ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understand our results of operations and financial condition. The MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and notes thereto included in Item 8 – Financial Statements and Supplementary Data.
The MD&A generally discusses 2023 and 2022 items and year-to-year comparisons between 2023 and 2022. Discussions of 2021 items and year-to-year comparisons between 2022 and 2021 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 filed with the SEC on February 22, 2023.
We are a Marshall Islands company that transports iron ore, coal, grain, steel products and other drybulk cargoes along worldwide shipping routes through the ownership and operation of drybulk carrier vessels. Our fleet currently consist of 45 drybulk carriers, including 18 Capesize drybulk carriers, 15 Ultramax drybulk carriers, and twelve Supramax drybulk carriers with an aggregate carrying capacity of approximately 4,828,000 deadweight tons (“dwt”). The average age of our current fleet is approximately 11.7 years. We seek to deploy our vessels on time charters, spot market voyage charters, spot market-related time charters or in vessel pools trading in the spot market, to reputable charterers. The majority of the vessels in our current fleet are presently engaged under time charter, spot market voyage charters and spot market-related time charters that expire (assuming the option periods in the time charters are not exercised) between February 2024 and February 2025.
See pages 5 – 6 for a table of our current fleet.
IMO 2023 Compliance
In 2021, Genco initiated a comprehensive plan to comply with IMO regulations that took effect in 2023, namely the Energy Efficiency Existing Ship Index (“EEXI”) and the Carbon Intensity Indicator (“CII”) metrics, which call for a reduction in vessel greenhouse gas emissions. These metrics are intended to assess and measure the energy efficiency of all ships and these new regulations set required attainment values, with the goal of reducing the carbon intensity of international shipping.
We have invested and plan to continue to invest in energy conservation programs to install various energy-saving devices, or ESDs, high performance paint systems, upgrade propellers among other initiatives on select vessels in our fleet. We began installing these ESDs on certain ships that entered drydocking in 2022, and we plan to continue to invest in our fleet.
These requirements are discussed above under “Item 1 – Environmental and Other Regulations – Air Emissions.”
IMO 2030 to 2050 Guidelines
During the week of July 3, 2023, the Marine Environment Protection Committee, a sub-committee of the IMO, met in London focusing on medium to long term decarbonization targets for the shipping industry. New targets for greenhouse gas emissions reductions as compared to 2008 levels are below which are to be reviewed every five years:
● 2030: 20% reduction while striving for 30%
43
Table of Contents
● 2040: 70% reduction while striving for 80%
These requirements are discussed above under “Item 1 – Environmental and Other Regulations – Greenhouse Gas Regulations.”
Vessel Sales and Acquisitions
On October 10, 2023 and November 14, 2023, we entered into agreements to acquire two 2016-built 181,000 dwt Capesize vessels, the Genco Ranger and Genco Reliance, respectively. The purchase price of the Genco Ranger and Genco Reliance were $43.1 million and $43.0 million, respectively, and the vessels were delivered on November 27, 2023 and November 21, 2023, respectively. We drew down a total of $65 million on our revolving credit facility under the $450 Million Credit Facility during the fourth quarter of 2023 and utilized cash on hand to finance the purchases.
In order to opportunistically renew our fleet, in addition to the above vessel purchases, we agreed to divest three older, less fuel efficient vessels with their third special survey due in 2024. During the fourth quarter of 2023, we entered into agreements to sell three of our Capesize vessels, the Genco Claudius, Genco Commodus and Genco Maximus. The Genco Commodus was delivered to its third-party buyer on February 7, 2024. On February 24, 2024, we terminated the agreements to sell the Genco Claudius and the Genco Maximus due to the buyers’ breach of the agreements’ terms. We continue to market these vessels for sale in what we believe are favorable market conditions that may allow us to sell the vessels at prices above those previously agreed with the former buyers.
On May 18, 2021, we entered into agreements to acquire two 2022-built 61,000 dwt newbuilding Ultramax vessels from Dalian Cosco KHI Ship Engineering Co. Ltd. for a purchase price of $29.2 million each, which were renamed the Genco Mary and the Genco Laddey. The vessels were delivered on January 6, 2022, and we used cash on hand to finance the purchases.
We will continue to seek opportunities to renew our fleet going forward.
44
Table of Contents
Factors Affecting Our Results of Operations
We believe that the following table reflects important measures for analyzing trends in our results of operations. The table reflects our ownership days, chartered-in days, available days, operating days, fleet utilization, TCE rates and daily vessel operating expenses for the years ended December 31, 2023 and 2022 on a consolidated basis.
For the Year Ended
December 31, Increase
Fleet Data:
Ownership days (1)
Chartered-in days (2)
Capesize — — — — %
Available days (owned & chartered-in fleet) (3)
Available days (owned fleet) (4)
Operating days (5)
Fleet utilization (6)
45
Table of Contents
For the Year Ended
December 31, Increase
Average Daily Results:
Time Charter Equivalent (7)
Daily vessel operating expenses (8)
46
Table of Contents
Entire Fleet Major Bulk Minor Bulk
For the Year Ended For the Year Ended For the Year Ended
December 31, December 31, December 31,
47
Table of Contents
Operating Data
The following tables represent the operating data and certain balance sheet and other data as of and for the years ended December 31, 2023 and 2022 on a consolidated basis.
For the Years Ended December 31,
Income Statement Data:
Revenue:
Operating Expenses:
Net (loss) earnings per share-basic $ (0.30) $ 3.74 $ (4.04) (108.0) %
Net (loss) earnings per share-diluted $ (0.30) $ 3.70 $ (4.00) (108.1) %
For the Years Ended December 31,
Balance Sheet Data:
(U.S. Dollars in thousands, at end of period)
Other Data:
(U.S. Dollars in thousands)
48
Table of Contents
For the Year Ended
December 31,
Income tax expense — —
Results of Operations
VOYAGE REVENUES-
Our revenues are driven primarily by the number of vessels in our fleet, the number of days during which our vessels operate, the type of fixture our vessels are chartered on (spot market voyage charters or fixed rate time charters), and the amount of daily charterhire or freight rates that our vessels earn, that, in turn, are affected by a number of factors, including:
● the duration of our charters;
● our decisions relating to vessel acquisitions and disposals;
● the amount of time that we spend positioning our vessels;
● maintenance and upgrade work;
● the age, condition and specifications of our vessels;
● levels of supply and demand in the drybulk shipping industry; and
● other factors affecting spot market charter rates for drybulk carriers.
