SECURITIES AND EXCHANGE COMMISSION
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REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2022
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _____ to _______
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SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 001-38440
Grindrod Shipping Holdings Ltd.
(Exact name of registrant as specified in its charter)
(Translation of the registrant’s name into English)
(Jurisdiction of incorporation or organization)
(Address of principal executive offices)
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Fried, Frank, Harris, Shriver & Jacobson LLP
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of Each Class |
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Trading Symbol |
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Name of Each Exchange on Which Registered |
| Ordinary shares, no par value |
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GRIN |
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NASDAQ Global Select Market |
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 18,484,861 ordinary shares (excluding treasury shares)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act:
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Yes
NoIf this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
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Yes
x
NoNote-Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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Yes ¨
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
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Yes ¨
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer ¨ |
Accelerated filer x |
Non-accelerated filer ¨ |
Emerging growth company x |
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards
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provided pursuant to Section 13(a) of the Exchange Act.
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The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012. |
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
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If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements
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Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b).
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Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ¨ |
International Financial Reporting Standards as issued
by the International Accounting Standards Board x |
Other ¨ |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
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Item 17
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Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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Yes
x
No
Risks Related to Our Industry
Global economic conditions, in particular in China and the rest of the Asia-Pacific region, could negatively affect the markets in which we operate which could have a material adverse effect on our business, financial condition, cash flows, results of operations and ability to obtain financing.
The world economy is currently facing a number of challenges, including the COVID-19 pandemic and recent turmoil and hostilities in various regions, including Ukraine, Russia, Azerbaijan, North Korea, Myanmar, the Middle East, including Iran, Iraq, Syria, the Persian Gulf, Yemen, North Africa and the Gulf of Guinea. Drybulk demand is directly linked to the global macroeconomic landscape and there has historically been a strong link between the development of the world economy and demand for energy, including iron ore, coal and other commodities. An extended period of deterioration in the outlook for the world economy could reduce the overall demand for iron ore, coal and other commodities and for our services. Continuing economic instability could have a material adverse effect on our ability to implement our business strategy.
The United States, Europe and other parts of the world are likely to see gross domestic product (“GDP”) grow at a slower rate than in prior years. The credit markets in the United States and Europe have experienced significant contraction, deleveraging and reduced liquidity in 2008 and again in 2020, and the United States federal and state governments and European authorities have implemented and/or are considering a broad variety of governmental action and/or new regulation of the financial markets and may implement additional regulations in the future. Securities and futures markets and the credit markets are subject to comprehensive statutes, regulations and other requirements. The Securities and Exchange Commission, or the SEC, other regulators, self-regulatory organizations and exchanges are authorized to take extraordinary actions in the event of market emergencies, and may effect changes in law or interpretations of existing laws.
Economic slowdown in the Asia Pacific region, particularly in China, may exacerbate the effect on us, as we anticipate a significant number of the port calls made by our vessels and those of our competitors will continue to involve the loading or discharging of drybulk commodities such as iron ore and coal in ports in the Asia Pacific region. Before the global financial crisis that began in 2008, China had one of the world’s fastest growing economies in terms of GDP, which had a significant impact on shipping demand. Real growth rate continues to remain below pre-2008 levels and any improvement in the global economy in 2023 will depend on China’s recovery. As China is responsible for 53% of the world’s crude steel output and 74% of seaborne iron ore imports, the current crisis in China has a significant impact on our drybulk trade. The weaker Chinese economy in 2022 aggravated by the zero tolerance policy on COVID-19 outbreaks and an unstable property market led to lower oil and commodity prices and also had a moderating impact on global inflationary forces. To the extent the growth of the Chinese economy slows as a result of changes in political, economic or social conditions or developments in government policies (including. in particular, around economic growth, urbanization or infrastructure spending), the level of imports to and exports from China could be adversely affected, negatively impacting demand for drybulk shipping. It is possible that China and other countries in the Asia Pacific region will continue to experience slowed or even negative economic growth in the future. Moreover, economic slowdown in the economies of the United States, Europe and other Asian countries may further adversely affect economic growth in China and elsewhere. Our business, financial condition, cash flows and results of operations, as well as our future prospects, will likely be materially and adversely affected by a further economic downturn in any of these countries or geographic regions.
Global financial markets and economic conditions have been and continue to be volatile. Credit markets and the debt and equity capital markets have been distressed and the uncertainty surrounding the future of the global credit markets has resulted in reduced access to credit worldwide. Rising interest rates in the United States, Eurozone and other regions may also negatively impact global economic growth, demand for our drybulk shipping services and our cost of capital. These issues, along with significant write-offs in the financial services sector, the re-pricing of credit risk and the current weak economic conditions, have made, and will likely continue to make, it challenging to obtain additional financing. In addition, the current state of global financial markets and current economic conditions might adversely impact our ability to issue additional equity at prices which will not be dilutive to our existing shareholders or preclude us from issuing equity at all.
Also, as a result of concerns about the stability of financial markets due to supply disruptions, rising energy prices, the increase in the inflation and the solvency of counterparties specifically, the cost of obtaining money from the credit markets has increased. We cannot be certain that financing will be available to the extent required to implement our business strategy, or that we will be able to refinance our credit facilities in due course, on acceptable terms or at all. If financing or refinancing is not available when needed, or is available only on unfavorable terms, we may be unable to meet our obligations as they become due or we may be unable to enhance our existing business, acquire newbuildings and additional vessels or otherwise take advantage of business opportunities as they arise.
We face risks attendant to changes in economic environments, changes in interest rates, and instability in the banking and securities markets around the world, among other factors. Major market disruptions and adverse changes in market conditions and regulatory climate in the United States and worldwide may adversely affect our business or affect our ability to borrow amounts under credit facilities or any future financial arrangements. The recent and developing economic and governmental factors, together with possible further declines in charter rates and vessel values, could have a material adverse effect on our business, financial condition, cash flows and results of operations.
These global economic conditions have in the past and may continue to have in the future a number of adverse consequences for drybulk and other shipping sectors, including, among other things:
| • | low charter rates, particularly for vessels employed on short-term time charters or in the spot market; |
| • | decreases in the market value of drybulk carriers and limited second-hand market for the sale of vessels; |
| • | limited financing for vessels; |
| • | widespread loan covenant defaults; and |
| • | declaration of bankruptcy by certain vessel operators, vessel owners, shipyards and charterers. |
The occurrence of one or more of these events could have a material adverse effect on our business, financial condition, cash flows and results of operations.
Outbreaks of epidemic and pandemic diseases, and governmental responses thereto, could adversely affect our business. The COVID-19 pandemic, and measures to contain its spread, have impacted the markets in which we operate and could have a material adverse effect on our business, financial condition, cash flows and results of operations.
The COVID-19 pandemic, and measures to contain its spread, continues to negatively impact regional and global economies and trade patterns in markets in which we operate, the way we operate our business, and the businesses of our customers and suppliers. Governments in affected countries have implemented measures in an effort to contain the virus including travel restrictions, quarantines and other emergency public health measures and a number of countries implemented lockdown measures. Companies, including us, took precautions, such as requiring employees to work remotely, and imposing travel restrictions. These restrictions have had an adverse impact on global economic conditions, have resulted in a decline in demand for certain of the raw materials that our vessels transport, and have introduced new risks to our operations, some of which may not yet have become evident to us. As a result of these measures, our vessels may not be able to call on ports, or may be restricted from departing from ports, and the duration of voyages may increase in order to accommodate mandatory minimum periods between port calls which could increase our costs and delay the due date for payment of freight to us. In addition we may experience severe operational disruptions and delays, unavailability of normal port infrastructure and services including limited access to equipment, critical goods and personnel, closure of ports and customs offices, inability to renew or maintain the required classifications of our vessels, difficulty in executing vessel purchases or sales, potential decreases in the market values of vessels and related impairment charges, disruptions to crew change, quarantine of ships and/or crew, counterparty credit strength, limitations on sources of cash and liquidity, noncompliance with covenants in our credit facilities and financing lease obligations, as well as disruptions in the supply chain and industrial production which may lead to reduced cargo supply and/or the demand for such cargo and thus to a decline in the demand for our services, among other potential consequences.
Ongoing prevention and mitigation measures, and negative economic and trade impacts of the COVID-19 outbreak could materially and adversely affect our future operations, our business, financial condition and cash flows. The extent of the COVID-19 outbreak’s effect on our operational and financial performance will depend on future developments, including the duration, spread and intensity of the outbreak, the emergence of new variants, the development, availability, distribution and effectiveness of vaccines and treatments, the imposition of protective public safety measures and the impact on the global economy, all of which are uncertain and difficult to predict considering the rapidly evolving situation. As a result, the ongoing impact of the COVID-19 pandemic on our business will depend on numerous evolving factors we cannot reliably predict, which impact could be material and adverse.
Charter rates and spot markets for drybulk carriers are volatile and may decrease in the future, which could have a material adverse effect on our business, financial condition, cash flows and results of operations.
The drybulk shipping industry is cyclical with high volatility in charter rates and profitability. The degree of charter rate volatility among different types of drybulk carriers has varied widely; however, a downturn in the drybulk charter market will severely affect the entire drybulk shipping industry and charter rates for drybulk carriers will decline significantly. In the past, time charter and voyage charter rates for drybulk carriers have declined below operating costs of vessels. The Baltic Dry Index, or the BDI, an index of daily average of charter rates for key drybulk routes published by the Baltic Exchange Limited, which has long been viewed as the main benchmark to monitor the movements of the drybulk vessel charter market and the performance of the entire drybulk shipping market, declined approximately 97.5% from its high of 11,793 in May 2008 to 290 on February 10, 2016 and has remained volatile since then. During the year ended December 31, 2022, the BDI started on 2,285 and finished 34% lower on 1,515 points. It achieved a peak of 3,369 on May 23, 2022 and a trough of 965 on August 31, 2022, representing a 70% spread between high and low.
Fluctuations in charter rates result from changes in the supply of and demand for vessel capacity and changes in the supply of and demand for the major drybulk commodities carried by water internationally. Because the factors affecting the supply of and demand for vessels are outside of our control and are unpredictable, the nature, timing, direction and degree of changes in industry conditions are also unpredictable. Since we currently employ our vessels primarily in the spot market or spot market-oriented pools and do not have a significant amount of fixed revenue cover, we are exposed to the cyclicality and volatility of the spot market. Spot rates may fluctuate significantly based upon the supply of and demand for seaborne shipping capacity, and we may employ our vessels in these short-term markets at lower rates. Alternatively, charter rates available in the spot market may be insufficient to enable our vessels to operate profitably. A significant decrease in charter rates would adversely affect asset values and our profitability, cash flows and ability to pay dividends, if any, in the future, on our ordinary shares, and capital and interest on our indebtedness. Furthermore, a significant decrease in charter rates would cause asset values to decline and we may have to record an impairment charge in our financial statements which could adversely affect our financial results.
Factors that influence demand for drybulk carrier capacity include:
| • | supply of and demand for energy resources, commodities, consumer and industrial products; |
| • | changes in the exploration or production of energy resources, commodities, consumer and industrial products; |
| • | the location of regional and global production and manufacturing facilities; |
| • | the location of consuming regions for energy resources, commodities, consumer and industrial products; |
| • | the globalization of production and manufacturing; |
| • | global and regional economic and political conditions, including armed conflicts and terrorist activities, embargoes, tariffs and strikes; |
| • | disruptions and developments in international trade including additional trade tariffs imposed; |
| • | economic slowdowns caused by public health events such as the COVID-19 pandemic; |
| • | the cost of steel and labor; |
| • | the cost and availability of financing; |
| • | changes in seaborne and other transportation patterns, including the distance cargo is transported by sea; |
| • | environmental and other regulatory developments; |
| • | competition from alternative sources of energy; |
| • | international sanctions, embargoes, import and export restrictions, nationalizations and wars; |
| • | currency exchange rates; and |
| • | weather, natural disasters and other catastrophic events may disrupt drybulk trading patterns. |
Factors that influence the supply of drybulk carrier capacity include:
| • | the number of newbuilding orders and deliveries, including slippage in deliveries; |
| • | the number of shipyards and ability of shipyards to deliver vessels; |
| • | port or canal congestion; |
| • | the scrapping rate of older vessels; |
| • | environmental concerns and regulations; |
| • | changes in international regulations that may result in the reduced carrying capacity of vessels or early obsolescence of tonnage; |
| • | speed of vessel operation; |
| • | the number of vessels that are out of service, namely those that are laid-up, drydocked, awaiting repairs or otherwise not available for hire. |
In addition to the prevailing and anticipated charter rates, factors that affect the rate of newbuilding, scrapping and laying-up include newbuilding prices, secondhand vessel values in relation to newbuilding and scrap prices, costs of bunkers and other operating costs, costs associated with classification society surveys, normal maintenance and insurance coverage costs, the efficiency and age profile of the existing drybulk fleet in the market and government and industry regulation of maritime transportation practices, particularly environmental protection laws and regulations. These and other factors influencing the supply of and demand for shipping capacity are outside of our control, and we may not be able to correctly assess the nature, timing and degree of changes in industry conditions.
We anticipate that the future demand for our drybulk carriers will be dependent upon economic growth in the world’s economies, mainly China and India, seasonal and regional changes in demand, changes in the capacity of the global drybulk fleet and the sources and supply of drybulk cargo to be transported by sea. Adverse economic, political, social or other developments could have a material adverse effect on our business, financial condition, cash flows and results of operations.
The fair market values of our drybulk carriers are volatile and may decline in the future, which could limit the amount of funds that we can borrow, cause us to breach certain financial covenants in our credit facilities, or result in an impairment charge, and we may incur a loss if we sell a vessel following a decline in its market value.
The fair market values of our drybulk carriers have been very volatile and may continue to fluctuate depending on a number of factors, including:
| • | prevailing levels of charter rates; |
| • | the duration and impact of COVID-19; |
| • | general economic and market conditions affecting the shipping industry; |
| • | competition from varying types and sizes of vessels; |
| • | the supply of and demand for vessels; |
| • | other modes of transportation; |
| • | the cost of newbuildings; |
| • | governmental and other regulations; |
| • | the need to upgrade vessels as a result of charterer requirements, technological advances in vessel design or equipment or otherwise; |
| • | competition from other shipping companies. |
If the fair market values of our vessels decline, the amount of funds we may draw down under our credit facilities may be limited and we may not be in compliance with certain covenants contained in our credit facilities, which may result in an event of default. In such circumstances, we may not be able to refinance our debt or obtain additional financing. If we are not able to comply with the covenants in our credit facilities, and are unable to remedy the relevant breach, our lenders could accelerate our debt and foreclose on the mortgaged vessels in our Fleet. In addition, if we sell one or more of our vessels at a time when vessel prices have fallen, the sale may be less than the vessel’s carrying value on our financial statements, resulting in a loss on sale and a reduction in earnings, which could be material. See “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources”.
Conversely, if vessel values are elevated at a time when we wish to acquire additional vessels, the cost of such acquisitions may increase and this could have a material adverse effect on our business, financial condition, cash flows and results of operations.
Inflation could continue to adversely affect our business and financial results.
Inflation could continue to adversely affect our business and financial results by increasing the costs of labor and materials needed to operate our business. During the year ended December 31, 2022, we have experienced increased costs for crew, spares and stores, which trend we currently expect to continue into 2023. Depending on developments in the drybulk industry and other economic conditions, we may be unable to raise our charter rates enough to offset the increasing costs of our operations, which would decrease our profit margins. Inflation may also raise our costs of capital and decrease our purchasing power, making it more difficult to maintain sufficient funds to operate our business.
An inability to effectively time investments in and divestments of vessels could prevent the implementation of our business strategy and negatively impact our business, financial condition, cash flows and results of operations.
In order to maintain a young fleet, we are required to replace older vessels with newer ones over time. In order to do so, we intend to grow our Fleet by entering into long-term chartering and newbuildings contracts, making acquisitions and disposals in the resale and second-hand markets and exercising purchase options in certain of our long-term charter contracts. Our business is greatly influenced by long-term chartering contracts, the timing of investments and/or divestments, the exercise of our purchase options to acquire vessels and contracting of newbuildings. As of the date of this annual report, we have purchase options to acquire four vessels that we time charter. For a discussion of the terms of these purchase options, see “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Overview”. If we are unable to identify the optimal timing of such investments, of the exercise of our purchase options, of divestments or of contracting of newbuildings in relation to the shipping value cycle or unable to execute at the optimal timing due to capital constraints or other reasons, this could have a material adverse effect on our business, financial condition, cash flows and results of operations.
Drybulk carrier values have generally experienced high volatility. Investors can expect the fair market value of our vessels to fluctuate, depending on general economic and market conditions affecting the drybulk industries and competition from other shipping companies, types and sizes of vessels and other modes of transportation. In addition, as vessels age, they generally decline in value. These factors will affect the value of our vessels for purposes of covenant compliance under the credit facilities and at the time of any vessel sale. If for any reason we sell a vessel at a time when vessel prices have fallen, the sale may be at less than such vessel’s carrying amount on our financial statements, with the result that we could also incur a material loss on the sale and a reduction in earnings and reserves. The carrying values of our vessels may not represent their fair market value at any point in time. At the end of each reporting period and on a continuous basis, if indicators of impairment are present, the carrying amount of tangible and intangible assets is assessed to determine whether there is any indication that those assets may have suffered an impairment loss. We also assess the carrying value of an asset when we have contracted to divest of the asset for any reason, including the age of our vessels, if a joint venture that owns vessels comes to an end in accordance with its terms or if the asset no longer fits into our strategic planning. See “Item 5. Operating and Financial Review and Prospects—Critical Accounting Policies and Estimates”.
