Long-term charter contracts provide visibility to revenues and cash flows. But there’s always a risk involved if these contracts roll off in a weaker spot market like we’re experiencing now. In this article, we’ll see which companies are exposed to this risk.
For Diana Shipping (DSX), contract rollover is a near to medium-term risk. Among its Capesize fleet, almost all of the 12 contracts will expire within about a year and a half. The expiration date for the last contract is February 2017.
These contracts are lucratively priced compared to current spot rates or one-year forward charter rates. Out of these 12 contracts, three are priced above $20,000 per day, and five are above $14,000 per day. This compares to one-year forward time charter rates for Capesize at $11,550 per day as of July 1, according to Alibra Shipping estimates. Investors need to take note that DSX has recently been contracting for charters for a year or so and not longer, probably to take advantage of stronger spot market rates going forward.
For DryShips (DRYS), three contracts for its Capesize fleet are expiring within a year. The average charter rate for these contracts is $24,167 per day compared to a one-year forward charter rate of $11,500 per day and a two-year forward charter rate of $13,550 per day as of July 1, according to Alibra Shipping estimates. Most of the rest of the fleet is on spot rates and not impacted by rollovers. Since only three contracts are rolling over in a fleet of 13 Capesize, the recharter risk for DRYS is not much.
Rollover risk shielded by containerships
For Navios Maritime Partners (NMM), 98.4% of 2015 and 58.3% of 2016 operating days are covered. A significant number of NMM’s contracts are expiring over the next year. A total of 17 dry bulk vessels are coming off charter by May 2016.
Current dry time 12-month charter rates are significantly lower than rates at which the current charter expires. This presents a headwind for NMM’s cash flows. However, NMM’s recent containership acquisitions are likely to offset part of this downside.
For more on this subject, visit Market Realist’s Will Navios Partners Have Clear Sailing When Contracts Roll Over?
Low fixed-rate exposure
NMM forms 2.9% of the Guggenheim Shipping ETF (SEA). SEA generally follows the Dow Jones Shipping Index. In contrast, the SPDR S&P Metals and Mining Index (XME) gives investors exposure to the diversified metals and mining space.