49
Table of Contents
During 2023, voyage revenues decreased by $153.1 million, or 28.5%, to $383.8 million as compared to $536.9 million during 2022. The decrease in voyage revenues was primarily due to lower rates earned by our minor bulk vessels. Additionally, there was a decrease in voyage revenues earned by third party chartered-in vessels primarily as a result of fewer chartered-in days, as well as decrease in rates earned. During 2023, the drybulk freight market continued to experience significant volatility. Following the seasonal softness at the start of the year, the market began to strengthen during the end of the first quarter of 2023 and the early part of the second quarter of 2023. Subsequently, while trade volumes of iron ore and coal into China were strong, and unwinding of port congestion from April to September increased effective capacity of the fleet and pressured freight rates. This impact was notable during the third quarter in particular, which historically is a strong period for the market but in fact was atypically soft. During the fourth quarter of 2023, the market significantly rebounded reaching multi-year highs due to strong Brazilian iron ore volumes, as well as solid bauxite and coal trades while the unwinding of port congestion paused. On top of this, additional geopolitical factors began to materialize, including reductions in vessel traffic instituted by the Panama Canal Authority due to low water levels beginning in October and the later Houthi attacks on commercial vessels in the southern Red Sea and Gulf of Aden region. These two situations have resulted in vessel re-routing and increased fleet inefficiencies in the market. The impact of this is uncertain, as it may have the effect of raising drybulk shipping rates but may also impact global economic conditions, contributing to inflation and influencing monetary policy decisions, particularly in the West.
The average Time Charter Equivalent, or TCE rate, of our overall fleet decreased by 38.0% to $14,766 a day during 2023 from $23,824 a day during 2022. The TCE for our major bulk vessels decreased by 18.7% from $22,492 a day during 2022 to $18,280 a day during 2023. This decrease was primarily a result of higher voyage expenses incurred by our Capesize vessels. The TCE for our minor bulk vessels decreased by 49.1% from $24,585 a day during 2022 to $12,512 a day during 2023 primarily a result of lower rates achieved by our Ultramax and Supramax vessels, offset by lower voyage expenses.
For 2023 and 2022, we had ownership days of 16,135.2 days and 16,049.9 days, respectively. The increase in ownership days was due to the delivery of two Ultramax vessels during January 2022 and two Capesize vessels during November 2023. Fleet utilization increased from 96.5% during 2022 to 97.3% during 2023 primarily due to less offhire time for our Capesize vessels.
Please see pages 7 - 8 for a table that sets forth information about the current employment of the vessels in our fleet.
VOYAGE EXPENSES-
In time charters and spot market-related time charters, operating costs including crews, maintenance and insurance are typically paid by the owner of the vessel and specified voyage costs such as fuel and port charges are paid by the charterer. These expenses are borne by the Company during spot market voyage charters. There are certain other non-specified voyage expenses such as commissions which are typically borne by us. Voyage expenses include port and canal charges, fuel (bunker) expenses and brokerage commissions payable to unaffiliated third parties. Port and canal charges and bunker expenses primarily increase in periods during which vessels are employed on spot market voyage charters because these expenses are for the account of the vessel owner. At the inception of a time charter, we record the difference between the cost of bunker fuel delivered by the terminating charterer and the bunker fuel sold to the new charterer as a gain or loss within voyage expenses. Voyage expenses also include the cost of bunkers consumed during short-term time charters pursuant to the terms of the time charter agreement. Additionally, we may record lower of cost and net realizable value adjustments to re-value the bunker fuel on a quarterly basis for certain time charter agreements where the inventory is subject to gains and losses. Refer to Note 2 — Summary of Significant Accounting Policies in our Consolidated Financial Statements.
Voyage expenses were $143.0 million and $153.9 million during 2023 and 2022, respectively. This decrease was primarily due to lower bunker expenses for our minor bulk vessels and third-party chartered-in vessels, partially offset by higher voyage expenses incurred by our major bulk vessels.
50
Table of Contents
VESSEL OPERATING EXPENSES-
Vessel operating expenses decreased by $2.4 million from $99.5 million during 2022 to $97.1 million during 2023. This decrease was primarily due to an absence of COVID-19 related expenses, partially offset by an increase in the purchase of spare parts, higher insurance related costs, and higher crew costs due to the timing of crew changes.
Average daily vessel operating expenses (“DVOE”) for our fleet decreased to $6,017 per vessel per day during 2023 from $6,197 per vessel per day during 2022. The decrease in daily vessel operating expenses was primarily due to the absence of COVID-19 related expenses, partially offset by an increase in the purchase of spare parts, higher insurance related costs, as well as higher crew costs due to the timing of crew changes.
The potential impact of the war in Ukraine, the Israel-Hamas war and the Houthi conflict in the Red Sea, are unpredictable, and the actual amount of our DVOE could be higher or lower than budgeted as a result.
Our vessel operating expenses increase to the extent our fleet expands. Other factors beyond our control, some of which may affect the shipping industry in general, including, for instance, developments relating to market prices for crewing, lubes, and insurance, may also cause these expenses to increase. Crew costs on our vessels could increase in the future due to higher wages as a result of the potential impact of the war in Ukraine, the Israel-Hamas war, and the Houthi conflict in the Red Sea among other potential macroeconomic events. We expect our 2024 vessel operating expenses to be higher than in 2023 as a result of increased expenses for crewing as well as spares and stores.
Based on estimates provided by GSSM, our DVOE budget for the full year of 2024 is expected to be $6,150 per vessel per day. The potential impacts of the war in Ukraine, the Israel-Hamas war, and the Houthi conflict in the Red Sea among other potential macroeconomic events, are unpredictable, and the actual amount of our DVOE could be higher or lower than budgeted as a result.
CHARTER HIRE EXPENSES-
Charter hire expenses decreased by $18.0 million from $27.1 million during 2022 to $9.1 million during 2023. The decrease was primarily due to a decrease in chartered-in days during 2023 as compared to 2022, as well as a decrease in hire rates.
GENERAL AND ADMINISTRATIVE EXPENSES-
We incur general and administrative expenses which relate to our onshore non-vessel-related activities. Our general and administrative expenses include our payroll expenses, including those relating to our executive officers, operating lease expense, legal, auditing and other professional expenses. General and administrative expenses include nonvested stock amortization expense which represents the amortization of stock-based compensation that has been issued to our Directors and employees pursuant to the 2015 Equity Incentive Plan. Refer to Note 16 — Stock-Based Compensation in our Consolidated Financial Statements. General and administrative expenses also include legal and professional fees associated with our credit facilities, which are not capitalizable to deferred financing costs. We also incur general and administrative expenses for our overseas offices located in Singapore and Copenhagen. We expect our 2024 general and administrative expenses to be higher than in 2023 as a result of costs related to our 2024 annual meeting.
General and administrative expenses increased by $2.6 million from $25.7 million during 2022 to $28.3 million during 2023. The increase was primarily due to higher nonvested stock amortization expense.
TECHNICAL MANAGEMENT FEES-
Technical management fees include the direct costs incurred by GSSM for the technical management of the vessels under its management.
Technical management fees were $4.0 million and $3.3 million during 2023 and 2022, respectively. The variance was due to the timing of expenses during the year.
51
Table of Contents
DEPRECIATION AND AMORTIZATION-
We depreciate the cost of our vessels on a straight-line basis over the expected useful life of each vessel. Depreciation is based on the cost of the vessel less its estimated residual value.
