Daiichi Chuo may cancel ships, sell stock as freight rates dive

Bloomberg

Ship operator Daiichi Chuo K.K. may cancel ship orders, pare its fleet and sell new stock after getting emergency financing from shareholder Mitsui O.S.K. Lines Ltd. to help weather a slump in dry-bulk rates.

“We’re considering a drastic reform package,” President Masakazu Yakushiji said in a recent interview at the company’s Tokyo head office. “We never thought the market would stay this low for this long.”

The company is in talks about canceling or delaying 10 of 60 on-order dry-bulk vessels as it heads toward a second straight annual loss.

Nippon Yusen K.K. and Mitsui O.S.K., Japan’s largest shipping lines, have also cut earnings forecasts as the industry contends with expanding capacity, slowing demand and higher fuel prices.

Daiichi Chuo “needs to announce a restructuring plan quickly,” said Minoru Matsuno, president of Value Search Asset Management Co., a Tokyo-based investment adviser. “It also has to come up with an independent strategy to strengthen earnings that doesn’t overlap Mitsui O.S.K.”

The ship operator intends to declare a turnaround plan alongside its first-half results, which are due Oct. 31, Yakushiji said. Mitsui O.S.K. agreed last week to give the company a ¥15 billion loan facility until March 31.

Both Daiichi Chuo and Mitsui O.S.K. have fallen almost 40 percent this year. The Baltic Dry Index, a benchmark for commodity shipping rates, has tumbled 56 percent in the past 12 months.

Daiichi Chuo may cut its fleet to fewer than 200 vessels from about 240, Yakushiji said. It is also considering selling preferred stock to raise new funds or a combination with Mitsui O.S.K., he said.

“We have to think of ways to boost our capital,” he said. An acquisition by Mitsui O.S.K. “wouldn’t happen soon” because of the need for due diligence, he said.

Mitsui O.S.K. hasn’t made any decision on its future relationship with Daiichi Chuo, said Akika Hamakawa, a spokeswoman for the Tokyo-based company. The shipping line owns 26 percent of Daiichi Chuo.

Daiichi Chuo will probably exceed the ¥8 billion loss it has forecast for the year ending in March, Yakushiji said. The company lost ¥9.3 billion last fiscal year.