An over-supply of drybulk carrier capacity may lead in the future to a reduction or depression in drybulk carrier charter rates, as has happened in the past, and lead to a reduction in the value of our vessels, which may limit our ability to operate our drybulk carriers profitably.
The market supply of drybulk carriers has increased significantly since the beginning of 2005. As of February 2023, newbuilding orders, which extend to 2025 and beyond, had been placed for approximately 7.5% of the existing global drybulk fleet capacity for handysize drybulk vessels and 7.7% of the existing global drybulk fleet capacity for supramax/ultramax drybulk vessels. There has been a relatively slower pace of both newbuild deliveries and demolition over the last decade due to uncertainty over fuelling technology. Drybulk carrier supply growth has in previous years outpaced drybulk carrier demand growth, causing downward pressure on drybulk charter rates. If the capacity of new drybulk carriers delivered exceeds the capacity of drybulk carriers being scrapped, drybulk capacity will increase. Until the new supply is fully absorbed by the market, drybulk charter rates may continue to be under pressure in the near to medium term and this could have a material adverse effect on our business, financial condition, cash flows and results of operations.
We operate in the highly competitive international shipping industry and we may not be able to compete for charters and contracts of affreightment, or COAs, with new entrants or established companies with greater resources, and, as a result, we may be unable to employ our vessels profitably.
Our vessels are employed in a highly competitive market that is capital intensive and highly fragmented. The competition in the market is based primarily on supply and demand and we compete for charters and COAs on the basis of price, vessel location, size, age, the condition of the vessel, our and our third-party commercial managers’ reputations, and the acceptability of the vessel and its technical managers and operators to the charterers.
We compete primarily with other independent and state-owned drybulk vessel-owners. Our competitors may have more resources than us and may operate vessels that are newer, and therefore more attractive to charterers, than our vessels. Ownership and control of drybulk carriers is highly fragmented and is divided among a large number of players including publicly listed and privately owned shipping companies, mining companies, commodity trading houses, private equity and other investment funds and state-controlled owners. Due in part to the highly fragmented markets in which we operate, competitors with greater resources could enter the drybulk shipping industries and operate larger fleets through consolidations or acquisitions and may be able to offer lower charter rates and higher quality vessels than we are able to offer. If we are unable to successfully compete with other drybulk shipping companies, our competitors may be able to offer better prices than us, which could result in our achieving lower revenue from our vessels and our business, financial condition, cash flows and results of operations could be materially adversely affected.
Our drybulk shipping charter rates and spot rates will be subject to seasonal and cyclical fluctuations, which could have a material adverse effect on our business, financial condition, cash flows and results of operations.
We operate our drybulk carriers in markets that have historically exhibited seasonal variations in demand and, as a result, in charter rates. This seasonality may result in volatility in our operating results to the extent that we enter into new charter agreements or renew existing agreements during a time when charter rates are weaker or we operate our vessels in the spot market or on index-based time charters or have index-based COAs, which may result in quarter-to-quarter volatility in our operating results.
The drybulk sector is typically stronger in the northern hemisphere fall and winter months in anticipation of increased consumption of coal and other raw materials in the northern hemisphere. The celebration of Chinese New Year in the first quarter of each year, usually results in lower volumes of seaborne trade into China during this period. In addition, unpredictable weather patterns tend to disrupt vessel routing and scheduling as well as the supply of certain commodities.
We are subject to complex laws and regulations, including environmental and safety regulations that can adversely affect the cost, manner or feasibility of doing business.
Our operations are subject to numerous international, national, state and local laws, regulations, treaties and conventions in force in international waters and the jurisdictions in which our vessels operate or are registered, which can significantly affect the ownership and operation of our vessels. These laws and regulations include, but are not limited to, the U.S. Oil Pollution Act of 1990, or OPA, the Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, the U.S. Clean Air Act of 1970, as amended by the Clean Air Act Amendments of 1977 and 1990, or the CAA, the U.S. Clean Water Act, or the CWA, and the U.S. Maritime Transportation Security Act of 2002, or the MTSA, and regulations of the UN International Maritime Organization, or IMO, including the International Convention for the Prevention of Pollution from Ships of 1973, or MARPOL, including the designation of Emission Control Areas, or ECAs, thereunder, the International Convention for the Safety of Life at Sea of 1974, or SOLAS, the International Convention on Civil Liability for Bunker Oil Pollution Damage of 2001, or BUNKER, the International Convention of Civil Liability for Oil Pollution Damage of 1969, or CLC, the International Ship and Port Facility Security Code, or the ISPS code, and the International Convention on Load Lines of 1966, or the LL Convention.
Compliance with such laws, regulations and standards, where applicable, may require installation of costly equipment or implementation of operational changes, and the need for such actions may affect the resale value or useful lives of our vessels. These costs could have a material adverse effect on our business, financial condition, cash flows and results of operations, or our ability to offer competitive charter rates. A failure to comply with applicable laws and regulations may result in administrative and civil penalties, criminal sanctions or the suspension or termination of our operations. Because such conventions, laws, and regulations are often revised, we cannot predict the ultimate cost of complying with them or the impact thereof on the fair market values or useful lives of our vessels. Additional conventions, laws and regulations may be adopted which could limit our ability to do business or increase the cost of our doing business and which may materially adversely affect our operations. For example, the International Convention for the Control and Management of Ships’ Ballast Water and Sediments, or the BWM Convention, adopted by the IMO in February 2004, calls for the phased introduction of mandatory reduction of living organism limits in ballast water over time (as discussed further below). In order to comply with these living organism limits, vessel owners may have to install expensive ballast water treatment systems. The BWM Convention entered into force on September 8, 2017 and while we believe that our vessels have been or will be fitted with systems that will comply with the standards, there can be no assurance that these systems have been or will be approved by the regulatory bodies of every jurisdiction in which we may wish to conduct our business.
Environmental laws often impose strict liability for remediation of spills and releases of oil and hazardous substances, which could subject us to liability without regard to whether we were negligent or at fault. Under OPA, for example, owners, operators and bareboat charterers are jointly and severally strictly liable for the discharge of oil within the 200-mile exclusive economic zone around the United States (unless the spill results solely from, under certain limited circumstances, the act or omission of a third party, an act of God or an act of war). An oil spill could result in significant liability, including fines, penalties, criminal liability and remediation costs for natural resource damages under other international and U.S. federal, state and local laws, as well as third-party damages, including punitive damages, and could harm our reputation with current or potential charterers of our drybulk carriers.
We are required by various governmental and quasi-governmental agencies to obtain certain permits, licenses, and certificates with respect to our operations, and satisfy insurance and financial responsibility requirements for potential oil (including marine fuel) spills and other pollution incidents. Although we have insurance to cover certain environmental risks, there can be no assurance that such insurance will be sufficient to cover all such risks or that any claims will not have a material adverse effect on our business, financial condition, cash flows, or results of operations. See “Item 4. Information on the Company—Business Overview—Environmental and Other Regulations”.
Climate change and greenhouse gas restrictions may adversely affect our operating results.
An increasing concern for, and focus on, climate change has promoted extensive existing and proposed international, national and local regulations intended to reduce greenhouse gas, or
“
GHG
” emissions
. These regulatory measures may include, among others, adoption of cap and trade regimes, carbon taxes, increased efficiency standards and incentives or mandates for renewable energy. Any passage of climate control legislation or other regulatory initiatives by the IMO, the European Union, the United States or other countries where we operate, or any treaty adopted at the international level, that restrict emissions of GHG could require us to make significant financial expenditures that we cannot predict with certainty at this time. Compliance with such regulations and our efforts to participate in reducing GHG emissions will likely increase our compliance costs, require significant capital expenditures to reduce vessel emissions and require changes to our business. Even in the absence of climate control legislation and regulations, our business and operations may be materially affected to the extent that climate change results in sea level changes or more intense weather events. See “Item 4. Information on the Company—Business Overview—Environmental and Other Regulations”.
Adverse effects upon the oil and gas industry relating to climate change, including growing public concern about the environmental impact of climate change, may also adversely affect demand for our services. For example, increased regulation of GHGs or other concerns relating to climate change may reduce the demand for coal in the future or create greater incentives for use of alternative energy sources. Therefore, any long-term material adverse effect on the coal industry could have a material adverse effect on our future performance, results of operations, cash flows and financial position.
Our growth depends on continued growth in demand for commodities including iron ore and coal and the continued demand for seaborne transportation of such cargoes. A shift in consumer demand towards other energy sources or changes to trade patterns for these commodities could have a material adverse effect on our business, financial condition, cash flows and results of operations.
A significant portion of our earnings are related, directly or indirectly, to the global demand for commodities including iron ore and coal. A shift in the consumer demand from these commodities towards other energy resources such as liquefied natural gas, wind energy, solar energy, or water energy will potentially affect the demand for our drybulk carriers. This could have a material adverse effect on our business, financial condition, cash flows and results of operations.
In addition, our growth depends on continued growth in world and regional demand for commodities and the transportation of such cargoes by sea, which could be negatively affected by a number of factors, including:
| • | technology developments and their effect on factors such as cost, alternative or substitute products, alternative methods of production and the location of production; |
| • | the economic and financial developments globally, including actual and projected global economic growth; |
| • | fluctuations in the actual or projected price of crude oil, refined petroleum products or other bulk liquids; |
| • | refining capacity and its geographical location; |
| • | increases in the production of oil or natural gas in areas linked by pipelines to consuming areas, the extension of existing, or the development of new, pipeline systems in markets we may serve, or the conversion of existing non-oil pipelines to oil pipelines in those markets; |
| • | decreases in the consumption of oil or natural gas due to increases in its price relative to other energy sources, and other factors making consumption of oil or natural gas less attractive or energy conservation measures; |
| • | availability of new, alternative energy sources; and |
| • | negative or deteriorating global or regional economic or political conditions, particularly in oil-consuming regions, which could reduce energy consumption or its growth. |
Seaborne trading and distribution patterns are primarily influenced by the relative advantage of the various sources and locations of production, locations of consumption, pricing differentials and seasonality. Changes to the trade patterns of commodities such as iron ore or coal may have a significant negative or positive impact on our revenue. This could have a material adverse effect on our business, financial condition, cash flows and results of operations.
The refining and chemical industries may respond to any economic downturn and demand weakness by reducing operating rates, partially or completely closing refineries and plants and by reducing or cancelling certain investment expansion plans, including plans for additional refining capacity, in the case of the refining industry. Continued reduced demand for refined petroleum products and other bulk liquids and the shipping of such cargoes or the increased availability of pipelines used to transport refined petroleum products and bulk liquid chemicals would have a material adverse effect on our future growth and could have a material adverse effect on our business, financial condition, cash flows and results of operations.
If we cannot meet our customers’ quality and compliance requirements we may not be able to operate our vessels profitably which could have a material adverse effect on our business, financial condition, cash flows and results of operations.
Customers have a high and increasing focus on quality and compliance standards with their suppliers across the entire value chain, including the shipping and transportation segment. Our continuous compliance with these standards and quality requirements is vital for our operations. Related risks could materialize in multiple ways, including a sudden and unexpected breach in quality and/or compliance concerning one or more vessels, and a continuous decrease in the quality concerning one or more vessels occurring over time. Any noncompliance by us, either suddenly or over a period of time, on one or more vessels, above and beyond what we deliver, could have a material adverse effect on our business, financial condition, cash flows and results of operations.
World events, including terrorist attacks and regional conflict, could have a material adverse effect on our business, financial condition, cash flows and results of operations.
On February 24, 2022, Russia invaded Ukraine leading to what is now a multi-month war and a humanitarian crisis. The impacts of the conflict to date on the drybulk market have included a redirection of cargo flows and higher commodity prices as market participants rush to secure commodities in tighter global markets, particularly for energy and grains, resulting in part from sanctions on various Russian exports. Faced with increased fuel prices, drybulk carriers have also run at slower average vessel speeds to reduce fuel consumption. The U.S., Europe and other countries have imposed unprecedented economic sanctions in response to Russian actions, which could be increased with uncertain effects on the drybulk market and the world economy. In addition, the U.S. and certain other North Atlantic Treaty Organization (NATO) countries have been supplying Ukraine with military aid. The longer-term impact of Russia’s war in Ukraine remains unknown. Russia and Ukraine export significant volumes of coal and grain cargoes. A reduction of these exports as well as the global effect of these reduced supplies may result in lower trade volumes, higher commodity prices, increased inflation, and potential demand destruction. U.S. officials have also warned of the increased possibility of Russian cyberattacks, which could disrupt the operations of businesses involved in the drybulk industry, including ours. As a reaction to higher energy prices, China has chosen to increase domestic coal production to bolster energy security. The scope or intensity of the ongoing military conflict as well as sanctions and other responses to it could increase, potentially having negative effects on the global economy and markets. While Ukraine and Russia reached an agreement to extend an arrangement allowing shipment of grain from Ukrainian ports through a humanitarian corridor in the Black Sea in November 2022, the agreement could be terminated before its expiration date in March 2023, or the agreement may not be renewed, which could result in supply shortages and increased grain prices in the region and globally. Any of these occurrences, or the continuation or worsening of any such occurrences, could have a material adverse impact on our business, results of operation, financial condition, and ability to pay dividends.
Past terrorist attacks, as well as the threat of future terrorist attacks around the world, continue to cause uncertainty in the world’s financial markets and may affect our business, operating results and financial condition. Continuing conflicts and recent developments in Ukraine, Russia, Azerbaijan, North Korea, Myanmar, the Middle East, including Iran, Iraq, Syria, the Persian Gulf, Yemen, North Africa and the Gulf of Guinea, and the presence of the United States or other armed forces in the Middle East, may lead to additional acts of terrorism and armed conflict around the world, which may contribute to further economic instability in the global financial markets. Recently, government leaders have declared that their countries may turn to trade barriers to protect or revive their domestic industries in the face of foreign imports. These uncertainties could also adversely affect our ability to obtain additional financing on terms acceptable to us or at all. War in a country in which a material supplier, including crew supply services, or customer of ours is located could impact that supply to us or our ability to earn revenue from that customer. In the past, political conflicts have also resulted in attacks on vessels, mining of waterways and other efforts to disrupt international shipping, particularly in the Arabian Gulf region. Acts of terrorism and piracy have also affected vessels trading in regions such as the South China Sea, the Gulf of Aden off the coast of Somalia and West Africa. Restrictions on imports, including in the form of tariffs, as discussed further below, have had and could have a major impact on global trade and demand for shipping. Please also refer to “—Outbreaks of epidemic and pandemic diseases, and governmental responses thereto, could adversely affect our business. COVID-19, and measures to contain its spread, have impacted the markets we operate in and could have a material adverse effect on our business, financial condition, cash flows and results of operations.” above. Any of these occurrences could have a material adverse effect on our business, financial condition, cash flows and results of operations.
An increase in trade protectionism and the unraveling of multilateral trade agreements could have a material adverse impact on our charterers’ business and, in turn, could cause a material adverse impact on our results of operations, financial condition and cash flows.
Our operations expose us to the risk that increased trade protectionism will adversely affect our business. Government leaders may determine that their countries may turn to trade barriers to protect or revive their domestic industries in the face of foreign imports, thereby depressing the demand for shipping. The United Kingdom formally left the European Union on January 31, 2020, although a transition period remained in place until December 2020. The Brexit transition period ended in January 2021 and the EU-UK Trade and Cooperation Agreement formally entered into force in May 2021. It is still to be seen whether this and other trade agreements will encourage free trade and co-operation in the region over the long term. In the United States, the new administration under President Biden completed Phase One of the trade agreement with China which was primarily based on increased exports from the United States to China in exchange for reduced tariffs. There is still uncertainty about the future relationship between the United States and China as well as other exporting countries in the Asia Pacific region with respect to trade policies, treaties, government regulations and tariffs. Any of these recent and future changes could have a material adverse effect on our future performance, results of operations, cash flows and financial position.
Restrictions on imports, including in the form of tariffs, has had and could continue to have a major impact on global trade and demand for shipping. Specifically, increasing trade protectionism in the markets that our charterers serve may cause an increase in (i) the cost of goods exported from exporting countries such as China and Mexico, (ii) the length of time required to deliver goods from exporting countries, (iii) the costs of such delivery and (iv) risks associated with exporting goods. These factors may result in a decrease in the quantity of goods to be shipped. Protectionist developments, or the perception they may occur, may have a material adverse effect on global economic conditions, and has and may continue to significantly reduce or otherwise impact global trade, including trade between the United States and China. These developments would have an adverse impact on our charterers’ business, operating results and financial condition. This could, in turn, affect our charterers’ ability to make timely charter hire payments to us and impair our ability to renew charters and grow our business. This could have a material adverse effect on our business, results of operations and financial condition, as well as our cash flows.
Acts of piracy on ocean-going vessels may have a material adverse effect on our business, financial condition, cash flows and results of operations.
