Jan. 25: Korea Bankruptcy Slams Dry-Bulk Stocks

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When a big South Korean ocean-freight company entered receivership in late January, dry-bulk shipping stocks plunged across the board.

By far the most exposed to the struggles of Korea Line Corp. was Eagle Bulk Shipping ( EGLE) whose stock fell more than 11% on the day the receivership came to light.

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

The company later disputed that figure. In a statement, Eagle called its exposure "modest," saying that "the vast majority of our charters with KLC are fixed at close to current market rates." A spokesman for Eagle called the $700 million figure "rather dramatic."

Some investors feared that the bankruptcy of one of Eagle's most important customers could trigger breaches in its own loan covenants. Eagle hads about $1.1 billion in debt, at the time, which was about the same as the value of the company's fleet, according to the shipping-equities trader.

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.

Two weeks later, when Eagle reported fourth-quarter earnings, the company said it had moved all the ships previously chartered to KLC into short-term fixtures at spot-market rates with other companies. Eagle said it was able to obtain a daily fee of about $15,000 for each vessel. Had Eagle not done so, the ships it had chartered to Korea Lines would have gone out of service while the troubled outfit worked through its receivership.

Since late January, just before the KLC news broke, Eagle shares had traded flat, at about $4.

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