Depreciation and amortization expenses increased by $6.3 million from $60.2 million during 2022 to $66.5 million during 2023. This increase was primarily due to an increase in drydocking amortization expense for the major bulk vessels that completed their drydockings during the second quarter of 2022 through the first quarter of 2023.
IMPAIRMENT OF VESSEL ASSETS-
During 2023, we recorded $41.7 million of impairment of vessel assets. This included impairment losses for three of our Capesize vessels. There was no vessel impairment recorded during 2022.
Refer to Note 2 — Summary of Significant Accounting Policies in our Consolidated Financial Statements for further information regarding the impairment of the vessels.
OTHER INCOME (EXPENSE)-
INTEREST EXPENSE-
Interest expense decreased by $0.3 million from $9.1 million during 2022 to $8.8 million during 2023. Interest expense during 2023 and 2022 consisted primarily of interest expense under our credit facilities and amortization of deferred financing costs for those facilities. The decrease was primarily a result of lower outstanding debt and settlement payments received our interest rate cap agreements partially offset by higher interest rates. Refer to Note 7 — Debt in the Consolidated Financial Statements for information regarding our credit facilities.
INTEREST INCOME-
Interest income increased by $1.7 million from $1.0 million during 2022 to $2.7 million during 2023 primarily due to higher interest income earned on our cash and cash equivalents.
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST –
During 2023 and 2022, net income attributable to noncontrolling interest was $0.5 million and $0.8 million, respectively, which is associated with the net income attributable to the noncontrolling interest of GSSM, which was formed during September 2021.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are cash flow from operations, cash on hand, equity offerings and credit facility borrowings. We currently use our funds primarily for the acquisition of vessels, fleet renewal, drydocking for our vessels, payment of dividends, debt repayments and satisfying working capital requirements as may be needed to support our business. Our ability to continue to meet our liquidity needs is subject to and will be affected by cash utilized in operations, the economic or business environment in which we operate, shipping industry conditions, the financial condition of our customers, vendors and service providers, our ability to comply with the financial and other covenants of our indebtedness, and other factors.
We believe, given our current cash holdings, if drybulk shipping rates do not decline significantly from current levels, our capital resources, including cash anticipated to be generated within the year, are sufficient to fund our operations for at least the next twelve months. Such resources include unrestricted cash and cash equivalents of $46.5 million as of December 31, 2023 in addition to the $294.8 million availability under the $500 Million Revolver as of December 31, 2023, which compares to a minimum liquidity requirement under our credit facility of approximately $23 million as of the date of this report, as well as the net proceeds from our agreed upon vessel sales of approximately $55
52
Table of Contents
million. Given anticipated capital expenditures related to drydockings and fuel efficiency upgrade costs of $22.3 million and $35.4 million during 2024 and 2025, respectively, as well as any quarterly dividend payments, we anticipate to continue to have significant cash expenditures. Refer to “Capital Expenditures” below for further details. However, if market conditions were to worsen significantly due to the war in Ukraine, the Houthi conflict in the Red Sea, the Israel-Hamas war, or other causes, then our cash resources may decline to a level that may put at risk our ability to pay dividends per our capital allocation strategy or at all. During the fourth quarter of 2023, we drew down $65 million under the revolver of the $450 Million Credit Facility to partially fund the purchase of two Capesize vessels that were delivered during the fourth quarter of 2023. Throughout 2022 and 2023, the Company made a total of $111.0 million of voluntary debt prepayments, resulting in a reduced cash flow breakeven rate from previous levels. Of that amount, there were seven $8.8 million quarterly repayments that represented the previously announced quarterly debt reduction payment as part of our plan to reduce our debt. These amounts were deducted from operating cash flows in each of our quarterly 2022 and 2023 dividend payment calculations. The remainder of the debt we paid down included $40.0 million which was prepaid to optimize our working capital management, using our revolver to keep funds available while saving interest expense. Additionally, during the fourth quarter of 2023, we paid down $9.75 million under the $500 Million Revolver. Going forward, given the nature of our new revolving credit facility, we plan to actively manage our debt balance to reduce interest expense. As of December 31, 2023, there are no mandatory debt repayments until we must repay $200.0 million in 2028. Although we do not have any mandatory debt repayments until 2028, we intend to continue to pay down debt on a voluntary basis with a medium-term goal of zero net debt.
As of December 31, 2023, the $500 Million Revolver contained collateral maintenance covenants that require the aggregate appraised value of collateral vessels to be at least 140% of the principal amount of the loan outstanding under such facility. If the values of our vessels were to decline as a result of the various geopolitical factors previously mentioned or otherwise, we may not satisfy this collateral maintenance requirement. If we do not satisfy the collateral maintenance requirement, we will need to post additional collateral or prepay outstanding loans to bring us back into compliance, or we will need to seek waivers, which may not be available or may be subject to conditions.
In the future, we may require capital to fund acquisitions or to improve or support our ongoing operations and debt structure, particularly in light of economic conditions resulting from the war in Ukraine, the Houthi conflict in the Red Sea, the Israel-Hamas war, and the trajectory of China’s economic recovery. We may from time to time seek to raise additional capital through equity or debt offerings, selling vessels or other assets, pursuing strategic opportunities, or otherwise. We may also from time to time seek to incur additional debt financing from private or public sector sources, refinance our indebtedness or obtain waivers or modifications to our credit agreements to obtain more favorable terms, enhance flexibility in conducting our business, or otherwise. We may also seek to manage our interest rate exposure through hedging transactions. We may seek to accomplish any of these independently or in conjunction with one or more of these actions. However, if market conditions are unfavorable, we may be unable to accomplish any of the foregoing on acceptable terms or at all.
On November 29, 2023, we entered into a fourth amendment to amend, extend and upsize our existing $450 Million Credit Facility and implement the $500 Million Revolver. The amended structure consists of a $500 million revolving credit facility, which can be utilized to support growth of our asset base as well as general corporate purposes. Refer to Note 7 — Debt in our Consolidated Financial Statements for further details regarding the terms of the $500 Million Revolver, which information is incorporated herein by reference.
In the fourth quarter of 2023, we drew down $65 million under our revolver to partially fund the acquisition of the Genco Ranger and Genco Reliance, 2016-built Capesize vessels.
As of December 31, 2023, we were in compliance with all financial covenants under the $500 Million Revolver.
53
Table of Contents
Dividends
We disclosed on April 19, 2021 that, on management’s recommendation, our Board of Directors adopted a quarterly dividend policy for dividends payable which commenced in the first quarter of 2022 in respect of our financial results for the fourth quarter of 2021. Under the quarterly dividend policy, the amount available for quarterly dividends is to be calculated based on the following formula:
Operating cash flow
Less: Capital expenditures for drydocking
Less: Voluntary quarterly reserve
Cash flow distributable as dividends
The amount of dividends payable under the foregoing formula for each quarter of the year will be determined on a quarterly basis.