Acts of piracy have historically affected ocean-going vessels trading in regions of the world such as the South China Sea, the Arabian Sea, the Red Sea, the Indian Ocean, in the Gulf of Aden off the coast of Somalia and the Gulf of Guinea. Sea piracy incidents continue to occur, particularly in the Gulf of Aden off the coast of Somalia, in the Gulf of Guinea and the west coast of Africa, with drybulk carriers vulnerable to such attacks. Acts of piracy may result in death or injury to persons or damage to property. If these piracy attacks result in regions in which our vessels are deployed being characterized as “war risk” zones by insurers or by the Joint War Committee of Lloyds Insurance and IUA Company, or Joint War Committee, as “war and strikes” listed areas, premiums payable for such coverage could increase significantly and such insurance coverage may be more difficult to obtain. In addition, crew costs, including costs of employing on-board security guards, could increase in such circumstances. In some circumstances where one of our vessels is chartered-out or on time charter, the time charterer may have limited liability for charter payments in the event of an act of piracy and may also claim that a vessel seized by pirates is not “on-hire” for a certain number of days and that they are therefore entitled to cancel the charter party, a claim that we would dispute. Voyage charterers do not bear any of the liability relating to acts of piracy except for possible contributions in general average. We may not be adequately insured to cover losses from these incidents, which could have a material adverse effect on our business, financial condition, cash flows and results of operations. In addition, any hijacking as a result of an act of piracy against our vessels, or an increase in cost, or unavailability, of insurance for our vessels, could have a material adverse effect on our business, financial condition, cash flows and results of operations.
We are subject to international safety regulations and requirements imposed by our classification societies and the failure to comply with these regulations and requirements may subject us to increased liability, may adversely affect our insurance coverage and may result in a denial of access to, or detention in, certain ports.
The operation of our vessels is affected by the requirements set forth in the International Management Code for the Safe Operation of Ships and for Pollution Prevention, or the ISM Code. The ISM Code requires vessel owners, vessel managers and bareboat charterers to develop and maintain an extensive “safety management system” that includes the adoption of a safety and environmental protection policy setting forth instructions and procedures for safe operation of vessels and describing procedures for dealing with emergencies. In addition, vessel classification societies impose significant safety and other requirements on our vessels. The failure of a vessel owner or bareboat charterer to comply with the ISM Code may subject it to increased liability, may invalidate existing insurance or decrease available insurance coverage for the affected vessels and may result in a denial of access to, or detention in, certain ports. Each of our vessels is ISM Code-certified or will be ISM Code-certified when delivered to us. However, if we are subject to increased liability for non-compliance, if our insurance coverage is adversely impacted as a result of non-compliance or if any of our vessels are denied access to, or are detained in, certain ports as a result of non-compliance with the ISM Code, it could have a material adverse effect on our business, financial condition, cash flows and results of operations.
In addition, the hull and machinery of every commercial vessel must be classed by a classification society authorized by its country of registry. The classification society certifies that a vessel is safe and seaworthy in accordance with the applicable rules and regulations of the country of registry of the vessel and SOLAS. The cost of maintaining our vessels’ classifications, or class, may be substantial. If any vessel does not maintain its class or fails any annual, intermediate or special survey, the vessel will be unable to trade between ports and will be unemployable and uninsurable, which could have a material adverse effect on our business, financial condition, cash flows and results of operations.
Increased inspection procedures and tighter import and export controls could increase costs and disrupt our business.
International shipping is subject to various security and customs inspection and related procedures in countries of origin and destination and trans-shipment points. Inspection procedures may result in the seizure of contents of our vessels, delays in the loading, offloading, trans-shipment or delivery and the levying of customs duties, fines or other penalties against us.
It is possible that changes to inspection procedures could impose additional financial and legal obligations on us. Changes to inspection procedures could also impose additional costs and obligations on our customers and may, in certain cases, render the shipment of certain types of cargo uneconomical or impractical. Any such changes or developments could have a material adverse effect on our business, financial condition, cash flows and results of operations.
Changes in fuel, or bunker, prices may adversely affect our profits.
Fuel, or bunkers, is a significant portion of our expenses when we are responsible for voyage expenses in operating our vessels and changes in the price of fuel may adversely affect our profitability. The price and supply of fuel is unpredictable and fluctuates based on events outside our control, including geopolitical developments, supply of and demand for oil and gas, actions by the Organization of the Petroleum Exporting Countries, or OPEC, and other oil and gas producers, war and unrest in oil producing countries and regions, regional production patterns and environmental concerns. In February 2022, crude oil prices increased to a new seven year high impacted by the Russia-Ukraine conflict and the sanctions and other measures imposed on Russia by the United Kingdom, European Union, the United States and other countries. In October 2022, OPEC announced that it would be reducing oil production which further increased the global price of oil. Sanctions, trade restrictions and reducing production have increased uncertainty in the global energy markets and fuel may become much more expensive in the future, which could have a material adverse effect on our business, financial condition, cash flows and results of operations.
On November 22, 2022, the United States Department of the Treasury, announced determinations, pursuant to Executive Order 14071, which would prohibit the provision of trading/commodities broker, financing, shipping, insurance, flagging, and customs brokering services as they relate to the maritime transport of crude oil and petroleum products of Russian Federation origin. The Treasury Department, in coordination with other G7 states, the European, Union, and Australia, authorized the provision of the foregoing services when the price of Russian-origin crude oil does not exceed a certain price, as determined by the Secretary of the Treasury, effectively creating price caps on Russian-origin crude oil and petroleum products. Effective December 5, 2022, the Secretary of the Treasury and other members of the price cap coalition set the price cap on Russian-origin crude oil at $60 per barrel. Effective February 5, 2023, the Secretary of the Treasury set the price cap on Discount to Russian-origin crude petroleum products at $45 per barrel and the price cap on Premium to Russian-origin crude petroleum products at $100 per barrel. The discount to crude price cap applies to naphtha, residual fuel oil, and waste oils, whereas the premium to crude price cap applies to gasoline, motor fuel blending stock, gasoil and diesel fuel, kerosene and kerosene-type jet fuel, and vacuum gas oil.
In addition, the purchase of more costly fuels for our vessels to comply with IMO 2020 regulations limiting sulfur content in fuels could negatively affect our business to the extent we are unable to recover the higher costs from our customers.
To mitigate the risk associated with fuel price increases, we may enter into forward bunker contracts that permit us to purchase fuel at a fixed price in exchange for payment of a certain amount. We may incur a loss on such contracts if the price of fuel declines below the price at which the contract permits us to purchase fuel, or a significant increase in the price of fuel may not be fully mitigated by our entry into any such contracts. Either occurrence could have a material adverse effect on our business, financial condition, and results of operations, cash flows, and ability to pay dividends.
Long-term technological innovations could expose us to lower vessel utilization and/or decreased charter rates.
New vessel designs purport to offer material operational flexibility, increased speed, fuel economy and the ability to load and discharge cargo quicker when compared to older designs. Such savings could result in a substantial reduction of costs for charterers compared to vessels of ours. Competition from these more technologically advanced vessels may reduce demand for certain of our older vessels, impair our ability to re-charter such vessels at competitive rates, impair the resale value of such vessels and could have a material adverse effect on our business, financial condition, cash flows and results of operations.
We operate drybulk carriers worldwide and, as a result, our business has inherent operational risks, which may reduce our revenue or increase our expenses, and we may not be adequately covered by insurance.
The international shipping industry is an inherently risky business involving global operations of ocean-going vessels. Our vessels and their cargoes are at risk of being damaged or lost because of events such as marine disasters, bad weather, mechanical failures, human error, environmental accidents, war, terrorism, piracy and other circumstances or events. In addition, transporting cargoes across a wide variety of international jurisdictions creates a risk of business interruptions due to political circumstances in foreign countries, hostilities, labor strikes and boycotts, the potential for changes in tax rates or policies, and the potential for government expropriation of our vessels. Any of these events may result in loss of revenue, increased costs and decreased cash flows to our customers, which could impair their ability to make payments to us under our charters.
Changing economic, regulatory and political conditions in some countries, including political and military conflicts, have from time to time resulted in attacks on vessels, mining of waterways, piracy, terrorism, labor strikes and boycotts. These hazards may result in death or injury to persons, loss of revenue or property, payment of ransoms, environmental damage, higher insurance rates, damage to our customer relationships, market disruptions, and interference with shipping routes (such as delay or rerouting), which may reduce our revenue or increase our expenses and also subject us to litigation.
If our vessels suffer damage, they may need to be repaired at a drydocking facility. The costs of drydock repairs are unpredictable and can be substantial. We may have to pay drydocking costs that our insurance does not cover in full. In addition, space at drydocking facilities is sometimes limited and not all drydocking facilities are conveniently located. We may be unable to find space at a suitable drydocking facility or we may be forced to travel to a drydocking facility that is distant from the relevant vessel’s position. The loss of earnings while our vessels are being repaired and repositioned or from being forced to wait for space, as well as the actual cost of repairs, could have a material adverse effect on our business, financial condition, cash flows and results of operations. Additionally, in certain cases we bareboat charter our vessels. Such vessels could require significant repairs when the vessel is returned to us.
The operation of any vessel is subject to the inherent possibility of marine disaster, including oil spills and other environmental mishaps, and the liabilities arising from owning and operating vessels in international trade.
Furthermore, the operation of certain vessel types, such as drybulk carriers, also has certain unique risks. With a drybulk carrier, the cargo itself and its interaction with the vessel can be an operational risk. By their nature, drybulk cargoes are often heavy, dense, easily shifted, and react badly to water exposure. In addition, drybulk carriers are often subjected to battering treatment during unloading operations with grabs, jackhammers (to pry encrusted cargoes out of the hold) and small bulldozers. This treatment may cause damage to the vessel. Vessels damaged due to treatment during unloading procedures may be more susceptible to breach at sea. Hull breaches in drybulk carriers may lead to the flooding of the vessel’s holds. If a drybulk carrier suffers flooding in its forward holds, the bulk cargo may become so dense and waterlogged that its pressure may buckle the vessel’s bulkheads, leading to the loss of a vessel. If we are unable to adequately maintain our vessels, we may be unable to prevent these events. Other bulk cargoes will include a certain amount of moisture and may “liquefy” under certain conditions which can cause the cargo to shift, render the vessel unstable and cause it to sink or suffer damage. Any of these circumstances or events could have a material adverse effect on our business, financial condition, cash flows and results of operations. In addition, the loss of any of our vessels could harm our reputation as a safe and reliable vessel owner and operator.
In the event of a casualty to a vessel or other catastrophic event, we will rely on our insurance to pay the insured value of the vessel or the damages incurred. We procure insurance for the vessels in our Fleet against those risks that we believe the shipping industry commonly insures against. These insurances include marine hull and machinery insurance, protection and indemnity insurance, war risk insurance and freight, demurrage and defense insurance, or FD&D insurance. We insure our vessels for third-party liability claims subject to and in accordance with the rules of the P&I Associations in which the vessels are entered. In this regard we are insured against some contractual claims and tort claims, including environmental damage, pollution and crew personal injury and illness claims. The current amount of insurance coverage for pollution claims available to us on commercially reasonable terms through P&I Associations is limited to $1 billion per vessel per incident. The objective of a P&I Association is to provide mutual insurance based on the aggregate tonnage of a member’s vessels entered into the association. Claims are paid through the aggregate premiums of all members of the association, although members remain subject to calls for additional funds if the aggregate premiums are insufficient to cover claims payable by the association. Claims payable by the association may include those incurred by members of the association, as well as claims payable by the association from other P&I Associations with which our P&I Association has entered into inter-association agreements. We cannot assure you that the P&I Associations to which we belong will remain viable or that we will not become subject to additional funding calls which could adversely affect us.
We do not currently maintain insurance against loss of hire on our vessels resulting from business interruptions that result from the loss of use of a vessel other than limited loss coverage relating to defined war risk events. The insurers may not pay particular claims as the payment of some claims may be treated as discretionary by the board of directors of the P&I Association. Our insurance policies may contain deductibles for which we will be responsible and limitations and exclusions which may increase our costs or lower our revenue or prevent recovery. Moreover, insurers may default on claims they are required to pay.
We cannot assure you that we will be adequately insured against all risks or that we will be able to obtain adequate insurance coverage at reasonable rates for our vessels in the future, or that we will be able to obtain certain insurance coverage. For example, in the past more stringent environmental regulations have led to increased costs for, and in the future may result in the lack of availability of, insurance against risks of environmental damage or pollution. Additionally, our insurers may refuse to pay particular claims. Any significant loss or liability for which we are not insured could have a material adverse effect on our business, financial condition, cash flows and results of operations.
Maritime claimants could arrest or attach one or more of our vessels, which could interrupt our cash flows.
In certain jurisdictions, an extensive range of claims may give rise to maritime liens, such as claims by suppliers of goods and services to a vessel and cargo claims, and maritime liens against a vessel maybe granted for claims against the time charterer of that vessel. The holder of a maritime lien is entitled to enforce the claim against the vessel notwithstanding that the claim may be against another party that has an interest in the vessel. In addition, in some jurisdictions, such as South Africa under the “associated ship” procedures, a claimant may arrest either the vessel that is subject to the claimant’s maritime claim or any “associated” vessel, which is any other vessel owned by the same owner or is owned by a company that is controlled, directly or indirectly by any person or persons through the owning company or the chartering company, whomever was liable, at the time the claim arose.
The arrest or attachment of one or more of our vessels could require us to pay large sums of money to have the arrest or attachment lifted. The occurrence of any of the above events could have a material adverse effect on our business, financial condition, cash flows and results of operations.
Labor interruptions could disrupt our business.
We could be subject to industrial action or other labor unrest that could prevent or hinder our operations from being carried out normally. If not resolved in a timely and cost-effective manner, such business interruptions could have a material adverse effect on our business, financial condition, cash flows and results of operations. These effects would be exacerbated if such a disruption were to occur on one of our vessels that are manned by masters, officers and crews that are employed by third parties that we do not control.
Our vessels may call on ports located in countries that are subject to restrictions imposed by the United States, United Kingdom, United Nations or other governments, which could adversely affect our reputation and the market for our ordinary shares.
Although we do not expect that our vessels will call on ports located in countries subject to sanctions and embargoes imposed by the U.S. government and other authorities or countries identified by the U.S. government or other authorities as state sponsors of terrorism, from time to time on charterers’ instructions, our vessels may call on ports located in such countries in the future. Our vessels have called on ports in Cuba on very limited occasions in compliance with applicable sanctions, including with respect to humanitarian shipments arranged by the United States Agency for International Development, or USAID. Prior to each voyage on behalf of USAID, we confirmed that the charterer possessed a license authorizing the transactions under U.S. sanctions laws. The U.S. sanctions and embargo laws and regulations vary in their application, as they do not all apply to the same covered persons or proscribe the same activities, and such sanctions and embargo laws and regulations may be amended or strengthened over time.
On August 2, 2017, the United States enacted the Countering America’s Adversaries Through Sanctions Act, or CAATSA. CAATSA authorizes secondary sanctions on persons worldwide who conduct certain business with Iran, Russia, and North Korea. These include secondary sanctions on persons (1) dealing with most sectors of the North Korean economy, including the transportation sector, (2) engaging in any activity related to Iran’s ballistic missile program, including transportation, and (3) dealing with certain activities in the Russian energy sector, including support of Russian energy export pipelines and certain energy projects. On September 21, 2017, President Trump issued an executive order imposing additional sanctions against North Korea, including a prohibition on vessels calling at ports in the United States that have called at North Korean ports within the past 180 days or that have engaged in vessel-to-vessel transfers with vessels that have called at North Korean ports within the past 180 days. On April 6, 2018, the United States imposed sanctions on seven Russian oligarchs and certain companies they own or control, 17 senior Russian government officials, a state-owned Russian weapons trading company, and a Russian bank. These sanctions were imposed in part under CAATSA, and some were specifically for persons operating in the energy sector of the Russian Federation economy. CAATSA also requires the mandatory imposition of secondary sanctions on any non-U.S. person that knowingly facilitates significant transactions for or on behalf of these designated Russian persons or any entities in which they own, directly or indirectly, a 50% or greater interest.
On October 13, 2017, President Trump declined to certify Iran’s compliance with the Joint Comprehensive Plan of Action (“JCPOA”), which had eased or waived certain nuclear-related sanctions and secondary sanctions. On January 12, 2018, President Trump announced that the United States did not intend to renew its sanctions waivers under the JCPOA when the waivers next expire on May 12, 2018 unless significant changes were made to the JCPOA. On May 8, 2018, President Trump announced that the United States would withdraw from the JCPOA and begin the process of reimposing sanctions that were waived under the JCPOA. The United States determined that these sanctions would be reimposed in two tranches. One set of sanctions was reimposed after a 90-day wind down period that ended August 6, 2018, and the remainder was reimposed after a 180-day wind down period that ended November 4, 2018. All sanctions that were suspended or waived under the JCPOA, including those under CISADA and the Iran Threat Reduction Act, have been in force since November 5, 2018 at the latest. The secondary sanctions related to Iran’s petroleum and petrochemical sectors, energy sector, and port operators, shipping, and shipbuilding sectors were reimposed after the 180-day wind down period that ended November 4, 2018. Since such time, Iran has breached certain of its undertakings in the JCPOA, although the remaining parties to the JCPOA all continue formally to be participants in the JCPOA. On February 21, 2020, Iran was placed on the blacklist of High-Risk Jurisdictions subject to a Call for Action by the Financial Action Task Force (“FATF”).
