. Regarding the vessel supply side, net fleet growth year-to-date is approximately 2%.
The order book as a percentage of the fleet is 6%, which compares to 7% of the fleet that is greater than or equal to 20 years old. Encouragingly, new building vessel ordering has been relatively low this year despite the strong market conditions.
We believe these positive supply and demand dynamics provide a solid foundation for the drybulk market and lead to low thresholds for demand to exceed to improve fleet-wide utilization and freight rates. For the balance of the year, we expect increased iron ore exports to be a catalyst for Capesize rates, while increased grain exports from the Black Sea region in August are expected to be supportive to Supramax earnings in the Atlantic Basin ahead of the North American grain season in the fourth quarter.
These demand drivers are expected to be met by favorable supply side fundamentals underpinned by the historically low order book. This concludes our presentation.
And we would now be happy to take your questions.
Operator
We will move on to our first question from Randy Giveans of Jefferies.
Randy Giveans
Congrats, obviously, on the best quarter in a decade. I'm sure I'll say the same again next quarter but I guess, 2 questions for me.
First, you mentioned you're going to repay $117 million in debt during the back half of the year, you also have I believe $87 million due to complete the acquisition of the 4 vessels. So I guess, where does that put your balance sheet and your maybe financial flexibility for future acquisitions or maybe even share repurchases at this point in the next few months?
John Wobensmith
I mean look, we -- a couple of things. So the 3 ships that we just bought or agreed to buy, which we'll be taking delivery of between August and October, as you saw we did de-risk those purchases with time charters on 3 of our existing ships, 2 years between $23,375 and $25,500.
As I said in the opening remarks that actually yields a 50% cash-on-cash return. So you're effectively paying off half of the purchase price over a 2-year period on ships that are 2017 and 2014 built.
So I think we've done a pretty good job of de-risking and covering. We have a very large revolving credit facility in place.
I think part of that was to have additional firepower for acquisition. But having said that, we're also concentrated on the value strategy and deleveraging the balance sheet.
So for the time being, I think we're very happy with the acquisitions we've made, Randy. But we certainly definitely will still have cash at the end of the year after the paydowns and taking delivery of the ships.
So we'll take it as it come, and we're going to continue to look for opportunities. As I mentioned on the call earlier, values are still compelling from where freight rates are and where time charter rates are.
Again, evidenced by those 2-year deals that we did a few weeks ago.
Randy Giveans
Sure. Yes, I can see that as well.
And then speaking of those charter rates that you mentioned there, you chartered out a few of those Ultramaxes, very strong rates, as you mentioned, $23,000, $24,000, $25,000 for 2 years. I guess a few questions around that.
Any additional appetite for further Ultramax charter outs or is there kind of a base level of spot exposure you want to have there? And then as it pertains to the Capesizes, I think you only have one charter there or maybe 2.
Is the reason that charter activity and rates aren't as elevated on the Capesizes because of maybe uncertainty around Chinese steel production? And really, I'm just trying to ask you about that as well, so kind of a 2-for-1 question here because that's clearly the big concern in the market.
John Wobensmith
So in terms of chartering activity, we may do a couple more on the Ultras but I think you're going to see us focus more on the Capes in terms of locking up cash flows. That is the most volatile sector, and as we come closer and closer to implementing fully the value strategy I think it makes sense to have coverage in place.
Rates today in the Capes are still probably around $30,000 a day for 1 and 2 year rates are probably $24,000 to $25,000 a day. So good, healthy numbers.
Having said that, the spot market is actually quite a bit higher. My guess is as the spot market continues to hold up over the next couple of months and increase along the lines of the FFA curve, you'll see those charter rates move up further.
But I think that's where you're going to see us concentrate a little more on de-risking and our portfolio approach and putting some more ships away under longer-term charter.
Randy Giveans
Got it. On the steel front.
John Wobensmith
Yes. So look, on the steel front, in typical fashion there is a lot of conflicting reports.
And a lot of times, we see the Chinese government say things but not necessarily execute. I do think -- it seems like there is definitely some curtailment on steel production.
I think a lot of it's centered around the Communist party anniversary and reducing pollution, particularly around Beijing. It's possible that will continue for a little while, but we don't see any fundamental shift.
And I would point out that the most important thing to drybulk shipping and in terms of China is iron ore shipments. Now, granted the steel production goes into that, but the reality is Brazil is continuing to ramp up and get their logistics system back up and running after early 2019.
And we expect those volumes to continue. We've seen this before where even steel production has been flat, but yet iron ore imports continue to move up.
And as we're going into the second half of the year, again typically stronger seasonally second half of the year, for Vale it's usually 18% to 20% higher in terms of shipments in the first half. I don't see too much of a change in that right now.
And I also think the Chinese government was trying to put some downward pressure on iron ore prices, which successful no doubt about that, but that opens up steel margins. So it's actually better for the steel companies to see some of these lower iron ore prices.
And quite frankly, Vale and the Australian iron ore miners have low cash flow breakevens on iron ore production. So any -- these slight movements downwards are -- they're still producing excellent cash flow.
So a long answer to that, but reality is we continue to think the market firms coming into the third quarter here on the Capesize and the Ultras for that matter.
Randy Giveans
Yes, I appreciate the color and I agree. Obviously, the increase in Vale exports and really the non-Chinese steel production ramping as well could offset that.
Operator
We'll move on to our next question from Omar Nokta of Clarksons Securities.
Omar Nokta
I guess, as Randy said, congratulations on I guess on several fronts, the earnings and then also this refinance, the acquisitions and the new JV. I did want to ask about the $450 million credit facility, which with the $300 million revolver it's a pretty decent-sized revolver, I'd say and one I don't think I've really seen much of in the shipping space over the past several years.