For purposes of the foregoing calculation, operating cash flow is defined as voyage revenue less voyage expenses, charter hire expenses, realized gains or losses on fuel hedges, vessel operating expenses, general and administrative expenses other than non-cash restricted stock expenses, technical management fees, and interest expense other than non-cash deferred financing costs. Anticipated uses for the voluntary quarterly reserve include, but are not limited to, vessel acquisitions, debt prepayments and repayments, and general corporate purposes. In order to set aside funds for these purposes, the voluntary reserve will be set on a quarterly basis in the discretion of our Board and is anticipated to be based on future quarterly debt repayments and interest expense.
On February 21, 2024, our Board declared a quarterly dividend of $0.41 per share. Our quarterly dividend policy and declaration and payment of dividends are subject to legally available funds, compliance with applicable law and contractual obligations (including our credit facilities) and our Board’s determination that each declaration and payment is at that time in the best interests of the Company and its shareholders after its review of our financial performance.
In connection with our comprehensive value strategy, we have paid down additional indebtedness under our credit facilities and amended, extended and upsized our existing $450 Million Credit Facility with the $500 Million Revolver.
The declaration and payment of any dividend or any stock repurchase is subject to the discretion of our Board of Directors. Our Board of Directors and management continue to closely monitor market developments together with the evaluation of our quarterly dividend policy in the current market environment. The principal business factors that our Board of Directors expects to consider when determining the timing and amount of dividend payments or stock repurchases include our earnings, financial condition, and cash requirements at the time. Marshall Islands law generally prohibits the declaration and payment of dividends or stock repurchases other than from surplus. Marshall Islands law also prohibits the declaration and payment of dividends or stock repurchases while a company is insolvent or would be rendered insolvent by the payment of such a dividend or such a stock repurchase. Heightened economic uncertainty and the potential for renewed drybulk market weakness as a result of the war in Ukraine, the Israel-Hamas war, the Houthi conflict in the Red Sea, and related economic conditions may result in our suspension, reduction, or termination of future quarterly dividends.
54
Table of Contents
U.S. Federal Income Tax Treatment of Dividends
U.S. Holders
For purposes of this discussion, the term “U.S. Holder” means a beneficial owner of our common stock that is, for U.S. federal income tax purposes, (i) an individual U.S. citizen or resident, (ii) a corporation that is created or organized in or under the laws of the United States, any state thereof or the District of Columbia, or any other U.S. entity taxable as a corporation, (iii) an estate the income of which is subject to U.S. federal income taxation regardless of its source, or (iv) a trust if either (x) a court within the United States is able to exercise primary jurisdiction over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust, or (y) the trust has a valid election in effect under applicable Treasury Regulations to be treated as a U.S. person. If a partnership, or an entity treated for U.S. federal income tax purposes as a partnership, such as a limited liability company, holds common stock, the tax treatment of a partner will generally depend on the status of the partner and upon the activities of the partnership. If you are a partner in such a partnership holding our common stock, you are encouraged to consult your tax advisor. A beneficial owner of our common stock (other than a partnership) that is not a U.S. Holder is referred to below as a “Non-U.S. Holder.”
Subject to the discussion of passive foreign investment company (PFIC) status on pages 36 - 37 of this report, any distributions made by us to a U.S. Holder with respect to our common shares generally will constitute dividends to the extent of our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Distributions in excess of those earnings and profits will be treated first as a nontaxable return of capital to the extent of the U.S. Holder’s tax basis in our common shares (determined on a share-by-share basis), and thereafter as capital gain. U.S. Holders that own at least 10% of our shares may be able to claim a dividends-received-deduction and should consult their tax advisors.
Dividends paid on our common shares to a U.S. Holder who is an individual, trust or estate, or a “non-corporate U.S. Holder,” will generally be treated as “qualified dividend income” that is taxable to such non-corporate U.S. Holder at preferential tax rates, provided that (1) our common shares are readily tradable on an established securities market in the United States (such as the NYSE, on which our common shares are traded); (2) we are not a PFIC for the taxable year during which the dividend is paid or the immediately preceding taxable year (which we do not believe we have been, are, or will be); (3) the non-corporate U.S. Holder’s holding period of our common shares includes more than 60 days in the 121-day period beginning 60 days before the date on which our common shares becomes ex-dividend; and (4) the non-corporate U.S. Holder is not under an obligation to make related payments with respect to positions in substantially similar or related property. A non-corporate U.S. Holder will be able to take qualified dividend income into account in determining its deductible investment interest (which is generally limited to its net investment income) only if it elects to do so; in such case, the dividend will be taxed at ordinary income rates. Non-corporate U.S. Holders also may be required to pay a 3.8% surtax on all or part of such holder’s “net investment income,” which includes, among other items, dividends on our shares, subject to certain limitations and exceptions. Investors are encouraged to consult their own tax advisors regarding the effect, if any, of this surtax on their ownership of our shares.
Amounts taxable as dividends generally will be treated as passive income from sources outside the U.S. However, if (a) we are 50% or more owned, by vote or value, by U.S. Holders and (b) at least 10% of our earnings and profits are attributable to sources within the U.S., then for foreign tax credit purposes, a portion of our dividends would be treated as derived from sources within the U.S. With respect to any dividend paid for any taxable year, the U.S. source ratio of our dividends for foreign tax credit purposes would be equal to the portion of our earnings and profits from sources within the U.S. for such taxable year divided by the total amount of our earnings and profits for such taxable year. The rules related to U.S. foreign tax credits are complex and U.S. Holders should consult their tax advisors to determine whether and to what extent a credit would be available.
Special rules may apply to any “extraordinary dividend” — generally, a dividend in an amount which is equal to or in excess of 10% of a shareholder’s adjusted basis (or fair market value in certain circumstances) in a share of our common shares — paid by us. If we pay an “extraordinary dividend” on our common shares that is treated as “qualified dividend income”, then any loss derived by a non-corporate U.S. Holder from the sale or exchange of such common shares will be treated as long-term capital loss to the extent of such dividend.
55
Table of Contents
Tax Consequences if We Are a Passive Foreign Investment Company
As discussed in “U.S. tax authorities could treat us as a ‘passive foreign investment company,’ which could have adverse U.S. federal income tax consequences to U.S. shareholders” in Item 1.A Risk Factors in this report, a foreign corporation generally will be treated as a PFIC for U.S. federal income tax purposes if, after applying certain look through rules, either (1) at least 75% of its gross income for any taxable year consists of “passive income” or (2) at least 50% of the average value or adjusted bases of its assets (determined on a quarterly basis) produce or are held for the production of passive income, i.e., “passive assets.” As discussed above, we do not believe that our past or existing operations would cause, or would have caused, us to be deemed a PFIC with respect to any taxable year. No assurance can be given that the IRS or a court of law will accept our position, and there is a risk that the IRS or a court of law could determine that we are a PFIC. Moreover, there can be no assurance that we will not become a PFIC in any future taxable year because the PFIC test is an annual test, there are uncertainties in the application of the PFIC rules, and although we intend to manage our business so as to avoid PFIC status to the extent consistent with our other business goals, there could be changes in the nature and extent of our operations in future taxable years.