On February 24, 2022, the United States imposed additional sanctions on Russia in response to its invasion of Ukraine. Many of these sanctions are targeted at Russian banks and energy companies and Russian sovereign debt. The range of sanctions includes prohibitions on dealings in the debt or equity of certain Russian companies, as well as blocking sanctions imposed on many Russian individuals and entities. Similar sanctions have been imposed in coordination with the United States by the United Kingdom, European Union, and other countries. On March 8, 2022, President Biden issued an executive order prohibiting the importation into the United States of Russian-origin crude oil, petroleum, petroleum fuels, oil, liquefied natural gas, coal, and coal products, and prohibiting new investment by U.S. persons in the Russian energy sector. On March 11, 2022 President Biden issued an executive order prohibiting, among other things, the importation of various Russian-origin products, including seafood, alcohol, and non-industrial diamonds, into the United States and the exportation of luxury goods to Russia. On April 6, 2022, the United States issued Executive Order 14071, prohibiting new investment in Russia by a U.S. person. The U.S. also imposed full blocking sanctions on Sberbank and Alfa Bank, two of Russia’s largest financial institutions, and Alrosa, a state-owned company that is the world’s largest diamond mining company. As described in the risk factor regarding bunker prices, the United States, along with Western allies, imposed price caps on Russian-origin crude oil and petroleum products.
Although we believe that we are in compliance with all applicable sanctions and embargo laws and regulations, and intend to maintain such compliance, there can be no assurance that we will be in compliance in the future, particularly as the scope of certain laws may be unclear and may be subject to changing interpretations. Any such violation could result in an occurrence of an event of default under our credit facilities, fines or other penalties and could severely impact our ability to access U.S. capital markets and conduct our business, and could result in some investors deciding, or being required, to divest their interest, or not to invest, in us. In addition, certain institutional investors may have investment policies or restrictions that prevent them from holding securities of companies that have contracts with countries identified by the U.S. government as state sponsors of terrorism. The determination by these investors not to invest in, or to divest from, our securities may adversely affect the price at which our securities trade. Moreover, our charterers may violate applicable sanctions and embargo laws and regulations as a result of actions that do not involve us or our vessels, and those violations could in turn negatively affect our reputation or result in an inability to collect freight and demurrage when due. In addition, our reputation and the market for our securities may be adversely affected if we engage in certain other activities, such as entering into charters with individuals or entities in countries subject to U.S. sanctions and embargo laws that are not controlled by the governments of those countries, or engaging in operations associated with those countries pursuant to contracts with third parties that are unrelated to those countries or entities controlled by their governments. Investor perception of the value of our securities may be adversely affected by the consequences of war, the effects of terrorism, civil unrest and governmental actions in these and surrounding countries. The war in the Ukraine and sanctions against Russia has or may result in a negative impact on the availability of Russian and Ukrainian crews with a resulting global shortage of vessel crew and this may in turn result in higher crewing costs or an increase in the number of idle ship days.
We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act, U.K. Bribery Act, and other applicable worldwide anti-corruption laws.
We are subject to the U.S. Foreign Corrupt Practices Act, or FCPA, and other applicable worldwide anti-corruption laws, which generally prohibit corrupt payments by us, our employees, vendors, or agents. These laws include the U.K. Bribery Act, which became effective on July 1, 2011 and which is broader in scope than the FCPA, as it prohibits bribes to any person and contains no facilitating payments exception. Under the FCPA and other applicable anti-corruption laws, we may be held liable for some actions taken by strategic or local partners and agents. We operate our vessels in some jurisdictions that international corruption monitoring groups have identified as having high levels of corruption and may utilize vendors and agents to act on our behalf in those jurisdictions. Our activities create the risk of unauthorized payments or offers of payments by one of our employees, vendors, or agents that could be in violation of the FCPA or other applicable anti-corruption laws. While we devote substantial resources to our global compliance program and have implemented policies, training, and internal controls designed to reduce the risk of corrupt payments and to comply with the FCPA and other applicable anti-corruption laws, our employees, vendors, and agents may violate our policies. We also may not be able to adequately prevent or detect all possible violations of the FCPA and other applicable anti-corruption laws. If we are found to be responsible for violations of the FCPA or other applicable anti-corruption laws (either due to our own acts or our inadvertence, or due to the acts or inadvertence of others), our company and our employees could suffer from substantial civil and criminal penalties, including fines, incarceration, prohibitions or limitations on the conduct of our business, the loss of our financing facilities and significant reputational damage, including our relationships with our customers, all of which could have a material adverse effect on our business, financial condition, cash flows and results of operations. Government or regulatory investigations into potential violations of the FCPA or other applicable anti-corruption laws by Grindrod Shipping or its employees, vendors, or agents could also have a material adverse effect on our business, financial condition, cash flows and results of operations. Furthermore, detecting, investigating, and resolving actual or alleged violations of the FCPA and other applicable anti-corruption laws is expensive and can consume significant time and attention of our senior management.
The smuggling of drugs or other contraband onto our vessels may lead to governmental claims against us.
We expect that our vessels will call in ports where smugglers attempt to hide drugs and other contraband on vessels, with or without the knowledge of crew members. To the extent our vessels are found with contraband, whether inside or attached to the hull of our vessel and whether with or without the knowledge of any of our crew, we may face reputational damage and governmental or other regulatory claims which could have a material adverse effect on our business, financial condition, cash flows and results of operations.
Governments could requisition our vessels during a period of war or emergency, which could have a material adverse effect on our business, financial condition, cash flows and results of operations.
A government could requisition one or more of our vessels for title or for hire. Requisition for title occurs when a government takes control of a vessel and becomes its owner, while requisition for hire occurs when a government takes control of a vessel and effectively becomes its charterer at dictated charter rates. Generally, requisitions occur during periods of war or emergency, although governments may elect to requisition vessels in other circumstances. Although we may be entitled to compensation in the event of a requisition of one or more of our vessels, the amount and timing of payment would be uncertain. Government requisition of one or more of our vessels could have a material adverse effect on our business, financial condition, cash flows and results of operations.
Risks Related to Our Business
A substantial number of our drybulk vessels are employed in the spot market. Any decrease in drybulk spot rates in the future could have a material adverse effect on our business, financial condition, cash flows and results of operations.
A substantial number of our drybulk carriers are currently employed in the spot market. This exposes us to fluctuations in spot rates. The spot market may fluctuate significantly based upon drybulk carrier, cargo, energy resources, commodities and industrial products supply and demand. The successful operation of our vessels in the competitive spot charter market, depends on, among other things, obtaining profitable spot contracts and minimizing, to the extent possible, time spent waiting for employment and time spent traveling unemployed to a demand area. The spot market is very volatile, and, in the past, there have been periods when spot market rates have declined below the operating cost of vessels. If future spot market rates decline, then we may be unable to operate our vessels trading in the spot market profitably, meet our obligations, including payments on indebtedness, or pay dividends in the future. Furthermore, as spot charters may last up to several weeks, during periods in which spot rates are rising we will generally experience delays in realizing the benefits from such increases.
Our ability to renew expiring contracts or obtain new contracts on favorable terms or at all will depend on the prevailing market conditions at the time. If we are not able to extend contracts in direct continuation of current contracts or we are not able to obtain new contracts for existing or new owned vessels or new chartered-in vessels upon their delivery to us, or if new charters are entered into with our customers at charter rates substantially below the existing charter rates or on terms otherwise less favorable compared to current charter terms, this could have a material adverse effect on our business, financial condition, cash flows and results of operations.
In addition, we cannot assure you that we will be successful in finding employment for vessels we manage in the volatile drybulk spot market or whether any such employment will be at profitable rates. We cannot assure you that our vessels will be profitably operated by ourselves where we commercially manage our vessels outside of pools.
A reduction in charter rates, spot market rates and other market deterioration or the aging of our Fleet may require us to record impairment charges related to our long-lived assets (our vessels) and such charges may be large and have a material impact on our financial statements.
At December 31, 2022, we had vessels of $406.8 million in total on our consolidated statements of financial position, representing approximately 142% of our total equity.
At the end of each reporting period, and on a continuous basis, if indicators of impairment are present, the carrying amount of tangible and intangible assets is assessed to determine whether there is any indication that those assets may have suffered an impairment loss. We also assess the carrying value of an asset when we have contracted to divest of the asset for any reason, including the age of our vessels, if a joint venture that owns vessels comes to an end in accordance with its terms or if the asset no longer fits into our strategic planning. During the year ended December 31, 2020, we impaired vessels to the extent of $16.3 million as we contracted to sell them. During the year ended December 31, 2021, we reversed the impairment of a drybulk carrier to the extent of $3.6 million when the decision to sell was reversed and we reversed the impairment loss on the right-of-use assets to the extent of $1.0 million as the recoverable amount exceeded the carrying value. During the year ended December 31, 2022, we reversed the impairment of a drybulk carrier to the extent of $1.7 million when we decided to sell the vessel and we impaired the right-of-use assets to the extent of $1.0 million as the recoverable amount dropped below the carrying value.
If there is a reduction in our estimated charter rates, or if we intend to divest additional vessels, we may be required to record further impairment charges on our vessels, which would require us to write down the carrying value of these assets to their fair value. Since vessels and from time to time vessels under construction comprise a substantial portion of our consolidated statements of financial position, such charges could have a material impact on our financial statements. See “Item 5. Operating and Financial Review and Prospects—Critical Accounting Policies and Estimates”.
We depend on certain customers for our revenue. Customers may default on their obligations to us and the terms of charters may be difficult to enforce.
For the years ended December 31, 2022, 2021 and 2020, no single customer accounted for 10% or more of our drybulk business revenue. The loss of any of our significant customers, a customer’s failure to make payments or perform under any of the applicable contracts, a customer’s termination of any of the applicable contracts, or a decline in payments under the contracts could have a material adverse effect on our business, financial condition, cash flows and results of operations. Our contracts are governed by the law of a number of jurisdictions and provide for a variety of dispute resolution mechanisms and arbitration proceedings. There can be no assurance that we would be able to enforce any judgments against these charterers in jurisdictions where they are based or have their primary assets and operations. Even after a charter contract is entered, charterers may terminate charters early under certain circumstances.
A charterer may also terminate a charter for events that may or may not be within our control. The events or occurrences that will cause a charter to terminate or give the charterer the option to terminate the charter generally include a total or constructive total loss of the related vessel, the requisition for hire of the related vessel, the event of war in specified countries, the vessel becoming subject to seizure for more than a specified number of days, our failure to deliver the related vessel within a fixed period of time or the failure of the related vessel to meet specified performance criteria.
The ability of a customer to perform its obligations under a contract will depend on a number of factors that are beyond our control. These factors may include general economic conditions, conditions specific to the customer, the condition of the drybulk sector of the shipping industry to which the customer is exposed, and the charter rates received for specific types of vessels. The costs associated with the default by a customer may be considerable and could have a material adverse effect on our business, financial condition, cash flows and results of operations.
Our customers may go bankrupt or fail to perform their obligations under the contracts, they may delay payments or suspend payments altogether, they may terminate the contracts prior to the agreed-upon expiration date or they may attempt to renegotiate the terms of the contracts. The failure of a customer to perform its obligations under a contract may mean we increase our exposure to the spot market, which is subject to greater rate fluctuation than the time charter market. If we receive lower rates under replacement contracts or are unable to re-employ all of our vessels, it could have a material adverse effect on our business, financial condition, cash flows and results of operations.
A drop in spot market rates may provide an incentive for some charterers and other customers to default on their charters and contracts.
If spot market rates decline, charterers may no longer need a vessel that is then under charter or may be able to obtain a comparable vessel at lower rates. Currently, and in the future, we may employ certain of our vessels in fixed rate time charters. When we enter into a time charter, as well as bareboat charter or COA, charter rates under that charter or contract may be fixed for the term of the charter or contract. If the spot market or term charter rates available in the drybulk shipping market becomes significantly lower than the rates that a customer is obliged to pay us under our existing charters or contracts, the customer may have incentive to default under that charter or contract or attempt to renegotiate the charter or contract. If our charterers fail to meet their obligations to us or attempt to renegotiate our charter agreements, it may be difficult to secure substitute employment for such vessel, and any new employment we secure in the spot market or on time charters, or as bareboat charters or under COAs, may be at lower rates. As a result, we could sustain significant losses which could have a material adverse effect on our business, financial condition, cash flows and results of operations.
We are subject to certain risks with respect to our counterparties to contracts, and failure of such counterparties to meet their obligations could cause us to suffer losses or could have a material adverse effect on our business, financial condition, cash flows and results of operations.
We have entered into, and may enter into, various contracts, including pool arrangements, time charters, spot voyage charters, shipbuilding contracts, credit facilities and other agreements. Such agreements subject us to counterparty risks. The ability and willingness of each of our counterparties to perform its obligations under a contract with us will depend on a number of factors that are beyond our control and may include, among other things, general economic conditions, the condition of the maritime industries and the overall financial condition of the counterparty. Should a counterparty fail to honor its obligations under agreements with us, or seek to renegotiate the terms of the contract, we could sustain significant losses that could have a material adverse effect on our business, financial condition, cash flows and results of operations.
Circumstances beyond our control could affect our customers’ financial strength, and because many of our customers are privately held companies, information about the financial strength of our customers may not always be available. As a result, we might have little advance warning of financial or other problems affecting our customers and their non-performance, financial or other problems could have a material adverse effect on our business, financial condition, cash flows and results of operations.
We may be unable to attract and retain key management personnel and other employees in the shipping industry, which may negatively affect the effectiveness of our management and our results of operations.
Our success depends to a significant extent upon the abilities and efforts of our management team and our ability to hire and retain key members of our management team. We do not maintain “key man” life insurance on any of our officers. The loss of any of these individuals and difficulty in hiring and retaining personnel, including key personnel, could have a material adverse effect on our business, financial condition, cash flows and results of operations.
The aging of our vessels may result in increased operating costs in the future, which could have an adverse effect on our business, financial condition, cash flows and results of operations.
In general, the cost of maintaining a vessel in good operating condition increases with the age of the vessel. As our vessels age typically they will become less fuel-efficient and more costly to maintain than more recently constructed vessels due to improvements in engine and other technology. Cargo insurance rates increase with the age of a vessel, making older vessels less desirable to charterers. Governmental regulations and safety or other equipment standards related to the age of vessels may also require expenditures for alterations or the addition of new equipment to our vessels and may restrict the type of activities in which our vessels may engage. We cannot assure you that, as our vessels age, market conditions will justify those expenditures or enable us to operate our vessels profitably during the remainder of their useful lives. See “—A reduction in charter rates, spot market rates and other market deterioration or the aging of our Fleet may require us to record impairment charges related to our long-lived assets (our vessels) and such charges may be large and have a material impact on our financial statements.” above.
We may not have adequate insurance to compensate us for losses that may result from our operations due to the inherent risks in the industry.
There are a number of risks associated with the operation of ocean-going vessels, including mechanical failure, collision, human error, war, terrorism, piracy, loss of life, property loss, cargo loss or damage and business interruption due to political circumstances in foreign countries, hostilities and labor strikes. Any of these events may result in loss of revenue, increased costs and decreased cash flows. In addition, the operation of any vessel is subject to the inherent possibility of marine disaster, including oil spills and other environmental mishaps, and the liabilities arising from owning and operating vessels in international trade.
We are insured against some contractual claims and tort claims (including claims related to environmental damage and pollution) through memberships in protection and indemnity associations or clubs, or P&I Associations. As a result of such membership, the P&I Associations provide us coverage for such tort and contractual claims. We also carry hull and machinery insurance and war risk insurance for our vessels. We insure our vessels for third-party liability claims subject to and in accordance with the rules of the P&I Associations in which the vessels are entered. We do not maintain cover for loss of hire or earnings arising out of insured peril events other than limited loss coverage relating to defined war risk events. We can give no assurance that we will be adequately insured against all risks. We may not be able to obtain adequate insurance coverage for our vessels in the future. The insurers may not pay particular claims. Our insurance policies contain deductibles for which we will be responsible and limitations and exclusions which may increase our costs or lower our revenue or prevent recovery.
The objective of a P&I Association is to provide mutual insurance based on the aggregate tonnage of a member’s vessels entered into the association. Claims are paid through the aggregate premiums of all members of the association and the P&I Association’s retained earnings, although members remain subject to calls for additional funds if the aggregate premiums are insufficient to cover claims payable by the association. Claims payable by the association may include those incurred by members of the association, as well as claims payable by the association from other P&I Associations with which our P&I Association has entered into interassociation agreements. We cannot assure you that the P&I Associations to which we belong will remain viable or that we will not become subject to additional funding calls which could adversely affect us.
We cannot assure you that we will be able to renew our insurance policies on the same or commercially reasonable terms, or at all, in the future. For example, more stringent environmental regulations have led in the past to increased costs for, and in the future may result in the lack of availability of, protection and indemnity insurance against risks of environmental damage or pollution. Any uninsured or underinsured loss could harm our business, financial condition, cash flows and results of operations. In addition, our insurance may be voidable by the insurers as a result of certain of our actions, such as our vessels failing to maintain certification with applicable maritime self-regulatory organizations. Further, we cannot assure you that our insurance policies will cover all losses that we incur, or that disputes over insurance claims will not arise with our insurance carriers. Any claims covered by insurance would be subject to deductibles, and since it is possible that a large number of claims may be brought, the aggregate amount of these deductibles could be material. In addition, our insurance policies are subject to limitations and exclusions, which may increase our costs or lower our revenue, and could have a material adverse effect on our business, financial condition, cash flows and results of operations.
We may have difficulty managing our planned growth properly.
