AlixPartners sees more dry bulk firms going bust

The study found that industry revenues fell 18% from 2014 to 2015. while earnings before interest, taxes, depreciation, and amortization (EBITDA) plunged 168% from $169m to losses of $115m.

"Conditions are likely to worsen in 2016," the study warned. Factors causing this include China’s economic slowdown continuing to depress demand for basic materials with coal imports in particular down 30% from 2014 to 2015.

Exacerbating the problem is the perennial problem that industry consolidation and vessel scrapping remain well below the levels needed to lead to a significant rebound in pricing, especially as easy funding and desperate shipbuilders continue to push the building new vessels.

"Even companies that restructured a few years ago are struggling, and at this point, the majority of companies in our 2016 Dry Bulk Shipping Outlook are at risk of bankruptcy," the study concluded.

Supporting its position, AlixPartners found that almost every company in its study is in distress, according to the Altman-Z score, an indicator of potential bankruptcy, with the average score for the sector already dropping below 1.00. A score below 1.80 is generally accepted as indicating a high probability of financial distress.

According to the global business advisory firm, the 2015 average was 0.46 compared with the 2013 average of 1.91. "Leverage is common in the industry; indeed, it usually forms part of a company’s operating model. However, as their performance faltered, companies found themselves struggling to generate the cash flow needed to sustain their leveraged models," AlixPartners explained.

"With substantial restructuring activity already in process in 2016, it’s expected the industry will see even more activity as the year proceeds," it predicted.

Remedial action suggested includes working proactively and forming close alliances with all company stakeholders to preserve cash and sustain a range of options instead of waiting until liquidity runs out; minimising costs by improving both operating performance and applications of working capital; stop newbuildings while also continuing to scrap or idle older or less efficient vessels to more aggressively manage supply; and finally seek opportunities to consolidate through M&As, alliances or pools to more effectively manage fleet utilization.

Looking ahead AlixPartners concluded that "three years from now, demand may come back, but shipowners should focus on the next 36 months and act as though depressed demand is here to stay".

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