If we were to be treated as a PFIC for any taxable year in which a U.S. Holder owns shares of our common stock (and regardless of whether we remain a PFIC for subsequent taxable years), the tax consequences to such a U.S. holder upon the receipt of distributions in respect of such shares that are treated as “excess distributions” would differ from those described above. In general, an excess distribution is the amount of distributions received during a taxable year that exceed 125% of the average amount of distributions received by a U.S. Holder in respect of the common shares during the preceding three taxable years, or if shorter, during the U.S. Holder’s holding period prior to the taxable year of the distribution. The distributions that are excess distributions would be allocated ratably over the U.S. Holder’s holding period for the common shares. The amount allocated to the current taxable year and any taxable year prior to the first taxable year in which we were a PFIC would be taxed as ordinary income. The amount allocated to each of the other taxable years would be subject to tax at the highest marginal rate in effect for the U.S. Holder for that taxable year, and an interest charge for the deemed deferral benefit would be imposed on the resulting tax allocated to such other taxable years. The tax liability with respect to the amount allocated to taxable years prior to the year of the distribution cannot be offset by net operating losses. As an alternative to such tax treatment, a U.S. Holder may make a “qualified electing fund” election or “mark to market” election, to the extent available, in which event different rules would apply. The U.S. federal income tax consequences to a U.S. Holder if we were to be classified as a PFIC are complex. A U.S. Holder should consult with his or her own advisor with regard to those consequences, as well as with regard to whether he or she is eligible to and should make either of the elections described above.
Non-U.S. Holders
Non-U.S. Holders generally will not be subject to U.S. federal income tax on dividends received from us on our common shares unless the income is effectively connected with the conduct by the Non-U.S. Holder of a trade or business in the United States (“effectively connected income”) (and, if an applicable income tax treaty so provides, the dividends are attributable to a permanent establishment maintained by the Non-U.S. Holder in the U.S.). Effectively connected income (or, if an income tax treaty applies, income attributable to a permanent establishment maintained in the U.S.) generally will be subject to regular U.S. federal income tax in the same manner discussed above relating to taxation of U.S. Holders. In addition, earnings and profits of a corporate Non-U.S. Holder that are attributable to such income, as determined after allowance for certain adjustments, may be subject to an additional branch profits tax at a rate of 30%, or at a lower rate as may be specified by an applicable income tax treaty. Non-U.S. Holders may be subject to tax in jurisdictions other than the United States on dividends received from us on our common shares.
Dividends paid on our common shares to a non-corporate U.S. Holder may be subject to U.S. federal backup withholding tax if the non-corporate U.S. Holder:
● fails to provide us with an accurate taxpayer identification number;
● fails to comply with applicable certification requirements
56
Table of Contents
A holder that is not a U.S. Holder or a partnership may be subject to U.S. federal backup withholding with respect to such dividends unless the holder certifies that it is a non-U.S. person, under penalties of perjury, or otherwise establishes an exemption therefrom. Backup withholding tax is not an additional tax. Holders generally may obtain a refund of any amounts withheld under backup withholding rules that exceed their income tax liability by timely filing a refund claim with the IRS.
You are encouraged to consult your own tax advisor concerning the overall tax consequences arising in your own particular situation under U.S. federal, state, local, or foreign law from the payment of dividends on our common stock.
Cash Flows
Net cash provided by operating activities for the years ended December 31, 2023 and 2022 was $91.8 million and $189.3 million, respectively. This decrease in cash provided by operating activities was primarily due to lower net revenue earned by our minor and major bulk vessels, as well as changes in working capital. These decreases were partially offset by a decrease in drydocking costs incurred during 2023 as compared to 2022.
Net cash used in investing activities during the years ended December 31, 2023 and 2022 was $91.6 million and $55.0 million, respectively. The increase was primarily due to a $38.8 million increase in the purchase of vessels, principally resulting from the purchase of two Capesize vessels that delivered during the fourth quarter of 2023 as compared to the purchase of two Ultramax vessels that delivered during the first quarter of 2022. There was also a $1.4 million increase in insurance proceeds for hull and machinery claims for our vessels.
Net cash used in financing activities during the years ended December 31, 2023 and 2022 was $17.4 million and $190.7 million, respectively. During 2023, the decrease in total net cash used in financing activities related to our credit facilities was $104.0 million as compared to 2022. This was a result of the $65.0 million drawn down during the fourth quarter of 2023 used to partially finance the purchase two Capesize vessels that delivered during the fourth quarter of 2023, as well as a decrease in debt repayments during 2023 as compared to 2022. Additionally, there was a $74.8 million decrease in the payment of dividends during 2023 as compared to 2022. These decreases were partially offset by a $5.5 million increase in deferred financing costs during 2023 as compared to 2022 related to the $500 Million Revolver that was entered into on November 29, 2023 to amend our $450 Million Credit Facility.
Credit Facilities
On August 3, 2021, we entered into the $450 Million Credit Facility. On November 29, 2023, we entered into a fourth amendment to amend, extend and upsize our existing $450 Million Credit Facility, implementing the $500 Million Revolver. The amended structure consists of a $500 million revolving credit facility, which can be utilized to support growth of our asset base as well as general corporate purposes. Refer to Note 7 — Debt in our Consolidated Financial Statements for further details regarding the terms of the $500 Million Revolver, which information is incorporated herein by reference.
Interest Rate Swap Agreements, Forward Freight Agreements and Currency Swap Agreements
At December 31, 2023, we had one interest rate cap agreement to manage interest costs and the risk associated with changing interest rates. Such agreements cap the borrowing rate on our variable debt to provide a hedge against the risk of rising rates. At December 31, 2023, the total notional principal amount of the interest rate cap agreements was $50.0 million.
Refer to the table in Note 8 — Derivative instruments of our Consolidated Financial Statements which summarizes the interest rate cap agreement in place as of December 31, 2023.
As part of our business strategy, we may enter into interest rate swap agreements to manage interest costs and the risk associated with changing interest rates. In determining the fair value of interest rate derivatives, we consider the creditworthiness of both the counterparty and ourselves, which has not changed significantly and has no effect on the
57
Table of Contents
valuation. Valuations prior to any adjustments for credit risk would be validated by comparison with counterparty valuations. Amounts would not and should not be identical due to the different modeling assumptions. Any material differences would be investigated.