So I guess, kudos to you on being able to get a revolver that size. But also I wanted to ask in terms of how the mechanics of the revolver, how does that work in terms of vessel acquisitions?
We've seen it where if you have a revolver and you use it to buy ships, the --that portion that's been drawn converts into a term loan. Is that what's happening here or does this stay on as a revolver?
Apostolos Zafolias
Thanks, Omar. No, it's a regular revolver.
It does not convert into a term loan. You're able to draw and pay back and redraw and it has regular quarterly reductions of about $11.7 million, but it does not term out.
It's just a regular revolver and gives us plenty of flexibility going forward. I will also say that 5 of the vessels in our fleet will stay unencumbered, so that -- those provide additional flexibility for us in the future.
And it also has an uncommitted accordion feature. So if we did want to increase the facility amount, we could do that by putting additional vessels in there.
John Wobensmith
Yes. I mean, Omar, I would look at it as a holistic $450 million credit facility.
Yes, $300 million is a revolver and $150 million is a term loan, but it's really a $450 million facility that, as Apostolos says, reduces based on a 20-year amort schedule at $11 million and change per quarter. That's how I would view it.
Omar Nokta
Got it. Yes.
Pretty nice schedule there. And then not that you would necessarily want to do this considering you're reducing debt fairly aggressively here, but just in terms of, let's say, all else equal you don't have that much drawn on the facility if you were to buy a ship for say, $30 million, could that be completely --fully drawn?
If you were to pay $30 million for a ship, could you draw down $30 million to fund it or does it have to adhere to some LTV covenant?
John Wobensmith
You could...
Omar Nokta
Sorry, help fund that.
Apostolos Zafolias
So you could draw down $30 million depending on the revolver availability, obviously. You would not need to put it out in as collateral.
There is an overall covenant of 55% LTV, a drawdown, but that's for the whole revolver, right.
Omar Nokta
Got it. Yes.
And I appreciate you kind of answering that. And then one kind of follow-up is, as Randy asked about, you intend to repay $117 million here during the second half, get you down to that $250 million at year-end.
And it sounds, if I recall it, Apostolos you mentioned that you're not going to stop there at year-end $250 million, next year you intend to continue paying down debt. Is there a certain level or amount that you intend to pay or you have a target of how much of that $250 million you want to pay down next year?
John Wobensmith
Great question, Omar. So we don't have a target set yet but as we're coming into the next quarter earnings call, if you will, we -- if you think about it, we will have our third quarter cash flow in the bag, so to speak, we will have probably 60% of our fourth quarter fixtures done.
So we will have a very good sense coming into the end of the year, our cash position and how much we'll be paying ultimately down too. Clearly, the target is $250 million, it'd be great if we could go lower than that, but that's going to depend on freight rates.
So also at that time we're going to take a view on 2022, and we will then let the market know what we plan on repaying for debt for 2022. So it's a little bit of a let's wait, let's make sure we have as much information as possible as we head into year-end, and then we can set that repayment for 2022.
Omar Nokta
Makes sense. It sounds like you're -- no matter what the amount of debt outstanding at year-end, if I just do a simple calculation, will be below the scrap value of the fleet, so not a bad place to be.
John Wobensmith
Yes. Yes.
And basis today's scrap values? Yes, that -- I would agree with that.
But look ultimately, Omar, one of the key tenets of this strategy is obviously get down to that net debt 0 because we want a rock solid, low cash flow breakeven rate so that we can continue to pay dividends throughout any type of market cycle.
Operator
We will now move on to our next question from James Jang of Univest Securities.
James Jang
I have a couple of quick questions. We're expecting a start of a real super cycle in the drybulk sector in the coming year, and we're expecting that to last about 2.5 to 3 years.
My question is, are you open to chartering in vessels at current levels if you are -- if you have the same sentiment as me with the super cycle coming up or would you like to own vessels?
John Wobensmith
I think it's a little bit of both. So first of all, we definitely are in the owning vessel business and will continue to be.
But as part of our -- particularly our minor bulk strategy, we do quite a bit of booking of forward cargoes and using other people's vessels at times to move those cargoes. So we do charter in.
But those typically be -- those are typically for short-term cargo covering where we believe we can make a profit on those liftings. We have done some longer-term charters in the sense of 3 to 5 months or 4 to 6 months.
But again, that's on the -- usually on the back of a decent backhaul cargo, so that we're covering quite a bit of the -- of that minimum period and then using it to make money on the front haul. What I think you're referring to is longer-term charters, longer-term chartering in.
And I would say, no. We -- that -- we view that as quite a bit more risk to do longer-term charters.
We have a large enough fleet where we can operate very efficiently, and we'd rather use our minor bulk fleet, trade around that with 4 cargoes, and as I said, on a short-term basis use -- potentially use other vessels outside of our fleet. But long term, I would say the answer is no.
We just look at that as dialing up the risk too much.
James Jang
Got you. Okay.
The next question is on the expensing. So with the smaller vessels folded in, do we assume that the Cape will be in the next month that you would look at or you view maybe more of still a case-by-case basis and value?
John Wobensmith
I would call it a case-by-case basis. We have a barbell approach where we've identified we want to continue to grow in Capes and Ultras.
There have been some very compelling Ultramax transactions that we've been able to execute on, which we have quickly and definitively. The Capesize market in terms of acquiring eco vessels, which is what we are focused on, is a little more challenging in the sense that the market is not as liquid as the eco Ultramax market, but we will definitely continue to look at that.
And if we see an opportunity then we'll move on it.
Operator
And it appears we have no further questions at this time. I'd like to turn the conference back for any additional or closing remarks.
John Wobensmith
Thank you, everyone, for participating today, and I hope everyone has a nice day and enjoys the rest of your summer. Thank you.
Operator
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation.
You may now disconnect.