Greek Shippers Might Pay the Price After All

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For years, Greek shippers have maintained a leading position in the international maritime business. The long shipping tradition of their home country provided a major competitive advantage that enabled them to establish a strong foothold in the global shipping industry. Greek ship owners have the largest merchant marine fleet worldwide. In particular, they control about 16% of the global dry bulk fleet and operate about ¼ of the world's oil tankers.  are carried on Greek ships.

Up until now, Greek shippers seemed to be immune to the on-going financial turbulence in Greece and the resulting transformation of the national tax regime. As their revenue is largely derived from offshore operations, their performance is not impacted by domestic economic conditions. Moreover, for years they have been enjoying a tax-free status. Greek shipping magnates were exempted from taxes on earnings generated overseas provided that they met specific criteria such has obtaining a special permit and importing a certain amount annually to cover administrative expenses. Also, they could avail themselves with several fiscal incentives when operating ships that flew the Greek flag.

However, Greece is experiencing the sixth consequent year of economic contraction with no hope of a possible turnaround in the foreseeable future. Thus, the government is forced to implement additional fiscal measures. This time it seems like ship owners are going to pay the price. For the first time in decades, Greek officials are considering imposing a levy for ships sailing under foreign flags aiming to collect about 160 million by the end of 2014. The tax will apply to tonnage of foreign-flagged vessels and is targeting about 762 owners. While it might seem necessary, the proposed tax reform comes at a time most crucial for shipping companies. Due to the prevailing turmoil and the lack of liquidity in the sector internationally, most of the shipping giants are heavily burdened with debt obligations.

A perfect example is Dryships (NASDAQ: DRYS). For the third quarter of 2012, the company saw its net voyage revenues from the dry bulk segment decline by almost 50% compared to last year causing investor's sentiment to deteriorate. As of Sept. 30, 2012, its total debt exceeded $4 billion imposing serious risks over the firm's long-term sustainability.

Recently, the company sold via novation agreements two of its tankers under construction. With this deal, Dryships managed to reduce its capital expenditure by $101 million. The company remains committed to decreasing its debt pile by relying largely on the strong performance of its drilling business. For the first nine months of 2012, revenues generated from drilling contracts posted a robust increase of about $250 million compared to the same period in 2011.

Dryships has been using its 65% stake in Ocean Rig UDW (NASDAQ: ORIG) in order to address a large portion of the capital needs in the shipping segment and gain some extra time. Still, even though I do believe that Dryships could be one of the potential winners from an industry recovery, it has a long way to go before achieving financial discipline.

One of the least indebted companies within the industry is Diana Shipping (NYSE: DSX). The firm has a current ratio of 8.09, which is way higher than the industry's median, and a debt-to-equity ratio of 0.33. Despite the drop in time charter equivalent rates, the company managed to sustain a comparably healthy financial position.

For the period 2007-2011, the firm's total current assets grew at an impressive pace from $21.5 million to $432 million. At the end of 2011, total current liabilities stood at slightly above $48 million. As of September 30, 2012 Diana had over $452 million in cash and cash equivalents and $413 million in long-term debt.

Diana's overall solid balance sheet enables the company to take advantage of attractive market opportunities and expand its fleet. By borrowing conservatively and controlling its expenses, the firm managed to grow its fleet while maintaining a firm financial position. This way Diana expects to improve its revenue generation capacity at the event of a positive turn in the industry cycle.

Overall, the favorable tax regime on shipping earnings underlined the unique contribution of the Greek maritime industry to the domestic economy. The industry is a major component of the country's foreign exchange inflow and a significant source of employment. For the period 2000-2010, the industry remitted $175 billion, which represented half the national debt of 2009. At the moment, over 200,000 people depend directly or indirectly on shipping. Even though, not yet formally introduced, a change in the tax regime, no matter how small, could result in the immediate relocation of shipping companies and possibly a general slowdown in the sector. Consequently, thousands of Greek citizens are going to lose their jobs in a time when the unemployment rate in Greece is growing at a ceaseless pace.   

FaniKel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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