As part of our business strategy, we may also enter into arrangements commonly known as forward freight agreements, or FFAs, to hedge and manage our exposure to the charter market risks relating to the deployment of our vessels. Generally, these arrangements would bind us and each counterparty in the arrangement to buy or sell a specified tonnage freighting commitment “forward” at an agreed time and price and for a particular route. Upon settlement, if the contracted charter rate is less than the average of the rates (as reported by an identified index) for the specified route and period, the seller of the FFA is required to pay the buyer an amount equal to the difference between the contracted rate and the settlement rate multiplied by the number of days in the specific period. Conversely, if the contracted rate is greater than the settlement rate, the buyer is required to pay the seller the settlement sum. Although FFAs can be entered into for a variety of purposes, including for hedging, as an option, for trading or for arbitrage, if we decided to enter into FFAs, our objective would be to hedge and manage market risks as part of our commercial management. It is not currently our intention to enter into FFAs to generate a stream of income independent of the revenues we derive from the operation of our fleet of vessels. If we determine to enter into FFAs, we may reduce our exposure to any declines in our results from operations due to weak market conditions or downturns, but may also limit our ability to benefit economically during periods of strong demand in the market. We have not entered into any FFAs as of December 31, 2023 and 2022.
Interest Rates
The effective interest rate for the years ended December 31, 2023 and 2022 include interest rates associated with the interest expense for our various credit facilities, including the following: the $500 Million Revolver and the $450 Million Credit Facility (until the $450 Million Credit Facility was amended to become the $500 Million Revolver on November 29, 2023).
The effective interest rate for the aforementioned credit facilities, including the cost associated with unused commitment fees, if applicable, was 8.29% and 4.63% during 2023 and 2022, respectively. The effective interest rate does not include the effect of any interest rate cap agreements. The interest rate on the debt, excluding unused commitment fees, ranged from 6.43% to 7.58% and 2.26% to 6.54% during 2023 and 2022, respectively.
Capital Expenditures
We make capital expenditures from time to time in connection with our vessel acquisitions. Our fleet currently consists of 45 drybulk vessels, including 18 Capesize drybulk carriers, 15 Ultramax drybulk carriers and twelve Supramax drybulk carriers.
As previously announced, we have implemented a fuel efficiency upgrade program for certain of our vessels in an effort to generate fuel savings and increase the future earnings potential for these vessels. The upgrades have been successfully installed during previous drydockings.
Under our comprehensive IMO 2023 compliance plan, we have and intend to install energy saving devices and apply high performance paint systems in order to reduce fuel consumption and emissions among other key initiatives, on select vessels. We have and plan to undertake most, if not all, of these initiatives while our vessels undergo their regularly scheduled drydocking. The future estimated expenditures are included in the table below.
58
Table of Contents
In addition to acquisitions that we may undertake in future periods, we will incur additional expenditures due to special surveys and drydockings for our fleet. .
We estimate our drydocking costs, including capitalized costs incurred during drydocking related to vessel assets and vessel equipment, ballast water treatment systems (“BWTS”) costs, fuel efficiency upgrades and scheduled off-hire days for our fleet through 2025 to be:
(U.S. dollars in millions)
The costs reflected are estimates based on drydocking our vessels in China. Actual costs will vary based on various factors, including where the drydockings are actually performed. We expect to fund these costs with cash on hand. These costs do not include drydock expense items that are reflected in vessel operating expenses.
Actual length of drydocking will vary based on the condition of the vessel, yard schedules and other factors. Higher repairs and maintenance expenses during drydocking for vessels which are over 15 years old typically result in a higher number of off-hire days depending on the condition of the vessel.
During 2023 and 2022, we incurred a total of $10.9 million and $25.8 million of drydocking costs, respectively, excluding costs incurred during drydocking that were capitalized to vessel assets or vessel equipment.
We completed the drydocking of five of our vessels during 2023, one of which began during the fourth quarter of 2022. We estimate that ten of our vessels will be drydocked during 2024 and 20 of our vessels will be drydocked during 2025.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of those financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions and conditions.
Critical accounting policies are those that reflect significant judgments of uncertainties and potentially result in materially different results under different assumptions and conditions. We have described below what we believe are our most critical accounting policies, because they generally involve a comparatively higher degree of judgment in their application. For an additional description of our significant accounting policies, see Note 2 to our Consolidated Financial Statements included in this report.
Vessels and Depreciation
We record the value of our vessels at their cost (which includes acquisition costs directly attributable to the vessel and expenditures made to prepare the vessel for its initial voyage) less accumulated depreciation. We depreciate our drybulk vessels on a straight-line basis over their estimated useful lives, estimated to be 25 years from the date of initial delivery from the shipyard. Depreciation is based on cost less the estimated residual scrap value of $400/lwt based on the 15-year average scrap value of steel. An increase in the residual value of the vessels will decrease the annual depreciation charge over the remaining useful life of the vessels. Similarly, an increase in the useful life of a drybulk vessel would also decrease the annual depreciation charge. Comparatively, a decrease in the useful life of a
59
Table of Contents
drybulk vessel or in its residual value would have the effect of increasing the annual depreciation charge. However, when regulations place limitations over the ability of a vessel to trade on a worldwide basis, we will adjust the vessel’s useful life to end at the date such regulations preclude such vessel’s further commercial use.
The carrying value of each of our vessels does not represent the fair market value of such vessel or the amount we could obtain if we were to sell any of our vessels, which could be more or less. Under U.S. GAAP, we would not record a loss if the fair market value of a vessel (excluding its charter) is below our carrying value unless and until we determine to sell that vessel or the vessel is impaired as discussed below under the heading “Impairment of long-lived assets.”
During 2023, we recorded losses of $41.7 million related to the impairment of vessel assets. There were no impairment losses incurred during 2022. During 2023, we recorded an impairment loss for three of our Capesize vessels (the Genco Claudius, the Genco Commodus and the Genco Maximus) which have been classified as held for sale as of December 31, 2023. Refer to Note 2 — Summary of Significant Accounting Policies in our Consolidated Financial Statements for further information regarding the impairment recorded during 2023.
Under our credit facilities, we regularly submit to the lenders valuations of our vessels on an individual charter free basis in order to evidence our compliance with the collateral maintenance covenants under our credit facility. Such a valuation is not necessarily the same as the amount any vessel may bring upon sale, which may be more or less, and should not be relied upon as such. We were in compliance with the collateral maintenance covenant under our $500 Million Revolver as of December 31, 2023. Refer to Note 7 — Debt in our Consolidated Financial Statements for additional information. We obtained valuations for all of the vessels in our fleet pursuant to the terms of the $500 Million Revolver.
We compare the carrying value of our vessels with the vessel valuations obtained for covenant compliance purposes to determine whether an indicator of impairment is present (excluding the three vessels held for sale as of December 31, 2023 as noted above). As of December 31, 2023, eight of our Capesize vessels had carrying values that exceeded their vessel valuations, which is an indicator of impairment. As of December 31, 2022, 17 of our vessels, including 16 Capesize vessels and one Ultramax vessel, had carrying values that exceeded their vessel valuations, which is an indicator of impairment. However, based on the analysis of the anticipated undiscounted future net cash flows to be derived from each of these vessels as of December 31, 2023 and 2022, there were no impairment losses recorded for these vessels during 2023 and 2022 (excluding the three vessels held for sale as of December 31, 2023 as noted above).
