Daiichi Chuo May Cancel Ships, Sell Stock as Rates Tumble

Daiichi Chuo Kisen Kaisha (9132) said it 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 an Oct. 4 interview at the company’s Tokyo head office. “We never thought the market would stay this low for this long.”

The company, which fell in Tokyo trading, 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. (9101) 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.”

Turnaround Plan

The ship operator intends to announce a turnaround plan alongside its first-half results, which are due Oct. 31, Yakushiji said. Mitsui O.S.K. last week agreed to give the company a 15 billion yen ($192 million) loan facility until March 31.

The company dropped 4.5 percent, the most since Sept. 24, to 64 yen at the close. Mitsui O.S.K. tumbled 7.1 percent. Both companies have fallen almost 40 percent this year. The Baltic Dry Index (BDIY), 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’s 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, according to data compiled by Bloomberg.

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

“We can’t avoid bigger losses,” Yakushiji said. “We’ve already reduced costs by almost as much as we can. We’re not going to get much economic impact from further cuts.”

Ship Orders

The company has arranged financing for 40 of the 60 ships it has on order, Yakushiji said. He didn’t say which shipyards the company is discussing cancellations with.

Nippon Yusen probably made a loss of 3 billion yen in the six months ended Sept. 30 compared with an earlier forecast for a 7.5 billion yen profit, it said Sept. 28. Mitsui O.S.K. had a loss of 13.5 billion yen in the period, according to a preliminary announcement last week. That compared with an earlier forecast for a 2 billion yen loss.

To contact the reporters on this story: Chris Cooper in Tokyo at ccooper1@bloomberg.net; Kiyotaka Matsuda in Tokyo at kmatsuda@bloomberg.net

To contact the editor responsible for this story: Neil Denslow at ndenslow@bloomberg.net

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