Our Fleet consists of 24 owned drybulk carriers and seven long-term chartered-in drybulk carriers. One of our principal strategies is to continue to grow by expanding our operations while prioritizing risk management and balance sheet flexibility, and we may, in the future, increase the size of our Fleet. Our future growth will primarily depend upon a number of factors, some of which may not be within our control. These factors include our ability to:
| • | identify suitable drybulk carriers, including newbuilding slots at shipyards and/or shipping companies for acquisition at attractive prices; |
| • | sell older vessels at an appropriate time in the market; |
| • | obtain required financing for our existing and new vessels and operations; |
| • | identify businesses engaged in managing, operating or owning drybulk carriers for acquisition or joint ventures; |
| • | integrate any acquired drybulk carriers or businesses successfully with our existing operations, including obtaining any approvals and qualifications necessary to operate vessels that we acquire; |
| • | hire, train and retain qualified personnel and crew to manage and operate our growing business and Fleet; |
| • | identify additional new markets; |
| • | enhance our customer base; and |
| • | enhance our operating, financial and accounting systems and controls. |
Our failure to effectively identify, acquire, develop and integrate any drybulk vessels or businesses, or our inability to effectively manage our Fleet, could materially adversely affect our business, financial condition, cash flows and results of operations.
Furthermore, the number of employees that perform services for us and our current operating and financial systems may not be adequate as we expand the size of our Fleet, and we may not be able to effectively hire more employees or adequately improve those systems. In addition, if we further expand our Fleet, we will need to recruit suitable additional seafarers and shoreside administrative and management personnel. We cannot guarantee that we will be able to hire suitable employees. If we or our crewing agent encounters business or financial difficulties, we may not be able to adequately staff our vessels. If we are unable to enhance our financial and operating systems or to recruit suitable employees, it could materially adversely affect our business, financial condition, cash flows and results of operations. Growing any business by acquisition presents numerous risks such as undisclosed liabilities and obligations, difficulty in obtaining additional qualified personnel and managing relationships with customers and suppliers and integrating newly acquired operations into existing infrastructures. Acquisitions may require additional equity issuances, which may dilute our ordinary shareholders, or debt issuances (with amortization payments). The effect of an acquisition may be to lower our available cash. If any such events occur, it could have a material adverse effect on our business, financial condition, cash flows and results of operations.
We cannot give any assurance that we will be successful in executing our growth plans or that we will not incur significant expenses and losses in connection with our future growth.
Grindrod Shipping is a holding company and depends on the ability of its subsidiaries to distribute funds to it in order to satisfy its financial obligations and to make dividend payments.
Grindrod Shipping is a holding company and its subsidiaries conduct all of its operations and own all of its operating assets. Grindrod Shipping has no significant assets other than the equity interests in and loans to its subsidiaries. As a result, its ability to satisfy its financial obligations and to pay dividends to its shareholders depend on its subsidiaries and their ability to distribute funds to it. If Grindrod Shipping is unable to obtain funds from its subsidiaries, its board of directors may exercise its discretion not to declare or pay dividends.
Our future capital needs are uncertain and we may need to raise additional funds in the future. If we are unable to fund our future capital expenditure needs, we may not be able to continue to operate some of our vessels or continue with some or all of our future Fleet expansion plans, which would have a material adverse effect on our business, financial condition, cash flows and results of operations.
We may face liquidity issues if poor market conditions in the drybulk market return for a prolonged period. In addition, we may need to raise additional capital to maintain, replace and expand the operating capacity of our Fleet and fund our operations. Our future funding requirements will depend on many factors, including the cost and timing of vessel acquisitions, and the cost of retrofitting or modifying existing vessels as a result of technological advances in vessel design or equipment, changes in applicable environmental or other regulations or standards, customer requirements or otherwise.
In order to fund our capital expenditures, we may be required to incur borrowings or raise capital through the sale of debt or equity securities. Our ability to borrow money and access the capital markets through future offerings may be limited by a number of factors, including:
| • | our financial performance; |
| • | the liquidity of the overall capital markets; |
| • | the state of the Singapore, South African, United States and global economies; |
| • | general economic conditions and other contingencies and uncertainties that are beyond our control; and |
| • | the state of the drybulk industry. |
We cannot assure you that we will be able to obtain additional funds on acceptable terms, or at all. If we raise additional funds by issuing equity or equity-linked securities, our shareholders may experience dilution or reduced distributions. Any additional debt or equity financing that we raise may contain terms that are not favorable to us or our shareholders, including, in the case of debt financing, making us subject to more restrictive covenants than those applicable to our existing credit facilities. Rising interest rates in the United States, Eurozone and elsewhere may increase the cost of our debt in the future.
Our failure to obtain the funds for necessary future capital expenditures could limit our ability to continue to operate some or all of our vessels or could cause us to impair the value of our vessels as well as limit our ability to continue with some or all of our Fleet expansion plans. Any of these factors could have a material adverse effect on our business, financial condition, cash flows and results of operations. Even if we are successful in obtaining such funds through financings, the terms of such financings could further limit our ability to pay dividends.
Servicing our current or future indebtedness and meeting certain financing obligations limits funds available for other purposes and if we cannot service our debt and meet our other financing obligations, we may lose our vessels.
Borrowing under our credit facilities requires us to dedicate a part of our cash flow to paying interest and repaying capital on our indebtedness under such facilities.
These payments and certain financing obligations limit funds available for working capital, capital expenditures and other purposes, including further equity investments in our joint venture or debt financing in the future. Amounts borrowed under our credit facilities bear interest at variable rates. Increases in prevailing rates could increase the amounts that we would have to pay to our lenders, even though the outstanding principal amount remains the same, and our net income and cash flows would decrease. We expect our earnings and cash flow to vary from year to year due to the cyclical nature of the drybulk industry.
If we do not generate or reserve enough cash flow from operations to satisfy our debt obligations, we may have to undertake alternative financing plans, which may be more costly than our historical financing due to increased interest rates in the United States, Eurozone and elsewhere, such as:
| • | seeking to raise additional capital; |
| • | refinancing or restructuring our debt; |
| • | reducing or delaying capital investments. |
However, these alternative financing plans, if necessary, may not be sufficient to allow us to meet our debt obligations. In addition, our 24 owned vessels are pledged as collateral to secure our various debt obligations. If we are unable to meet our debt and other financing, lenders could elect to declare that debt, together with accrued interest and fees, to be immediately due and payable and proceed against the collateral vessels securing that debt or other assets.
We are exposed to volatility in benchmark rates (in particular LIBOR) and may selectively enter into derivative contracts, which can result in higher than market interest rates and charges against our income.
The loans under our credit facilities are generally advanced at a floating rate based on LIBOR, which was volatile in prior years and may rise in the future. LIBOR can affect the amount of interest payable on our debt, which, in turn, could have an adverse effect on our earnings and cash flow. Our financial condition could be materially adversely affected as we have not entered into interest rate hedging arrangements to hedge our exposure to the interest rates applicable to our credit facilities and may not enter into interest rate hedging arrangements for these or any other financing arrangements we may enter into in the future, including those we may enter into to finance a portion of the amounts payable with respect to newbuildings or acquisitions.
We may enter into derivative contracts to hedge our overall exposure to interest rate risk. Entering into swaps and other derivatives transactions is inherently risky and presents possibilities for incurring significant expenses. The derivatives strategies that we may employ may not be successful or effective, and we could, as a result, incur substantial additional interest and breakage costs.
Changes in the method pursuant to which LIBOR and other benchmark rates are determined may adversely affect our business and financial results.
As noted above, the loans under our credit facilities are generally advanced at a floating rate based on LIBOR. LIBOR has been the subject of recent national, international and other regulatory guidance and proposals for reform. On March 5, 2021, these reforms and other pressures caused the ICE Benchmark Administration (the “IBA”), the administrator of LIBOR, to announce the cessation of publication of certain types of LIBOR after December 31, 2021 with the cessation of the publication of remaining types of LIBOR after June 30, 2023. The United Kingdom Financial Conduct Authority (the “FCA”), which regulates LIBOR, separately announced that the IBA had notified the FCA of its intent to cease providing all LIBOR settings. While the FCA stated that, subject to the establishment of the new proposed powers, it would consult on the issue of requiring the IBA to produce certain LIBOR tenors on a synthetic basis, it confirmed that all 35 LIBOR settings will either cease to be provided by any administrator or will no longer be representative as of the dates published by the IBA. Regulators, industry groups and certain committees, such as the Alternative Reference Rates Committee (ARRC) have, among other things, published recommended fallback language for LIBOR-linked financial instruments, identified recommended alternatives for certain LIBOR rates, such as the Secured Overnight Financing Rate (SOFR) as the recommended alternative to U.S. Dollar LIBOR, and proposed implementations of the recommended alternatives in floating rate financial instruments. It is currently unknown the extent to which these recommendations and proposals will be broadly accepted, whether they will continue to evolve, and what the effect of their implementation may be on the markets for floating-rate financial instruments. At this time, it is not possible to predict the effect that these developments or any discontinuance, modification or other reforms may have on LIBOR, other benchmarks or floating-rate debt instruments, including our floating-rate debt. Any such discontinuance, modification, alternative reference rates or other reforms may materially adversely affect market rates of interest and the value of securities and other financial arrangements. These uncertainties, proposals and actions to resolve them, and their ultimate resolution also could negatively impact our funding costs, loan and other asset values, asset-liability management strategies, and other aspects of our business and financial results. As a result of LIBOR ceasing to exist, we are renegotiating our credit agreements and interest rate derivative agreements that extend beyond June 2023 and utilize LIBOR as a factor in determining the interest rate or hedge rate. Potential replacement reference rates such as Term SOFR differ from LIBOR in important ways. LIBOR is an unsecured lending rate, while Term SOFR is a secured lending rate, and
Term SOFR
is an overnight rate while LIBOR reflects term rates at different maturities. If our LIBOR-based borrowings are converted to
Term SOFR
, the differences between LIBOR and
Term SOFR
, plus the recommended spread adjustment, could result in higher interest costs than if LIBOR remained available, which could adversely impact our cost of debt. No assurance can be provided that the uncertainties around the transition from LIBOR or their resolution will not adversely affect the use, level, and volatility of our loans under our credit facilities generally advanced at a floating rate based on LIBOR.
As of December 31, 2022, we had $225.1 million of outstanding indebtedness and finance lease obligations with interest obligations based on LIBOR plus applicable margins.
We are leveraged, which could significantly limit our ability to execute our business strategy and we may be unable to comply with our covenants in our credit facilities that impose operating and financial restrictions on us, which could result in a default under the terms of these agreements.
As of December 31, 2022, we had $199.0 million of outstanding indebtedness under our credit facilities and other borrowings.
Our credit facilities impose operating and financial restrictions on us that limit our ability, or the ability of our subsidiaries party thereto, among other things, to:
| • | incur additional indebtedness on the relevant vessels securing that facility; |
| • | sell any collateral vessel (unless a corresponding amount under the relevant facility were prepaid in accordance with its terms); |
| • | upon the happening of an event of default or potential event of default, make additional investments or acquisitions; |
| • | upon the happening of an event of default or potential event of default, pay dividends; or |
| • | effect a change of ownership or control of the relevant borrower group under each facility. |
Therefore, we may need to seek permission from our lenders in order to engage in some corporate actions. Our lenders’ interests may be different from ours and we may not be able to obtain our lenders’ permission when needed. This may limit our ability to pay dividends on our ordinary shares if we determine to do so in the future, pay interest on our indebtedness, finance our future operations or capital requirements, make acquisitions or pursue business opportunities.
In addition, our credit facilities require us to maintain specified financial ratios and satisfy financial covenants, including ratios and covenants based on the market value of the vessels in our Fleet. Should our charter rates or vessel values materially decline in the future or for other reasons, we may seek to obtain waivers or amendments from our lenders with respect to such financial ratios and covenants, or we may be required to take action to reduce our debt or to act in a manner contrary to our business objectives to meet any such financial ratios and satisfy any such financial covenants.
Events beyond our control, including changes in the economic and business conditions in the shipping markets in which we operate, may affect our ability to comply with these covenants. We cannot assure you that we will meet these ratios or satisfy these covenants or that our lenders will waive any failure to do so or amend these requirements. A breach of any of the covenants in, or our inability to maintain the required financial ratios under, our credit facilities would prevent us from borrowing additional money under our credit facilities and could result in a default under our credit facilities. If a default occurs under our credit facilities, the lenders could elect to declare the outstanding debt, together with accrued interest and other fees, to be immediately due and payable and foreclose on the collateral securing that debt, which could constitute all or substantially all of our assets. Additionally, if not repaid the interest rate on the outstanding debt can be increased. Moreover, in connection with any waivers or amendments to our credit facilities that we may obtain, our lenders may impose additional operating and financial restrictions on us or modify the terms of our existing credit facilities including an increase in the interest rate. These restrictions may further restrict our ability to, among other things, pay dividends, repurchase our ordinary shares, make capital expenditures, or incur additional indebtedness.
Furthermore, certain of our debt agreements contain cross-default provisions that may be triggered if we default under the terms of other of our financing agreements. In the event of default by us under one of our debt agreements, the lenders under our other debt agreements could determine that we are in default under such other financing agreements. Such cross defaults could result in the acceleration of the maturity of such debt under these agreements and the lenders thereunder may foreclose upon any collateral securing that debt, including our vessels, even if we were to subsequently cure such default. In the event of such acceleration or foreclosure, we might not have sufficient funds or other assets to satisfy all of our obligations, which would have a material adverse effect on our business, financial condition, cash flows and results of operations. Please see “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources”.
Utilising derivative instruments, such as forward freight or bunker swap agreements, could have a material adverse effect on our business, financial condition, cash flows and results of operations.
From time to time, we may take positions in derivative instruments, including FFAs, interest rate swaps and bunker swaps. FFAs and other derivative instruments may be used to hedge our exposure to the various markets. A hedge may be contracted by providing for the sale of a contracted charter rate along a specified route and period of time. 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 specified period. Conversely, if the contracted rate is greater than the settlement rate, the buyer is required to pay the seller the settlement sum. The hedge reserve which represents the fair value gains and losses on the effective portion of the cash flow hedge was $1.3 million on FFAs and bunker swaps as at December 31, 2022. Movements in the hedging reserve are detailed in the Statement of comprehensive income.
Any hedging activities we engage in may not effectively manage exposure or have the desired impact on our financial conditions, results of operations or cash flows.
We may be subject to litigation that, if not resolved in our favor and not sufficiently insured against, could have a material adverse effect on our business, financial condition, cash flows and results of operations.
We may be, from time to time, involved in various litigation matters. These matters may include, among other things, contract disputes, personal injury claims, environmental claims or proceedings, toxic tort claims, employment matters, governmental claims for taxes or duties, and other litigation that arises in the ordinary course of our business. Although we intend to defend these matters vigorously, we cannot predict with certainty the outcome or effect of any claim or other litigation matter, and the ultimate outcome of any litigation or the costs and time to resolve them could have a material adverse effect on our business, financial condition, cash flows and results of operations. Insurance may not be applicable or sufficient in all cases and/or insurers may not remain solvent which could have a material adverse effect on our business, financial condition, cash flows and results of operations. See “Item 4. Information on the Company—Business Overview—Legal Proceedings”.
Some of the vessels in our Fleet are operated by third-party technical managers. Any failure of these technical managers to perform their obligations to us could have a material adverse effect on our business, financial condition, cash flows and results of operations.
We have contracted the technical management for a portion of our Fleet, including crewing, maintenance and repair services, to third-party technical management companies. The failure of these technical managers to perform their obligations could have a material adverse effect on our business, financial condition, cash flows and results of operations. Although we may have rights against our third-party managers if they default on their obligations to us, we will receive the benefit of that recourse only to the extent that we recover funds.
Some of the third-party managers for our vessels are privately held companies and there is little or no publicly available information about them.
Some of our vessels are managed by third parties. The ability of these third-party managers to render management services will depend in part on their own financial strength. Circumstances beyond our control could affect our third-party managers’ financial strength. Because some of our third-party managers are privately held companies, we might have little advance warning of financial or other problems affecting our technical manager and if they are unable to provide the technical management services we have contracted for, we may have delays in operating our vessels which could have a material adverse effect on our business, financial condition, cash flows and results of operations.
Security breaches and disruptions to our information technology infrastructure (cyber-security) could interfere with our operations and expose us to liability, which could have a material adverse effect on our business, financial condition, cash flows and results of operations.
In the ordinary course of business, we rely heavily on information technology networks and systems to process, transmit, and store information electronically, and to manage or support a variety of business processes and activities. Additionally, we collect and store certain data, including proprietary business information and customer and employee data, and may have access to other confidential information in the ordinary course of our business. Despite our cybersecurity measures (including monitoring of networks and systems, and maintenance of backup and protective systems) which are continuously reviewed and upgraded, our information technology networks and infrastructure may still be vulnerable to damage, disruptions, or shutdowns due to attack by hackers or breaches, employee error or malfeasance, data leakage, power outages, computer viruses and malware, including ransomware, telecommunication or utility failures, systems failures, natural disasters, or other catastrophic events. Additionally, the global threat of cyber-attacks has increased in response to the Russia-Ukraine War. Any such events could result in legal claims or proceedings, liability or penalties under privacy or other laws, disruption in operations, and damage to our reputation, which could have a material adverse effect on our business, financial condition, cash flows and results of operations.
In addition, some of our technology networks and systems are managed by third-party service providers (including cloud-service providers), and certain of such providers also have access to proprietary business information, customer and employee data, and confidential information on the conduct of our business. Like us, these third-party providers are subject to risks imposed by data breaches and disruptions to their technology infrastructure. A cyber-attack could defeat one or more of our third-party service providers’ security measures, allowing an attacker access to proprietary information from our company including our employees’, customers’ and suppliers’ data. Any such security breach or disruption to our third-party service providers could result in a disruption in operations and damage to our reputation and liability claims, which could have a material adverse effect on our business, financial condition, cash flows and results of operations.
