High Yield Equals High Risk – Watch Shipper Box Ships

Most of us know that a high yield on a preferred stock usually equals high risk and the preferred shares of Greek container ship owner Box Ships (ticker:TEU) are no exception. Preferred issue TEU-C has a 11.3% current yield.

Box Ships is a tiny container ship owner (9 ships) that is also pretty tiny in terms of revenue with only $12.9 million in revenue last quarter–which is 20% below the same quarter last year. Now in their latest earnings release the company claimed that the market had improved and they posted a small profit, which would seem to be a positive.  The problem is with the companies debt and covenents surrounding that debt. The company has over $131 million in debt–debt is almost 3 times most recent announced annual revenue.

In 2014 Box Ships had to get loan waivers from their lenders to be able to continue business as usual.  Those waivers begin to expire on 6/29/2015 (yes in 2 weeks) and as of yet the company has not announced that new waivers have been secured.  Additionally 2 of their 9 ships just came off charter and new contracts have not been announced.  2 ships out of 9 idled is not a situation that can be financially tolerated without severe consequences. Without waivers from their lenders it is possible that preferred share dividends could be suspended. We note that the company has about $8 million in available cash on the balance sheet as of 3/31/2015 (they have more actually, but 50% of their cash is restricted per loan covenents).  They have no borrowings available under current loan agreements.

With the above in mind one has to ask themselves if holding the TEU-C preferred is worth the risk (we are aware that they just declared the dividend for the current quarter)? 1 slip up and the dividend is cut–in this case likely to never be paid again.  With the cash on the balance sheet if the company secures waivers from lenders the dividend is likely safe for a quarter or 2 more, but one never knows–so just understand the risk.

The data we have noted above comes from the most recent 6-K (report of a foreign private issuer) which you can peruse here.