Britannia Bulk Talks About Financial Difficulties

Wednesday, October 29, 2008

While the company has not yet concluded the review of its financial results for the three months ended September 30, 2008, the company expects to announce a significant net loss for the period compared to the net income achieved during the second quarter of 2008. The company believes that the expected loss will have resulted from the substantial decreases in dry bulk charter rates that occurred during the period, exacerbated by the company’s increase in chartered-in capacity during the same period and its entry into the forward freight agreements (FFAs) and a bunker fuel hedge more fully described below.

Historically the Company has chartered-in vessels to increase its overall dead weight tonnage capacity and enhance its service offering to customers. During the three months ended September 30, 2008 the Company increased its chartered-in capacity at a time when the demand for dry bulk shipping capacity decreased significantly. This decrease continued throughout the third quarter of 2008 and dry bulk charter rates fell substantially during the same period. As a result, the charter rates the Company achieved during the three months ended September 30, 2008 for its chartered-in vessels were less than the rates the Company paid to secure many of these vessels, resulting in significant losses.

A Forward Freight Agreement (FFA) is an agreement to pay the difference between a current price and the future price of moving a product from one location to another, or for the future price of hiring a ship over a period of time. FFAs are used by ship-owners and charterers as means of protecting themselves against the volatility of freight rates. For example, a ship-owner would typically sell FFAs to hedge against falling freight rates. Similarly, a charterer would typically buy FFAs to fix shipping costs. Positions in FFAs can be closed out by buying or selling opposing positions.

The Company has historically entered into dry bulk FFAs as economic hedges relating to identifiable ship or cargo positions and as economic hedges of transactions expected to be carried out in the normal course of its shipping business. None of the Company’s FFA derivatives qualify for hedge accounting; therefore, the net changes in derivative assets and liabilities are reflected in current period operations. In the past, the Company has entered into FFA contracts to provide a fixed number of theoretical voyages at fixed rates, with such contracts generally ranging from one month to one year and settling monthly based on a published index. For such contracts, the Company recognizes monthly realized gains or losses from FFAs concurrently with monthly cash settlements. In addition, unrealized gains or losses on the FFAs are recorded in the Company’s statement of operations under “gains on forward freight agreements”.

Entering into FFAs can lead to material fluctuations in the Company’s reported net income on a period to period basis. Since July 2008, the Company bought FFAs that appear not to have been purchased to hedge identifiable ship or cargo positions. This resulted in the Company being more exposed to the falling charter rates and reduced overall demand for dry bulk shipping services than it would have been if its historic practice of using FFAs as economic hedges had been followed. In marking these FFAs to market, the Company expects to recognize a significant realized loss for the three months ended September 30, 2008. Cash settlement of such FFAs is scheduled to commence in the fourth quarter of 2008 and continue into 2009.

An independent committee of the Company’s Board of Directors has resolved to retain an external advisor to assist it in determining how the Company came to enter into these FFAs.

If the Company’s vessels are time-chartered out to third parties, the charterer pays for the bunker (fuel and oil). In such instance, any inflationary pressure on the cost of bunker fuel does not affect the Company’s results of operations. If, however, the Company’s vessels are employed under contracts of affreightment (COAs) or spot charters, the freight rates it receives are generally sensitive to the price of bunker fuel. A rise in bunker costs can sometimes have a negative temporary effect on the Company’s results since freight rates generally adjust upwards only after bunker fuel prices settle at a higher level. To mitigate the risk of this temporary effect, and in light of recent substantial movements in the price for bunker fuel, the Company has in the past entered into hedging arrangements whereby it purchased a fixed quantity of bunker fuel, calculated against identifiable COAs, at a fixed price to be delivered over a specified period of time.

Bunker fuel hedges are designated as cash flow hedges for accounting purposes and, accordingly, unrealized gains or losses resulting from changes in fuel prices are recorded in other comprehensive income (loss), a component of stockholders' equity.

In the three months ended September 30, 2008, the Company entered into a bunker fuel hedge which is currently uncompetitive because it is hedged to prices which are significantly above the current market price of bunker fuel. As a result, the Company currently estimates that its aggregate bunker fuel hedging losses for the three months ended September 30, 2008 will be significant.

Maritime Reporter September 2014 Digital Edition
FREE Maritime Reporter Subscription
Latest Maritime News    rss feeds

People & Company News

Decade Old India Shipping Summit Makes History

In ten years, India Shipping Summit held consistently in Mumbai, has sailed on a robust growth course despite the worldwide witnessing recessionary waves buffeting any endeavors to grow and gain.

Liebherr to Deliver RTGs to Mayotte and Manila

Liebherr confirms orders for variable speed RTGs and electric RTGs. DPWorld Asian Terminals Inc. has placed an order with Liebherr Container Cranes for a further 5 RTGs at its Manila facility.

U.S. Navy Contracts 12 Rapid Response Skimmers

Kvichak Marine won a US Navy contract for 12 30-ft.Rapid Response Skimmers (RRS) for delivery over the next 18 months, with options for up to 30 additional skimmers to be delivered through 2019.

Finance

Areva-Siemens Raises Claim Over Finnish Reactor Delays

The French-German consortium Areva-Siemens , the supplier of Finland's much-delayed Olkiluoto-3 nuclear reactor, has increased its claim against Finnish utility Teollisuuden Voima (TVO),

Ezra Bags $70m in Offshore Contracts

Ezra Holdings Limited, a leading contractor and provider of integrated offshore solutions to the oil and gas industry, today announced that the Group’s Subsea Services division,

WFW Advises ING Bank on $340m Loan Facility for Euronav

Watson, Farley & Williams (WFW) has advised ING Bank N.V. (ING) as sole bookrunner and facility agent for a syndicate of banks on a $340 million loan facility made available to Euronav NV.

 
 
Maritime Careers / Shipboard Positions Maritime Contracts Maritime Security Naval Architecture Offshore Oil Pod Propulsion Port Authority Ship Electronics Shipbuilding / Vessel Construction Winch
rss | archive | history | articles | privacy | terms and conditions | contributors | top maritime news | about us | copyright | maritime magazines
maritime security news | shipbuilding news | maritime industry | shipping news | maritime reporting | workboats news | ship design | maritime business

Time taken: 0.2047 sec (5 req/sec)