Because international shipping companies often generate most or all of their revenue in U.S. dollars, but incur a portion of their expenses in other currencies, exchange rate fluctuations could cause us to suffer exchange rate losses, thereby increasing expenses and reducing income.
We engage in worldwide commerce with a variety of entities. Although our operations may expose us to certain levels of foreign currency risk, our transactions are predominantly U.S. dollar-denominated. The U.S. dollar is our functional currency and the functional currency of nearly all our subsidiaries and joint ventures. Transactions in currencies other than the functional currency are translated at the exchange rate on the transaction date and the relevant payment is translated on the payment date, with the difference being reported in the income statement as an exchange gain or loss. Expenses incurred in foreign currencies against which the U.S. dollar falls in value can increase, decreasing our earnings. A greater percentage of our transactions and expenses in the future may be denominated in currencies other than the U.S. dollar. Assets and liabilities denominated in currencies different from the functional currency are translated into the functional currency for the preparation of the statements of financial position at the exchange rate prevailing on the statements of financial position date. Differences in exchange rates between statements of financial position dates may lead to gains or losses being reported in the income statement. Extraordinary transactions, and the translation of the financial statements of our subsidiaries whose functional currencies are not the U.S. dollar for purposes of preparing our consolidated accounts, may follow different translation procedures. The determination of the functional currency of a company is based on various factors and a company’s functional currency may change depending on its circumstances. As part of our overall risk management policy, we may attempt to hedge these risks in exchange rate fluctuations from time to time. We may not always be successful in such hedging activities and, as a result, our operating results could suffer as a result of losses incurred as a result of un-hedged exchange rate fluctuations. We may enter into derivative contracts to hedge our overall exposure to exchange rate risk. Entering into swaps and other derivatives transactions is inherently risky and presents various possibilities for incurring significant expenses. The derivatives strategies that we may employ may not be successful or effective, and we could, as a result, incur substantial additional exchange rate costs.
If we are unable to operate our financial and operations systems effectively or to recruit suitable employees as we expand our Fleet, our performance may be adversely affected.
Our current financial and operating systems may not be adequate as we implement our plan to expand the size of our Fleet, and our attempts to improve those systems may be ineffective. If our current financial and operating systems infrastructure is unable to manage the additional volume of our operations as our business grows, our operating efficiency could decline. If we fail to hire and retain qualified personnel to implement, protect and maintain our financial and operating systems or if we fail to upgrade our systems to meet our customers’ demands we may experience a disruption in operations and damage to our reputation, which could have a material adverse effect on our business, financial condition, cash flows and results of operations.
In addition, as we expand our Fleet, we or our third-party technical managers may have to recruit suitable additional seafarers or shore-based administrative and management personnel. We cannot assure you that we or our third-party technical managers will be able to continue to hire suitable employees as we expand our Fleet.
We need to maintain our relationships with local shipping agents, port and terminal operators.
Our drybulk carrier business is dependent upon our relationships with local shipping agents, port and terminal operators operating in the ports where our customers ship and unload their products. We believe that these relationships will remain critical to our success in the future and the loss of one or more of which could materially and negatively impact our ability to retain and service our customers. We cannot be certain that we will be able to maintain and expand our existing local shipping agent, port and terminal operator relationships or enter into new relationships, or that new or renewed relationships will be available on commercially reasonable terms. If we are unable to maintain and expand our existing local shipping agent, port and terminal operator relationships, renew existing relationships, or enter into new relationships, we may lose customers or cause delays in the ports in which we operate, which could have a material adverse effect on our business, financial condition, cash flows and results of operations.
Prolonged disruption or slowdown in the loading and unloading of our vessels and extended port congestion could affect our ability to operate our vessels and execute our COA contracts in a timely manner and may result in a loss of revenue.
We rely on third parties for the loading and unloading process of our vessels at ports. A disruption in loading and unloading logistics and congestion in the port could disrupt our ability to operate our vessels in a timely manner. Significant disruptions or slowdowns could result in a loss of revenue or the inability to execute our COA contracts in a timely manner which could have a material adverse effect on our business, financial condition, cash flows and results of operations.
If we acquire and/or operate secondhand vessels, we could be exposed to increased operating costs which could adversely affect our earnings and, as our Fleet ages, the risks associated with older vessels could adversely affect our ability to obtain profitable charters.
Although none of the vessels in our Fleet is a secondhand vessel, we may acquire (through the exercise of purchase options on our long-term chartered-in vessels or by other means) and/or operate secondhand vessels in the future. While we expect that we would typically inspect secondhand vessels prior to acquisition, this does not provide us with the same knowledge about their condition that we would have had if these vessels had been built for and operated exclusively by us and therefore we cannot assure you that the quality of any secondhand vessels that we buy will be acceptable. Generally, purchasers of secondhand vessels do not receive the benefit of warranties from the builders for the secondhand vessels that they acquire. We cannot assure you that, if we acquire and operate second hand vessels in the future, as our secondhand vessels age, market conditions will justify expenditures or enable us to operate our secondhand vessels profitably during the remainder of their useful lives.
Technological innovation could reduce our charter hire income and the value of our vessels.
The charter hire rates and the value and operational life of a vessel are determined by a number of factors including the vessel’s efficiency, operational flexibility and physical life. Efficiency includes speed, fuel economy and the ability to load and discharge cargo quickly. Flexibility includes the ability to carry a variety of cargoes, enter harbors, utilize related docking facilities and pass through canals and straits. The length of a vessel’s physical life is related to its original design and construction, its maintenance and the impact of the stress of operations. If new drybulk carriers are built that are more efficient or more flexible or have longer physical lives than our vessels, competition from these more technologically advanced vessels could adversely affect the amount of charter hire payments we receive for our vessels once their initial charters expire and the resale value of our vessels could significantly decrease. As a result, our business, financial condition, cash flows and results of operations could be materially adversely affected.
Newbuilding projects are subject to risks that could cause delays, cost overruns or cancellation of our newbuilding contracts.
We have in the past and may in the future enter into or acquire newbuilding contracts for drybulk carriers. Construction projects are subject to risks of delay or cost overruns inherent in any large construction project from numerous factors, including shortages of equipment, materials or skilled labor, unscheduled delays in the delivery of ordered materials and equipment or shipyard construction, failure of equipment to meet quality and/or performance standards, financial or operating difficulties experienced by equipment vendors or the shipyard, unanticipated actual or purported change orders, inability to obtain required permits or approvals, unanticipated cost increases between order and delivery, design or engineering changes and work stoppages and other labor disputes, adverse weather conditions or any other events of force majeure. Significant cost overruns or delays could have a material adverse effect on our business, financial condition, cash flows and results of operations. Additionally, failure to complete a project on time may result in the delay of revenue from that vessel.
We have contracted, and may in the future contract, with a trading house or a shipyard for the construction of a newbuilding. In the event the seller or the shipyard does not perform under its contract and we are unable to enforce the refund guarantee with a third-party bank for any reason, or we have not obtained such a guarantee, we may lose all or part of our investment, which could have a material adverse effect on our business, financial condition, cash flows and results of operations.
Our failure to comply with data privacy laws could damage our customer relationships and expose us to litigation risks.
Data privacy is subject to frequently changing rules and regulations, which sometimes conflict among the various jurisdictions and countries in which we provide services. It is possible that these laws may be interpreted and applied in a manner that is inconsistent with our data privacy practices. Complying with these various laws is difficult and could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business.
For example, in Singapore, the Personal Data Protection Act 2012, No. 26 of 2012 of Singapore (“PDPA”) generally requires organizations to give notice and obtain consent prior to collection, use or disclosure of personal data (data, whether true or not, about an individual who can be identified from that data or other accessible information). Amendments to the PDPA, effective as of February 1, 2021, introduced a mandatory breach notification obligation. South Africa’s comprehensive privacy law known as the Protection of Personal Information Act, 4 of 2013 (the “POPIA”) commenced on July 1, 2020 and became effective on July 1, 2021. All processing of personal information must conform to the POPIA’s provisions. Failure to comply with POPIA may lead to penalties and fines up to R10 million and/or imprisonment.
In Europe, the E.U. adopted the General Data Privacy Regulation (“GDPR”), a comprehensive legal framework to govern data collection, use and sharing and related consumer privacy rights, which took effect in May 2018. The GDPR includes significant penalties for non-compliance, including fines up to the higher of 20 million Euros and or 4% of global annual revenue. European regulators have issued numerous fines pursuant to the GDPR. In the U.K., Brexit has created uncertainty with regard to the regulation of data protection. In particular, while the Data Protection Act of 2018, which implements and complements the GDPR (“U.K. GDPR”), is now effective in the United Kingdom, the relationship between the U.K. and the E.U. in relation to certain aspects of data protection law remains unclear, and it is unclear how U.K. data protection laws and regulations will develop in the medium to longer term, including how data transfers to and from the U.K. will be regulated in the long term. Any changes to these laws may require us to modify our data processing practices and policies and to incur substantial costs and expenses to comply.
An additional area of regulatory complexity concerns the restrictions on transfers of personal data from certain countries to others. For example, in July 2020 the Court of Justice of the European Union invalidated the EU-U.S. and Swiss-U.S. Privacy Shield Frameworks, calling into question data transfers carried out under the European Commission's Standard Contractual Clauses ("SCCs"), which has created challenges for our transfer of personal data from the EEA, EU, and/or Switzerland to Singapore and other third countries with “inadequate data protection.” Any transfers by us or our vendors of personal data are subject to potential regulatory scrutiny and may increase our exposure under the GDPR and similar laws which contain cross-border personal data transfer heightened requirements and restrictions.
In addition to government activity, privacy advocacy and other industry groups have established and may continue to establish new self-regulatory standards that may place additional burdens on us. Our failure to adhere to or successfully implement processes in response to changing regulatory and self-regulatory requirements in this area could result in legal liability or impairment to our reputation in the marketplace, which could have a material adverse effect on our business, financial condition and results of operations
We currently bank with a limited number of financial institutions, which subjects us to credit risk.
We currently bank with a limited number of financial institutions. An event of default by any of these financial institutions could have a material adverse effect on our business, financial condition, cash flows and results of operations. In addition, our financial institutions are subject to internal and regulatory compliance protocols, which may delay access to our accounts. Such a delay could impact our ability to consummate transactions and operate our business, which could have a material adverse effect on our business, financial condition, cash flows and results of operations.
Risks Relating to Our Ordinary Shares
There may not be a liquid market for the Grindrod Shipping ordinary shares.
Grindrod Shipping’s ordinary shares are listed on the NASDAQ in the United States and quoted on the main board of the JSE in South Africa. There can be no assurance as to the liquidity of those markets for the Grindrod Shipping ordinary shares or the price at which the Grindrod Shipping ordinary shares may trade. The liquidity and the market for the Grindrod Shipping ordinary shares may be affected by a number of factors including variations in exchange and interest rates, the deterioration and volatility of the markets for similar securities, and/or any changes in Grindrod Shipping’s liquidity, financial condition, creditworthiness, results and profitability and future prospects. Following an initial tender offer and subsequent offer that was concluded on December 19, 2022, Good Falkirk (MI) Limited held 83.23% of Grindrod Shipping’s outstanding shares. The liquidity and market for our shares on both the NASDAQ and the JSE subsequent to the offer has been significantly reduced. In addition, our shareholder base includes South African residents who, subject to certain allowances in terms of the Exchange Control Regulations in South Africa, will generally be required to hold their ordinary shares on the JSE, and therefore the liquidity of the ordinary shares on the NASDAQ may be adversely impacted. Furthermore, ordinary shares owned by our “affiliates,” as that term is defined in Rule 144 under the Securities Act, will be subject to certain restrictions on transfer under the U.S. securities laws. Affiliates will only be permitted to sell their shares pursuant to a valid exemption from the registration requirements of the Securities Act or pursuant to an effective registration statement, which may impact the liquidity of the ordinary shares.
Taylor Maritime Investments Limited indirectly controls us and its interests may conflict with ours or yours in the future.
As of March 1, 2023, Good Falkirk (MI) Limited, a wholly owned subsidiary of Taylor Maritime Investments Limited (“TMI”), held 16,206,365 of our ordinary shares, representing 83.23% of our outstanding ordinary shares (excluding treasury shares). In addition, effective April 1, 2023 our chief executive officer will also be the chief executive officer and executive director of TMI. TMI is thus able, indirectly, to elect a majority of our directors and effectively control the vote on all matters submitted to a vote of our ordinary shareholders. TMI’s ability to control such corporate decision-making and prevent an unsolicited bid for the Company or any other change in control could have an adverse effect on the market price for our ordinary shares. TMI may at any time sell any or all of the ordinary shares of the Company held by it, and any such sale, and the potential for such sale, could have an adverse effect on the market price for our ordinary shares.
In the ordinary course of its business activities, TMI may also engage in activities where its interests conflict with our interests or those of our stockholders. For example, TMI also may pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us. In addition, TMI may have an interest in our pursuing acquisitions, divestitures, asset sales and other transactions that, in its judgment, could enhance its investment, even though such transactions might involve risks to you.
The Grindrod Shipping ordinary shares are traded on more than one stock exchange and this may result in price variations between the markets.
The Grindrod Shipping ordinary shares are listed on each of NASDAQ and the JSE. Trading in the Grindrod Shipping ordinary shares therefore takes place in different currencies (U.S. dollars on the NASDAQ and South African Rand on the JSE), and at different times (resulting from different time zones, different trading days and different public holidays in the United States and South Africa). The trading prices of the Grindrod Shipping ordinary shares on these two markets may differ as a result of these, or other, factors. Any decrease in the price of Grindrod Shipping’s ordinary shares on either of these markets could cause a decrease in the trading prices of Grindrod Shipping’s ordinary shares on the other market.
If securities or industry analysts do not publish research or reports about Grindrod Shipping’s business, or publish negative reports about its business, Grindrod Shipping’s ordinary share price and trading volume could decline.
The trading market for Grindrod Shipping ordinary shares depends, in part, upon the research and reports that securities or industry analysts publish about Grindrod Shipping or its businesses. If securities or industry analysts do not cover Grindrod Shipping, it could lose visibility in the financial markets, which could cause its share price or trading volume to decline.
Grindrod Shipping may not have sufficient distributable profits to pay dividends or otherwise distribute cash or assets to shareholders.
Under Singapore law and Grindrod Shipping’s constitution, dividends, whether in cash or in specie, must be paid out of Grindrod Shipping’s profits available for distribution. See “Item 8. Financial Information—Dividend Policy and Dividend Distributions”. As a holding company, Grindrod Shipping may earn distributable profits when it receives dividends or other income, including management fees or interest, if any. Grindrod Shipping generated distributable profits during 2021 and 2022 from which dividends were declared. The availability of distributable profits is assessed on the basis of Grindrod Shipping’s standalone unconsolidated accounts, which are based upon IFRS. There is no assurance that Grindrod Shipping will not incur losses, that it will remain profitable, or that it will have sufficient distributable income that might be distributed to its shareholders as a dividend or other distribution in the foreseeable future. Therefore, Grindrod Shipping may be unable to pay dividends to its shareholders unless it continues to generate or maintain sufficient distributable reserves. Accordingly, it may not be legally permissible for Grindrod Shipping to pay dividends to its shareholders in the future.
Notwithstanding that sufficient profits may be available for distribution, there are other conditions which may limit Grindrod Shipping’s ability to pay dividends. Grindrod Shipping’s board of directors may, without the approval of the shareholders under Singapore law, declare interim dividends during a fiscal year and any final dividends declared by Grindrod Shipping’s board of directors after the close of a fiscal year must be approved by shareholders at a general meeting. As such, any determination to pay dividends will be at the discretion of Grindrod Shipping’s board of directors, which may exercise its discretion to retain Grindrod Shipping’s future earnings for use in the development of Grindrod Shipping’s business, in reducing Grindrod Shipping’s indebtedness and for general corporate purposes. As a result, it is possible that only an appreciation of the price of our ordinary shares, if any, will provide a return to investors in our ordinary shares for the foreseeable future. Such potential appreciation is uncertain and unpredictable.
In addition, under Singapore law, it is possible to effect a capital reduction exercise to return cash and/or assets to shareholders by way of shareholder approval if Grindrod Shipping meets the relevant solvency requirements, which will be attested to by Grindrod Shipping’s board of directors. The completion of the capital reduction exercise will depend on whether Grindrod Shipping’s directors can execute a solvency statement, as well as whether there are any creditor objections raised. A reduction of capital is also possible by way of a shareholder approval if approved by an order of the court.
Any dividend payments on the Grindrod Shipping ordinary shares would be declared in U.S. dollars, and any shareholder whose principal currency is not the U.S. dollar would be subject to risks of exchange rate fluctuations.
The Grindrod Shipping ordinary shares are, and any cash dividends or other distributions to be declared in respect of them, if any, will be denominated in U.S. dollars. Shareholders whose principal currency is not the U.S. dollar will be exposed to foreign currency exchange rate risk. Any depreciation of the U.S. dollar in relation to such foreign currency will reduce the value of such shareholders’ ordinary shares and any appreciation of the U.S. dollar will increase the value in foreign currency terms. In addition, Grindrod Shipping will not offer its shareholders the option to elect to receive dividends, if any, in any other currency. Consequently, shareholders may be required to arrange their own foreign currency exchange, either through a brokerage house or otherwise, which could incur additional commissions or expenses.