The amount by which the carrying value at December 31, 2023 of eight of our Capesize vessels exceeded the valuation of such vessels for covenant compliance purposes ranged, on an individual vessel basis, from $4.1 million to $8.3 million per vessel, and $47.9 million on an aggregate fleet basis. Comparatively, the amount by which the carrying value at December 31, 2022 of 16 of our Capesize vessels and one of our Ultramax vessels exceeded the valuation of such vessels for covenant compliances ranged, on an individual vessel basis, from $0.1 million to $11.9 million per vessel, and $130.0 million on an aggregate fleet basis. The average amount by which the carrying value of these vessels exceeded the valuation of such vessels for covenant compliance purposes was $6.0 million and $7.6 million as of December 31, 2023 and 2022, respectively. However, neither such valuation nor the carrying value in the table below reflects the value of long-term time charters, if any, related to some of our vessels.
In the chart below, we list each of our vessels, the year it was built, the year we acquired it, and its carrying value as of December 31, 2023 and 2022. Vessels have been grouped according to their collateralized status as of December 31, 2023 and does not include any vessels held for sale.
Carrying Value (U.S.
dollars in
thousands) as of
Year December 31, December 31,
$500 Million Revolver
60
Table of Contents
Carrying Value (U.S.
dollars in
thousands) as of
Year December 31, December 31,
Unencumbered
$ 42,972 $ —
If we were to sell a vessel or hold a vessel for sale, and the carrying value of the vessel were to exceed its fair market value, net of costs to sell, we would record a loss in the amount of the difference. Refer to Note 2 — Summary of Significant Accounting Policies and Note 4 — Vessel Acquisitions and Dispositions in our Consolidated Financial
61
Table of Contents
Statements for information regarding the sale of vessel assets and the classification of vessel assets held for sale as of December 31, 2023.
Deferred drydocking costs
Our vessels are required to be drydocked approximately every 30 to 60 months for major repairs and maintenance that cannot be performed while the vessels are operating. We defer the costs associated with drydockings as they occur and amortize these costs on a straight-line basis over the period between drydockings. Deferred drydocking costs include actual costs incurred at the drydock yard; cost of travel, lodging and subsistence of our personnel sent to the drydocking site to supervise; and the cost of hiring a third party to oversee the drydocking. We believe that these criteria are consistent with U.S. GAAP guidelines and industry practice and that our policy of deferral reflects the economics and market values of the vessels. Costs that are not related to drydocking, including routine maintenance and repairs, are expensed as incurred. If the vessel is drydocked earlier than originally anticipated, any remaining deferred drydock costs that have not been amortized are expensed at the end of the drydock.
Impairment of long-lived assets
We follow the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) subtopic 360-10, “Property, Plant and Equipment” (“ASC 360-10”) which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts. If indicators of impairment are present, we perform an analysis of the anticipated undiscounted future net cash flows to be derived from the related long-lived assets.
Although rates have been strong on a relative basis in 2023 and 2022, the drybulk charter market has been volatile in recent years. Shipping rates for key drybulk routes increased during 2021 after a decline in 2020 which was principally as a result of the global economic slowdown caused by the COVID-19 pandemic, while another firm year was seen in 2022. Rates in 2023 declined from 2021 and 2022 highs, but were firm from a historical perspective.
When indicators of impairment are present and our estimate of future undiscounted cash flows for any vessel is lower than the vessel’s carrying value, the carrying value is written down, by recording a charge to operations, to the vessel’s fair market value if the fair market value is lower than the vessel’s carrying value.
We determined that as of December 31, 2023, the future income streams expected to be earned by such vessels over their remaining operating lives and upon disposal on an undiscounted basis would be sufficient to recover their carrying values. As of December 31, 2023, only eight of our Capesize vessels had indicators of impairment and the estimated future undiscounted cash flows for those Capesize vessels exceeded each of those vessels’ carrying values by a margin of approximately 15% to 30% of the carrying value. Our vessels remain fully utilized and have a relatively long average remaining useful life of approximately 13 years in which to recover sufficient cash flows on an undiscounted basis to recover their carrying values as of December 31, 2023. Management will continue to monitor developments in charter rates in the markets in which it participates with respect to the expectation of future rates over an extended period of time that are utilized in the analyses.
In developing estimates of future undiscounted cash flows, we make assumptions and estimates about the vessels’ future performance, with the significant assumptions being related to charter rates, fleet utilization, vessels’ operating expenses, vessels’ capital expenditures and drydocking requirements, vessels’ residual value and the estimated remaining useful life of each vessel. The assumptions used to develop estimates of future undiscounted cash flows are based on historical trends. Specifically, we utilize the rates currently in effect for the duration of their current time charters or spot market voyage charters, without assuming additional profit sharing. For periods of time where our vessels are not fixed on time charters or spot market voyage charters, we utilize an estimated daily time charter equivalent for our vessels’ unfixed days based on the most recent ten year historical one-year time charter average. In addition, we consider the current market rate environment and, if necessary, adjust our estimates of undiscounted cash flows to reflect the current rate environment. It is reasonably possible that the estimate of undiscounted cash flows may change in the future due to changes in current rates which could adversely affect the average rates being utilized and could result in impairment of certain of our older vessels. It is also reasonably possible that vessels that were not subject
62
Table of Contents
to impairment testing during 2023 because there was no indicator of impairment could be subject to such testing in the future.
Of the inputs that the Company uses for its impairment analysis, future charter rates are the most significant and most volatile. Based on the sensitivity analysis performed by the Company, the Company would record impairment on its vessels for time charter declines from their most recent ten-year historical one-year time charter averages as follows:
Percentage Decline from Ten-Year
Historical One-Year Time Charter
Average at Which Point Impairment
Would be Recorded
As of As of
December 31, December 31,
Ultramax (1) N/A (9.5)
Supramax (2) N/A N/A
For our impairment analysis, we utilize the ten-year historical one-year time charter average, as well as considering the current rate environment, to project future charter rates, which we believe appropriately takes into account the volatility and highs and lows of the shipping cycle.
Our time charter equivalent (TCE) rates for our fiscal years ended December 31, 2023 and 2022, respectively, were above or (below) the ten-year historical one-year time charter average as of such dates as follows:
TCE Rates as Compared with Ten-
Year Historical One-Year Time
Charter Average
(as percentage above/(below))
For the Years Ended December 31,
The projected net operating cash flows are determined by considering the future voyage revenues from existing time charters for the fixed fleet days and an estimated daily time charter equivalent for the unfixed days over the estimated remaining life of the vessel, assumed to be 25 years from the delivery of the vessel from the shipyard, reduced by brokerage and address commissions, expected outflows for vessels’ maintenance and vessel operating expenses (including planned drydocking and special survey expenditures) and required capital expenditures adjusted annually for inflation, assuming fleet utilization of 98%. The salvage value used in the impairment test is estimated to be $400 per light weight ton, consistent with our vessels’ depreciation policy discussed above.
