(Dry-bulk shipping story updated with further details on Deutsche Bank's downgrade of Genco Shipping, and for closing stock prices.)

NEW YORK ( TheStreet) -- Dry-bulk shipping stocks plunged across the board Tuesday after a major South Korean freight company -- which hires out vessels from ship owners, including several publicly traded ones -- filed for receivership amid one of the worst markets for dry-bulk cargoes since the financial crisis.

By far the most exposed to the struggles of Korea Line Corp. was Eagle Bulk Shipping ( EGLE), whose stock fell 11.3% to $4.01 in frantic trading Tuesday. Volume surpassed 12 million shares, nearly ten times the daily average turnover in the name.

According to one hedge-fund trader who focuses on shipping stocks, Korea Line has chartered 13 of Eagle Bulk's 48 ships. The charters are long term, lasting between six and ten years. That gives Eagle Bulk about $700 million in exposure to Korea Line, according to the calculations of the trader.

Eagle Bulk officials weren't immediately available for comment, but the company released a statement Monday to address the issue. It called its exposure to Korea Line "modest," saying that "the vast majority of our charters with KLC are fixed at close to current market rates."

Eagle said it "expects to be engaged in ongoing and constructive dialogue with KLC as the Company works on its rehabilitation plans. We will continue to update the market as events warrant."

Some investors fear that the bankruptcy of one of Eagle's most important customers could trigger breaches in its loan covenants. The company has about $1.1 billion in debt, which is about the same as the value of the company's fleet, according to the shipping-equities trader.

>>Dry Bulk 2011: Working Through the Glut

In a bit of cruel irony, Eagle at one point held insurance for just this situation -- i.e., to cover losses associated with the default of a charterer -- but the company decided to let that insurance expire last year, the trader said.

In a press release, Korea Line said it plans to maintain operations as it works to restructure its debt, Bloomberg reported Tuesday. It remains unclear what will become of Eagle's charter arrangements with Korea Line.

Word of a possible Korea Line bankruptcy had been rumored in the shipping industry for several weeks. Short interest in Eagle Bulk stock had risen of late as well.

Eagle isn't alone in its exposure to Korea Line. Navios Maritime Partners ( NMM), the all-dividend shipping company, which reported results Monday, derives about 15% of its revenue from ships chartered to Korea Line, according to the shipping-equities trader.

But Navios looks to be protected from that counterparty risk. According to a spokesman for Navios, the company has the default insurance that Eagle Bulk reportedly let expire last year. The insurance covers any losses that would come from charters terminated by a bankrupt counterparty.

A glut of new ships coming into service, combined with devastating floods in a key mining region in Australia, has destabilized the market for dry-bulk ships, which haul raw materials such as iron ore, coal and grain.

According to the Baltic Exchange, day rates for a capesize ship, the biggest dry-bulk freighters in the world, fell to $8,000 on Tuesday. That means that some ships are now losing money. The cost of operating a capesize vessel comes to $7,000 to $10,000 a day, according to industry experts.

Other dry-bulk stocks sold off sharply on heavy volumes Tuesday as well.

Genco Shipping & Trading ( GNK) closed down 8% at $11.91 after Deutsche Bank downgraded the stock to hold from buy.

The bearish call was part of a larger research report released Tuesday by the firm's shipping-stock analyst, Justin Yagerman, who recommended that investors rotate money from dry-bulk stocks into oil-tanker stocks.

The analyst pointed to the obvious to explain his dry-bulk bearishness: the glut. "Chinese and Indian commodity demand will likely be unable to match the substantial fleet growth expected to deliver in 2011 and 2012," Yagerman wrote in his 48-page report on the state of the maritime shipping trade.

Genco, compared to its peers, has a larger percentage of its fleet (80% in 2011, according to Yagerman) unchartered and picking up cargoes on the spot market, thus giving the company more relative exposure to the recent collapse in shipping rates. Other publicly traded shippers have as little as none of their ships on the spot market, their entire fleets locked up into long-term contracts.

Elsewhere in the sector, Excel Maritime ( EXM) surrendered 5.3% to close at $4.65, Navios Maritime Holdings ( NM) -- the sister company of Navios Partners --dropped 6.4% to $4.80, and DryShips ( DRYS) gave up 3% to finish at $4.76.

Holding up better than the rest was Diana Shipping ( DSX); the stock closed down 1% to $11.59.

-- Written by Scott Eden in New York

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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