Grindrod Shipping is a Singapore company, and because the rights of shareholders under Singapore law differ from those under U.S. law, you may have difficulty in protecting your shareholder rights or enforcing any judgment obtained in the United States against Grindrod Shipping or its affiliates.
Grindrod Shipping’s corporate affairs are governed by its constitution and by the applicable laws governing corporations incorporated in Singapore. The rights of Grindrod Shipping shareholders and the responsibilities of members of its board of directors under Singapore law are different from those applicable to a corporation incorporated in the United States and, therefore, Grindrod Shipping shareholders may have more difficulty protecting their interests in connection with actions by the management or members of the board of directors than they would as shareholders of a corporation incorporated in the United States.
All of Grindrod Shipping’s directors and senior management reside outside the United States. As a result, it may be difficult for investors to effect service of process within the United States upon Grindrod Shipping or any of these persons or to enforce in the United States any judgment obtained in the U.S. courts against Grindrod Shipping or any of these persons, including judgments based upon the civil liability provisions of the U.S. federal securities laws or the laws of any state or territory of the United States.
There is no treaty between the United States and Singapore providing for the reciprocal recognition and enforcement of judgments in civil and commercial matters and a final judgment for the payment of money rendered by any federal or state court in the United States based on civil liability, whether or not predicated solely upon the federal securities laws, would, therefore, not be automatically enforceable in Singapore. It is not clear whether a Singapore court may impose civil liability on Grindrod Shipping or Grindrod Shipping’s directors and officers in a suit brought in the Singapore courts against Grindrod Shipping or such persons with respect to a violation solely of the federal securities laws of the United States.
In addition, only registered shareholders reflected in the register of members are recognized under Singapore law as shareholders of a company. As a result, only registered shareholders have legal standing to institute shareholder actions or otherwise seek to enforce their rights as shareholders. Holders of dematerialised interests in Grindrod Shipping’s shares will be required to be registered shareholders as reflected in Grindrod Shipping’s register of members in order to institute or enforce any legal proceedings or claims as shareholders against Grindrod Shipping, its directors or its officers in the Singapore courts. Holders of dematerialised interests in the ordinary shares may become registered shareholders by exchanging their dematerialised interests in our ordinary shares for certificated shares and being registered in our register of members. The administrative process of becoming a registered holder could result in delays prejudicial to any legal proceedings or enforcement action. Consequently, it may be difficult for investors to enforce against Grindrod Shipping, its directors or its officers in Singapore judgments obtained in the United States which are predicated upon the civil liability provisions of the federal securities laws of the United States.
Grindrod Shipping is subject to the laws of Singapore, which differ in certain material respects from the laws of the United States.
As a company incorporated under the laws of Singapore, Grindrod Shipping is required to comply with the laws of Singapore, certain of which are capable of extraterritorial application, as well as Grindrod Shipping’s constitution. In particular, Grindrod Shipping is required to comply with certain provisions of the Securities and Futures Act 2001, Chapter 289 of Singapore, or the Singapore Securities and Futures Act, which prohibit certain forms of market conduct and information disclosures, and impose criminal and civil penalties on corporations, directors and officers in respect of any breach of such provisions. Grindrod Shipping is also required to comply with the Singapore Code on Take-Overs and Mergers, or the Singapore Code, which specifies, among other things, certain circumstances in which a general offer is to be made upon a change in effective control, and further specifies the manner and price at which voluntary and mandatory general offers are to be made.
The laws of Singapore and of the United States differ in certain significant respects. The rights of Grindrod Shipping’s shareholders and the obligations of its directors and officers under Singapore law are different from those applicable to a company incorporated in the United States in material respects, and Grindrod Shipping’s shareholders may have more difficulty and less clarity in protecting their interests in connection with actions taken by Grindrod Shipping’s management, directors or controlling shareholders than would otherwise apply to a company incorporated in the United States. See “Item 10. Additional Information—Comparison of Shareholder Rights” for a discussion of differences between Singapore and U.S. corporation law.
In addition, the application of Singapore law, in particular, the Companies Act 1967, or the Singapore Companies Act, may in certain circumstances impose more restrictions on Grindrod Shipping and its shareholders, directors and officers than would otherwise be applicable to a company incorporated in the United States. For example, the Singapore Companies Act requires directors to act with a reasonable degree of diligence and, in certain circumstances, imposes criminal liability for specified contraventions of particular statutory requirements or prohibitions. In addition, pursuant to the provisions of the Singapore Companies Act, shareholders holding 10% or more of the total number of paid-up shares carrying the right of voting in general meetings may require the convening of an extraordinary general meeting of shareholders by the directors. If the directors fail to comply with such request within 21 days of the receipt thereof, shareholders holding more than 50% of the voting rights represented by the original requisitioning shareholders may proceed to convene such meeting, and Grindrod Shipping will be liable for the reasonable expenses incurred by such requisitioning shareholders. Grindrod Shipping is also required by the Singapore Companies Act to deduct corresponding amounts from fees or other remuneration payable by Grindrod Shipping to such non-complying directors.
Anti-takeover provisions under the Singapore Securities and Futures Act and the Singapore Code on Take-overs and Mergers may delay, deter or prevent a future takeover or change of control of Grindrod Shipping, which could adversely affect the price of our ordinary shares.
The Singapore Code, issued pursuant to Section 321 of the Singapore Securities and Futures Act, regulates the acquisition of ordinary shares of,
inter alia
, listed public companies and contains certain provisions that may delay, deter or prevent a future takeover or change of control of Grindrod Shipping. Any person acquiring an interest, either on his own or together with parties acting in concert with him or her, in 30% or more of the voting shares in Grindrod Shipping must, except with the prior consent of the Singapore Securities Industry Council, or the SIC, extend a takeover offer for the remaining voting shares in Grindrod Shipping in accordance with the provisions of the Singapore Code. Likewise, any person holding between 30% and 50% of the voting shares in Grindrod Shipping, either on his own or together with parties acting in concert with him or her, must, except with the prior consent of the SIC, make a takeover offer in accordance with the provisions of the Singapore Code if that person together with parties acting in concert with him or her acquires additional voting shares in excess of one percent of the total number of voting shares in any six-month period. Therefore, any investor seeking to acquire a significant stake in Grindrod Shipping may be deterred from doing so if, as a result, such investor would be required to conduct a takeover offer for all of Grindrod Shipping’s voting shares.
Under the Singapore Code, an offeror must treat all shareholders of the same class in an offeree company equally. A fundamental requirement is that shareholders in the company subject to the takeover offer must be given sufficient information, advice and time to consider and decide on the offer.
These provisions contained in the Singapore Code may discourage or prevent transactions that involve an actual or threatened change of control of Grindrod Shipping, and may impede or delay a takeover of Grindrod Shipping by a third party. This may adversely affect the market price of Grindrod Shipping ordinary shares and impede the ability of Grindrod Shipping’s shareholders to realize any benefits from a potential change of effective control of Grindrod Shipping.
Under Singapore law, shareholder approval is required to allow us to issue new shares which could impact our ability to raise capital or consummate acquisitions. Any issuance of new shares would dilute the percentage ownership of existing shareholders and could adversely impact the market price of the ordinary shares.
Under Singapore law, Grindrod Shipping may only issue new shares with the prior approval of its shareholders.
At our last annual general meeting on May 26, 2022, Grindrod Shipping’s shareholders provided authority for our directors to issue ordinary shares pursuant to the vesting of awards under our 2018 Forfeitable Share Plan, or 2018 FSP, which is subject to the condition that the aggregate number of ordinary shares at any one time which may be granted in an award under the 2018 FSP, together with all existing awards that have not yet vested under the 2018 FSP, shall not exceed 5% of the number of ordinary shares in issue (excluding treasury shares), as determined in reference to the day preceding the award. Such authority shall continue in force until the earliest of (i) the conclusion of our next annual general meeting, (ii) the expiration of the period within which our next annual general meeting is required by law to be held, or (iii) the point at which the maximum number of awards permitted to be made in terms of the 2018 FSP as per the abovementioned limit has been reached. Notwithstanding that the abovementioned authority may have ceased to be in force, ordinary shares may be issued after the expiry of the approval in pursuance of awards made under the 2018 FSP whilst the authority was in force (subject always to the abovementioned limit on the maximum number of shares). Pursuant to the Transaction Implementation Agreement of the voluntary conditional cash offer made by Good Falkirk (MI) Limited (the “Offer”), the 2018 FSP was terminated upon acceptance of the Offer on November 29, 2022. At our annual general meeting, expected to be held on May 25, 2023, we plan to seek the approval of our shareholders for issuances of ordinary shares for the purposes of any new long-term incentive plan of the Company as recommended by our Compensation and Nomination Committee and adopted by our Board of Directors at the same maximum 5%, based on the number of ordinary shares in issue (excluding treasury shares) as determined in reference to the date proceeding the award. We also plan to seek approval of our shareholders under which any awards of fully paid up ordinary shares under the new long-term incentive plan, will be granted, free of payment to selected employees of Grindrod Shipping or its subsidiaries, executive directors and non-executive directors; and the non-executive directors.
At the forthcoming annual general meeting, we also plan to seek the approval of our shareholders for the allotment and issuance of ordinary shares whether by way of rights, bonus or otherwise and to allow us to make or grant offers, agreements or options that might or would require shares to be allotted and issued up to a number not exceeding 20% of the number of ordinary shares (excluding treasury shares) outstanding as at the date of the resolution allowing the same. Such authority shall continue in force until the earliest of (i) the conclusion of the next annual general meeting of the Company, (ii) the date by which the next annual general meeting is required by law to be held, or (iii) the point at which the maximum number of shares permitted as per the abovementioned limit has been reached. We also plan to seek approval of our shareholders for the renewal of the share repurchase mandate approved in the previous annual general meeting, which represents 10% of the total number of issued ordinary shares outstanding as of the date of the passing of the resolution.
Any issuance of additional shares for any other purpose or in future years (other than shares to be issued under an existing prior approval that remains in effect) will require the approval of shareholders. Because new issuances of ordinary shares are subject to shareholder approval, or in some circumstances, other regulatory approvals, if no or an insufficient number of shares have been approved for issuance in advance, we may be delayed in raising capital through equity offerings or delayed or prevented from consummating an acquisition using our ordinary shares. We may seek to raise capital in the future, including to fund acquisitions, future investments and other growth opportunities. We may, for these and other purposes, such as in connection with share incentive and share option plans (such as our forfeitable share plan), issue additional ordinary shares or securities convertible into ordinary shares. Any additional issuances of new shares could dilute the percentage ownership of our existing shareholders and could also adversely impact the market price of Grindrod Shipping’s ordinary shares. In addition, under the provisions of the Singapore Companies Act and Grindrod Shipping’s constitution, the board of directors may, with the applicable shareholder approval, issue new shares on terms and conditions and with the rights (including preferential voting rights) and restrictions as they may determine and may contain terms adverse to the ordinary shares.
The Jumpstart Our Business Startups Act of 2012, or JOBS Act, allows Grindrod Shipping to postpone the date by which it must comply with some of the laws and regulations intended to protect investors and to reduce the amount of information provided in Grindrod Shipping’s reports filed with the SEC, which could undermine investor confidence in Grindrod Shipping and adversely affect the market price of Grindrod Shipping’s ordinary shares.
For so long as Grindrod Shipping remains an “emerging growth company” as defined in the JOBS Act, it intends to take advantage of certain exemptions from various requirements that are applicable to public companies that are not emerging growth companies including:
| • | the provisions of the Sarbanes-Oxley Act of 2002, as amended, or Sarbanes-Oxley Act, requiring that Grindrod Shipping’s independent registered public accounting firm provide an attestation report on the effectiveness of Grindrod Shipping’s internal control over financial reporting; |
| • | Section 107 of the JOBS Act, which provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards. This means that an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. Grindrod Shipping currently prepares its financial statements in accordance with IFRS as issued by the IASB, which do not have separate provisions for publicly traded and private companies. However, in the event Grindrod Shipping converts to U.S. GAAP in the future while it is still an emerging growth company, Grindrod Shipping may be able to take advantage of the benefits of this extended transition period and, as a result, during the time that Grindrod Shipping delays such adoption of new or revised accounting standards Grindrod Shipping’s financial statements may not be comparable to companies that comply with all public company accounting standards; and |
| • | any rules that may be adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotation or a supplement to the auditor’s report on the financial statements. |
Grindrod Shipping intends to continue to take advantage of these exemptions until it is no longer an “emerging growth company”. Grindrod Shipping will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the date of its first sale of equity securities pursuant to an effective registration statement under the Securities Act, (b) in which it has total annual gross revenue of at least $1.07 billion, or (c) in which it is deemed to be a large accelerated filer, which means the market value of Grindrod Shipping ordinary shares that is held by non-affiliates exceeds $700 million as of the prior June 30, and (2) the date on which it issued more than $1.0 billion in non-convertible debt during the prior three-year period.
We cannot predict if investors will find our ordinary shares less attractive because Grindrod Shipping does and may continue to rely on these exemptions. If some investors find Grindrod Shipping ordinary shares less attractive as a result, there may be a less active trading market for the Grindrod Shipping ordinary shares, and the market price may be more volatile and may decline.
As a “foreign private issuer” Grindrod Shipping is permitted, and intends to continue, to follow certain home country corporate governance practices instead of otherwise applicable SEC and NASDAQ requirements, which may result in less protection than is accorded to investors under rules applicable to domestic U.S. issuers.
Grindrod Shipping’s status as a foreign private issuer also exempts it from compliance with certain SEC laws and regulations and certain regulations of the NASDAQ, including the proxy rules, the short-swing profits recapture rules of Section 16 of the Exchange Act of 1934, as amended, or the Exchange Act, certain rules relating to disclosure regarding executive compensation, and certain governance requirements such as independent director oversight of the nomination of directors and executive compensation. In addition, we are not required under the Exchange Act to file current reports and financial statements with the SEC as frequently or as promptly as U.S. domestic companies whose securities are registered under the Exchange Act and we are generally exempt from filing quarterly reports with the SEC. As a foreign private issuer, Grindrod Shipping is required to file (i) its annual financial statements on Form 20-F within four months of the end of each fiscal year so long as it is subject to the reporting requirements of Section 13(a) or Section 15(d) of the Exchange Act and (ii) furnish on Form 6-K an interim statement of financial position and income statement as of the end of its second fiscal quarter within six months of the end of the second quarter so long as it is listed on NASDAQ. The information Grindrod Shipping files or furnishes will not be the same as the information that is required in annual and quarterly reports on Form 10-K or Form 10-Q for U.S. domestic issuers. Furthermore, as a foreign private issuer, Grindrod Shipping is also not subject to the requirements of Regulation Fair Disclosure, or Regulation FD, promulgated under the Exchange Act, which restricts the selective disclosure of material information.
These exemptions and leniencies reduce the frequency and scope of information and protections to which you are otherwise entitled as an investor.
Grindrod Shipping may lose its foreign private issuer status, which would then require it to comply with the Exchange Act’s domestic reporting regime and cause Grindrod Shipping to incur additional legal, accounting and other expenses.
Grindrod Shipping is required to determine its status as a foreign private issuer on an annual basis at the end of its second fiscal quarter. In order to maintain its current status as a foreign private issuer, either (1) a majority of Grindrod Shipping ordinary shares must be either directly or indirectly owned of record by non-residents of the United States or (2) (a) a majority of Grindrod Shipping’s executive officers or directors must not be U.S. citizens or residents, (b) more than 50 percent of Grindrod Shipping’s assets cannot be located in the United States and (c) Grindrod Shipping’s business must be administered principally outside the United States. If Grindrod Shipping loses this status, it would be required to comply with the Exchange Act reporting and other requirements applicable to U.S. domestic issuers, which are more detailed and extensive than the requirements for foreign private issuers. Grindrod Shipping may also be required to make changes in its corporate governance practices in accordance with various SEC rules and the NASDAQ listing standards. Further, Grindrod Shipping would be required to comply with U.S. GAAP, as opposed to IFRS, in the preparation and issuance of its financial statements for historical and current periods. The regulatory and compliance costs to Grindrod Shipping under U.S. securities laws if it is required to comply with the reporting requirements applicable to a U.S. domestic issuer may be higher than the cost it would incur as a foreign private issuer. As a result, Grindrod Shipping expects that a loss of foreign private issuer status would increase its legal and financial compliance costs.
If Grindrod Shipping fails to establish and maintain proper internal controls, its ability to produce accurate financial statements or comply with applicable regulations could be impaired.
Section 404(a) of the Sarbanes-Oxley Act requires that, beginning with Grindrod Shipping’s annual report for the fiscal year ending December 31, 2019, Grindrod Shipping’s management assess and report annually on the effectiveness of its internal controls over financial reporting and identify any material weaknesses in its internal controls over financial reporting. Although Section 404(b) of the Sarbanes-Oxley Act requires Grindrod Shipping’s independent registered public accounting firm to issue an annual report that addresses the effectiveness of our internal controls over financial reporting, Grindrod Shipping has opted to rely on the exemptions provided to it by virtue of being an “emerging growth company”, and consequently we will not be required to comply with SEC rules that implement Section 404(b) of the Sarbanes-Oxley Act until we are no longer an “emerging growth company”.
If either Grindrod Shipping is unable to conclude that it has effective internal controls over financial reporting or, if required, Grindrod Shipping’s independent auditors are unwilling or unable to provide it with an unqualified report on the effectiveness of its internal controls over financial reporting as required by Section 404(b) of the Sarbanes-Oxley Act, investors may lose confidence in Grindrod Shipping’s operating results, the price of the Grindrod Shipping ordinary shares could decline and Grindrod Shipping may be subject to litigation or regulatory enforcement actions.