Although we believe that the assumptions used to evaluate potential impairment are reasonable and appropriate, such assumptions are highly subjective. There can be no assurance as to how long charter rates and vessel values will remain at their currently low levels or whether they will improve by any significant degree. Charter rates may remain at depressed levels for a prolonged period of time, which could adversely affect our revenue and profitability, and future assessments of vessel impairment.
63
Table of Contents
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate risk
We are exposed to the impact of interest rate changes. Our objective is to manage the impact of interest rate changes on our earnings and cash flow in relation to our borrowings. We held one interest rate cap agreement as of December 31, 2023 to manage future interest costs and the risk associated with changing interest rates. The total notional amount of the cap at December 31, 2023 is $50.0 million and the cap has a specified rate and duration and will expire during March 2024. Refer to Note 8 — Derivative Instruments of our Consolidated Financial Statements.
Interest rate cap agreements cap the borrowing rate on our variable debt to provide a hedge against the risk of rising rates.
The total asset associated with the cap at December 31, 2023 is $0.6 million which has been classified as a current asset on the consolidated balance sheet. As of December 31, 2023, the Company has accumulated other comprehensive income (“AOCI”) of $0.5 million related to the interest rate cap agreement. At December 31, 2023, $0.5 million of AOCI is expected to be reclassified into income over the next 12 months associated with interest rate derivatives.
We are subject to market risks relating to changes in SOFR rates because we have significant amounts of floating rate debt outstanding. On May 30, 2023, we entered into an amendment to the $450 Million Credit Facility to transition from the use of LIBOR to calculate interest to SOFR effective June 30, 2023, During the years ended December 31, 2023 and 2022, we were subject to the following interest rates on the outstanding debt under our credit facilities (refer to Note 7 — Debt in our Consolidated Financial Statements for effective dates and termination dates for our credit facilities outlined below):
● $450 Million Credit Facility
● $500 Million Revolver
● One-month SOFR plus 1.85%
A 1% increase in LIBOR and SOFR would have resulted in an increase of $1.6 million in interest expense for the year ended December 31, 2023.
From time to time, the Company may consider derivative financial instruments such as swaps and caps or other means to protect itself against interest rate fluctuations.
Derivative financial instruments
As part of our business strategy, we may enter into interest rate swap agreements or interest rate cap agreements to manage interest costs and the risk associated with changing interest rates. As of December 31, 2023, we held one interest rate cap agreement to manage interest costs and the risk associated with changing interest rates. The total notional amount of the cap at December 31, 2023 is $50.0 million and the cap has a specified rate and duration and will expire during March 2024. Refer to Note 8 — Derivative Instruments of our Consolidated Financial Statements.
64
Table of Contents
The interest rate cap agreement was initially designated and qualified as a cash flow hedge. The premium paid is recognized in income on a rational basis, and all changes in the value of the caps are deferred in AOCI and are subsequently reclassified into Interest expense in the period when the hedged interest affects earnings.
During the second quarter of 2022, based on the total outstanding debt under the $450 Million Credit Facility being below the total notional amount of the interest rate cap agreements, a portion of one of the interest rate cap agreements was dedesignated as a cash flow hedge. Subsequent gains and losses resulting from valuation adjustments on the dedesignated portion of the cap are recorded within interest expense. As the forecasted interest payments hedged are not remote of occurring, the amounts in AOCI as of the date of de-designation will be released over the remaining original hedge period.
Refer to the “Interest rate risk” section above for further information regarding interest rate swap agreements.
We have entered into bunker swap and forward fuel purchase agreements with the objective of reducing the risk of the effect of changing fuel prices. Our bunker swap and forward fuel purchase agreements do not qualify for hedge accounting treatment; therefore, any unrealized or realized gains or losses are recognized as other (expense) income. Refer to the “Bunker swap and forward fuel purchase agreements” section of Note 2 — Summary of Significant Accounting Policies for further information.
Currency and exchange rate risk
The majority of transactions in the international shipping industry are denominated in U.S. Dollars. Virtually all of our revenues and most of our operating costs are in U.S. Dollars. We incur certain operating expenses in currencies other than the U.S. Dollar, and the foreign exchange risk associated with these operating expenses is immaterial.
65
Table of Contents
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Genco Shipping & Trading Limited
Consolidated Financial Statements
Index to Consolidated Financial Statements
Page
a) Report of Independent Registered Public Accounting Firm (PCAOB ID 34) F-2
b) Consolidated Balance Sheets as of December 31, 2023 and 2022 F-4
g) Notes to Consolidated Financial Statements F-10
F-1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of
Genco Shipping & Trading Limited
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Genco Shipping & Trading Limited and subsidiaries (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive (loss) income, equity, and cash flows, for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2024, expressed an unqualified opinion on the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Impairment of Vessel Assets – Future Charter Rates – Refer to Note 2 of the consolidated financial statements
Critical Audit Matter Description
The Company’s evaluation of vessel assets for impairment involves an initial assessment of each vessel asset to determine whether events or changes in circumstances exist that may indicate that the carrying amount of the vessel asset may no longer be recoverable.
F-2
Table of Contents
If indicators of impairment exist for a vessel asset, the Company determines the recoverable amount by estimating the undiscounted future cash flows associated with the vessel. If the Company’s estimate of undiscounted future cash flows for any vessel asset for which indicators of impairment exist is lower than the vessel asset’s carrying value, and the vessel’s carrying value is greater than its fair market value, the carrying value is written down, by recording a charge to operations, to the vessel asset’s fair market value. The Company makes significant assumptions and judgments to determine the undiscounted future cash flows expected to be generated over the remaining useful life of the asset, including estimates and assumptions related to the future charter rates, fleet utilization, vessel operating expenses, vessel capital expenditures and drydocking requirements, vessel residual value and the estimated remaining useful life of each vessel. Projected future charter rates are the most significant and volatile assumption that the Company uses for its impairment analysis. Total vessel assets as of December 31, 2023, were $945.1 million, with $41.7 million of impairment losses recorded during the year ended December 31, 2023.
We identified future charter rates used in the undiscounted future cash flows analysis as a critical audit matter because of the complex judgments made by management to estimate future charter rates and the significant impact they have on undiscounted cash flows expected to be generated over the remaining useful life of the vessel. This required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the reasonableness of management’s estimate of future charter rates.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the future charter rates utilized in the undiscounted future cash flows included the following, among others:
/s/ Deloitte & Touche LLP
New York, New York
February 27, 2024We have served as the Company’s auditor since 2005.
F-3
Table of Contents
Genco Shipping & Trading Limited
Consolidated Balance Sheets as of December 31, 2023 and 2022
(U.S. Dollars in thousands, except for share and per share data)
December 31, December 31,
Assets