Grindrod Shipping has incurred and will continue to incur significant increased costs as a result of operating as a company whose ordinary shares are publicly traded in the United States, and its management is required to devote substantial time to compliance initiatives.
As a company whose ordinary shares are publicly traded in the United States, Grindrod Shipping incurs significant legal, accounting, insurance and other expenses that it had not incurred prior to the Spin-Off. In addition, the Sarbanes-Oxley Act, Dodd-Frank Wall Street Reform and Consumer Protection Act and related rules implemented by the SEC, have imposed various requirements on public companies including requiring establishment and maintenance of effective disclosure and internal controls. Grindrod Shipping’s management and other personnel devote a substantial amount of time to these compliance initiatives, and Grindrod Shipping may need to add additional personnel to continue to enhance its internal compliance infrastructure. Moreover, these rules and regulations have increased Grindrod Shipping’s legal and financial compliance costs and make some activities more time-consuming and costly. These laws and regulations could also make it more difficult and expensive for Grindrod Shipping to attract and retain qualified persons to serve on the board of directors, board committees or as senior management. Furthermore, if Grindrod Shipping is unable to satisfy its obligations as a public company in the United States, it could be subject to delisting of the ordinary shares, fines, sanctions and other regulatory action and potentially civil litigation.
Increased scrutiny and changing expectations from investors, lenders and other market participants with respect to our Environmental, Social and Governance (“ESG”) policies may impose additional costs on us or expose us to additional risks.
Companies across all industries are facing increased scrutiny relating to their ESG policies. Investor advocacy groups, certain institutional investors, investment funds, lenders and other market participants are increasingly focused on ESG practices and have placed increased importance on the implications and social cost of their investments. The increased focus may hinder access to capital, as investors and lenders may decide to reallocate capital as a result of their assessment of a company’s ESG practices. For example, lenders representing almost 50% of global shipping finance have signed up to the Poseidon Principles, a framework established in 2019 for responsible maritime shipping finance pursuant to which signatories agree to assess and disclose the climate alignment of their shipping portfolios and to work to bring the portfolios in line with the IMO’s climate targets. Reduced access to capital could hinder our growth. Companies that do not adapt to or comply with investor and lender expectations and standards, which are evolving, may suffer from reputational damage and their business, financial condition and stock price may be adversely affected.
We are facing increasing pressure from stakeholders to prioritize sustainable energy practices, reduce our carbon footprint and promote sustainability. It is likely that we will incur additional costs and require additional resources to monitor, report and comply with ESG requirements which could have a material adverse impact on our business, financial condition and results of operations.
Certain of Grindrod Shipping’s directors may have actual or potential conflicts of interest because of their current or former associations with our controlling shareholder or its affiliates
Certain of Grindrod Shipping’s directors are affiliated with our controlling shareholder. For example, from April 1, 2023, we have a joint chief executive officer with our controlling shareholder, who is also an executive director of both boards; and another director who is a director of a company which has a business relationship with our controlling shareholder. These relationships as well as any financial interests directors may have in us or our shareholders may create, or may create the appearance of, conflicts of interest when such persons face decisions that could have different implications for Grindrod Shipping and the relevant shareholder.
We may have to pay tax on U.S. source income, which would reduce our earnings.
Under the Internal Revenue Code of 1986, as amended, or the Code, 50% of the gross income derived by a non-U.S. corporation from, or in connection with, the use (or hiring or leasing for use) of a vessel, or the performance of services directly related to the use of a vessel that is attributable to transportation that either begins or ends, but that does not both begin and end, in the United States is characterized as U.S. source international transportation income. U.S. source international transportation income generally is subject to a 4% U.S. federal income tax without allowance for deduction or, if such U.S. source international transportation income is effectively connected with the conduct of a trade or business in the United States, or Effectively Connected Income, U.S. federal corporate income tax (presently imposed at a 21% rate) as well as a branch profits tax (presently imposed at a 30% rate on effectively connected earnings), unless the non-U.S. corporation qualifies for the statutory exemption from tax under Section 883 of the Code, or the Section 883 Exemption. The Section 883 Exemption applies separately to us and each of our subsidiaries that is treated as a corporation for U.S. federal income tax purposes and earns U.S. source international transportation income (which we refer to below as our “applicable subsidiaries”).
It is uncertain whether we will qualify for the Section 883 Exemption for any taxable year. We presently expect to be able to qualify for the Section 883 Exemption for any taxable year in which TMI directly or indirectly owns more than 50% of the value of our outstanding equity interests for at least half of the number of days in such taxable year, meets the “Publicly Traded Test” and provides us with certification of its “Qualified Shareholder” status (each as described in “Item 10. Additional Information—Taxation—Material U.S. Federal Income Tax Considerations—Taxation of Operating Income”). TMI has indicated to us that it presently meets the Publicly Traded Test and has agreed to provide us with certification of its Qualified Shareholder status.
We will also be required to obtain an ownership statement from each intermediary entity between us and TMI.
We presently expect that each of our applicable subsidiaries that is wholly-owned by us for at least half of the number of days in a taxable year would satisfy the Qualified Shareholder Stock Ownership Test for any taxable year in which we are able to satisfy the Qualified Shareholder Stock Ownership Test. We do not expect any applicable subsidiary that is not wholly-owned by us to satisfy the Qualified Shareholder Stock Ownership Test for any taxable year, unless a sufficient portion of such subsidiary’s other equity interests were owned by Qualified Shareholders to cause such subsidiary to be more than 50%-owned (by value) by Qualified Shareholders for at least half the number of days in a taxable year and such other Qualified Shareholders were to provide certifications of their Qualified Shareholder status. Given the factual nature of the issues involved and legal and practical uncertainties (including our reliance on TMI’s Qualified Shareholder status, which is outside of our control), we can give no assurances as to our or our applicable subsidiaries’ qualification for the exemption from tax under Section 883 of the Code for any taxable year. Furthermore, our board of directors could determine that it is in our best interests to take an action that would result in our and our applicable subsidiaries not being able to qualify for the exemption from tax under Section 883 of the Code in the future. Even if we qualify for the Section 883 Exemption for a taxable year, our applicable subsidiaries that are not wholly-owned by us for at least half of the number of days in such taxable year may not qualify for the Section 883 Exemption. There can be no assurance that we or any of our applicable subsidiaries will qualify for the Section 883 Exemption for any taxable year.
If we or our subsidiaries were not entitled to the Section 883 Exemption for any taxable year, we and our subsidiaries generally would be subject to a 4% U.S. federal income tax with respect to our and our subsidiaries’ gross U.S. source international transportation income or, if such U.S. source international transportation income were Effectively Connected Income, U.S. federal corporate income tax as well as a branch profits tax for any such taxable year or years. Our and our subsidiaries’ failure to qualify for the Section 883 Exemption could have a negative effect on our business and financial condition and result in decreased earnings available for distribution to our shareholders. Please see the discussion under “Item 10. Additional Information—Taxation—Material U.S. Federal Income Tax Considerations—Taxation of Operating Income”.
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 general, a non-U.S. entity treated as a corporation for U.S. federal income tax purposes will be treated as a “passive foreign investment company,” or a PFIC, for U.S. federal income tax purposes, for any taxable year, if, taking into account certain look-through rules, at least 75% of its gross income for such taxable year consists of certain types of “passive income,” or at least 50% of the average value of the entity’s assets during such taxable year produce or are held for the production of those types of “passive income”. For purposes of these tests, “passive income” generally includes dividends, interest, capital gains and rents derived other than in the active conduct of rental business. For purposes of these tests, income earned from the performance of services would not constitute “passive income”. By contrast, rental income generally would constitute “passive income” unless it were treated as derived in the active conduct of a trade or business under applicable rules.
U.S. shareholders of a PFIC are subject to a disadvantageous U.S. federal income tax regime with respect to the income derived by the PFIC, the distributions they receive from the PFIC, and the gain, if any, they derive from the sale or other disposition of their shares in the PFIC, as well as additional U.S. federal income tax filing obligations.
Based on our current and projected income, assets and methods of operation, we believe that we should not be treated as a PFIC with respect to our current taxable year and we expect that we should not become a PFIC for the foreseeable future. In this regard, we expect that substantially all of the vessels in our Fleet will be engaged in time or voyage chartering activities and we intend to treat our income from those activities as non-passive income, and the vessels engaged in those activities as non-passive assets, for PFIC purposes.
There is a significant amount of legal authority consisting of the Code, legislative history, and U.S. Internal Revenue Service, or IRS, pronouncements and administrative rulings supporting our position that the income derived from time charters and voyage charters constitutes services income (rather than rental income) for other tax purposes. There is, however, no direct legal authority under the PFIC rules addressing whether income from time chartering activities is services income or rental income. Moreover, it should be noted that there is also authority which characterizes time charter income as rental income rather than services income for other tax purposes. Accordingly, 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. In addition, no assurance can be given as to our current and future PFIC status, because such status requires an annual factual determination based upon the composition of our income and assets for the entire taxable year. In particular, because the total value of our assets for purposes of the asset test described above will generally be calculated using the market price of our ordinary shares, our PFIC status may depend in large part on the market price of our ordinary shares. Accordingly, fluctuations in the market price of the ordinary shares may cause us to become a PFIC. In addition, the composition of our income and assets will be affected by how, and how quickly, we use the cash generated by our business operations and any net proceeds that we receive from any future financing or capital transactions. The PFIC determination also depends on the application of complex U.S. federal income tax rules concerning the classification of our assets and income for this purpose, and these rules are uncertain in some respects. Further, the PFIC determination is made annually and our circumstances or the nature of our operations may change. Accordingly, there can be no assurance that we will not be classified as a PFIC for the current taxable year or any future taxable year, and no ruling from the IRS or opinion of counsel has been issued or has been or will be sought with respect to our potential status as a PFIC.
If the IRS were to determine that we are a PFIC for any taxable year in which a U.S. shareholder owned our ordinary shares, the U.S. shareholder generally would be subject to special tax rules resulting in increased tax liability with respect to any “excess distribution” the U.S. shareholder receives on, and any gain the U.S. shareholder realizes from a sale or other disposition (including a pledge) of, our ordinary shares, unless a “mark-to-market” election is available and a U.S. shareholder makes such election with respect to the ordinary shares. In addition, if we were treated as a PFIC for any taxable year in which a U.S. shareholder owned our ordinary shares, the U.S. shareholder would be required to file IRS Form 8621 with the U.S. shareholder’s U.S. federal income tax return for each year to report the U.S. shareholder’s ownership of such ordinary shares. Please see the discussion under “Item 10. Additional Information—Taxation-Material U.S. Federal Income Tax Considerations—U.S. Federal Income Taxation of U.S. Holders-PFIC Status and Significant Tax Consequences”.
We may be subject to taxes, which may reduce our cash available for distribution to our shareholders.
We, and our subsidiaries may be subject to tax in the jurisdictions in which we are organized or operate, reducing the amount of cash available for distribution. In computing our tax obligation in these jurisdictions, we are required to take various tax accounting and reporting positions on matters that are not entirely free from doubt and for which we have not received rulings from the governing authorities. We cannot assure you that upon review of these positions the applicable authorities will agree with our positions. A successful challenge by a tax authority could result in additional tax being imposed on us or our subsidiaries. In addition, changes in our operations or ownership could result in additional tax being imposed on us or our subsidiaries in jurisdictions in which operations are conducted.
Our wholly owned subsidiary, GSPL, is incorporated under the laws of Singapore and has been accepted under the Singapore Approved International Shipping Enterprise Scheme, or the Singapore AIS Scheme, pursuant to which it has the benefit of various tax exemptions in Singapore. In particular, qualifying income, including income from the operation of foreign-flagged vessels plying in international waters, would be tax exempt in Singapore. Other benefits under the Singapore AIS Scheme include the automatic withholding tax exemption on qualifying payments made in respect of qualifying loans entered into on or before December 31, 2026 to finance the purchase or construction of Singapore-flagged and foreign-flagged vessels, subject to conditions. The Singapore AIS Scheme is awarded for an initial period of 10 years, subject to an interim review of compliance after five years, and may be extended at the end of the term. GSPL’s initial Singapore AIS Scheme expired in 2014 and has been renewed through 2024 subject to compliance with specified conditions. There is no assurance that for any subsequent renewal we will be able to meet the qualifying conditions for the Singapore AIS Scheme at the time of renewal, that the Maritime and Port Authority of Singapore will grant us such approval, or that the Singapore AIS Scheme will continue to be available under Singapore laws. In the event that our award of the Singapore AIS Scheme is not renewed, we will no longer enjoy the tax exemptions described above, and unless we are able to utilize other similar tax exemption initiatives in the future, whether in Singapore or otherwise, our income may be subject to Singapore corporate income tax. As such, our business, financial condition, results of operations and prospects may be materially and adversely affected if our acceptance under the Singapore AIS Scheme is revoked, suspended, not renewed or otherwise terminated.
We and our subsidiaries could be adversely impacted by changes in tax laws in the jurisdictions in which we are organized or operate. In this regard, on October 8, 2021, the Organization for Economic Cooperation and Development (OECD) announced that 136 of the 140 countries and jurisdictions that are members of the OECD/G20 Inclusive Framework on base erosion and profit shifting have agreed on a framework to subject certain multinational enterprises to a minimum 15% tax rate. The agreement would reallocate certain taxing rights over multinational enterprises from their home countries to the markets where they have business activities and earn profits, regardless of whether the multinational enterprises have a physical presence in such markets. While international shipping income may be exempt from some or all the provisions included in the agreement, the impact of these provisions is uncertain and may not become evident for some time, and could result in additional tax imposed on us or our subsidiaries. If any such additional taxes were imposed on us or our subsidiaries, it could have a negative effect on our business and financial condition and result in decreased earnings available for distribution to our shareholders
Grindrod Shipping shareholders may be subject to Singapore taxes.
Singapore tax law may differ from the tax laws of other jurisdictions, including the United States. Gains from the sale of Grindrod Shipping ordinary shares by a person not tax resident in Singapore may be taxable in Singapore if such gains are considered as being part of the profits of any business carried on in Singapore. For additional information, see “Item 10. Additional Information—Taxation—Singapore Tax Considerations” in this annual report. You should consult your tax advisors concerning the overall tax consequences of acquiring, owning or selling the Grindrod Shipping ordinary shares.
| | INFORMATION ON THE COMPANY |
| A. | History and Development of the Company |
Grindrod Shipping is the holding company which acquired the international drybulk and tanker shipping group of Former Parent, whose origins date back to the formation of a shipping and related business in 1910 by Captain John Edward Grindrod. Grindrod Shipping was incorporated as a private company, Grindrod Shipping Holdings Pte. Ltd., in Singapore on November 2, 2017 under the Singapore Companies Act. With effect from April 25, 2018, Grindrod Shipping Holdings Pte. Ltd. was converted from a private company to a public company incorporated in accordance with the laws of Singapore and it changed its name to Grindrod Shipping Holdings Ltd.
Former Parent was involved in various sectors of the shipping and transport industry for more than 100 years. The drybulk business in its current form under the IVS brand dates back to 1976 and was acquired by Former Parent in 1999. The tankers business under the Unicorn brand dates back to 1973 when Former Parent acquired a tanker of approximately 20,000
dwt and the tankers business was effectively discontinued as of December 31, 2021
.
In connection with the Spin-Off, Former Parent made a
pro rata
distribution to all of Former Parent’s ordinary shareholders who received Grindrod Shipping ordinary shares, with shareholders of Grindrod Shipping holding Grindrod Shipping ordinary shares in the same proportion as they held their Former Parent ordinary shares immediately prior to the consummation of the Spin-Off.
On October 12, 2022, we announced that we had entered into a Transaction Implementation Agreement (“TIA”), dated as of October 11, 2022, between the Company, TMI and Good Falkirk (MI) Limited, a wholly-owned subsidiary of TMI (the
“
Offeror”), providing for a voluntary conditional cash offer (the
“
TMI Offer”) to be made by the Offeror for all of the issued ordinary shares in the capital of the Company. Under the terms of the TMI Offer, shareholders of the Company were entitled to receive the offer price of US$21.00 in cash for each Share tendered in the TMI Offer subject to the terms and conditions set forth in the TIA. Under the terms of the TIA, subject to the conditions to the Offer being satisfied (or, to the extent permitted, waived) as of the expiration time of the Offer, the Company agreed to declare and pay a special dividend of US$5.00 per Share to shareholders of record as of November 25, 2022 (the “Special Dividend”). On November 29, 2022, the initial TMI Offer made on October 28, 2022, expired and the Company instructed its transfer agents to pay the Special Dividend. All shares that were validly tendered were accepted for payment, following which TMI owned approximately 73.78% of the shares of the Company. A subsequent offer period began immediately thereafter and expired on December 19, 2022. On expiration of the subsequent offer period, TMI held approximately 83.23% of the outstanding shares of the Company.
Our principal executive offices are located at #03-01 Southpoint, 200 Cantonment Road, Singapore, 089763, our telephone number at that location is +65 6323 0048 and our website is http://www.grinshipping.com. The SEC maintains a website, http://www.sec.gov, that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including Grindrod Shipping. The information contained on our website is not incorporated by reference in this annual report.
From time to time, we have sold vessels in the ordinary course. For a discussion of our principal capital expenditures, see “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources”.
We are an international shipping company that owns, charters-in and operates a fleet of drybulk carriers. Our owned vessels are held in wholly owned subsidiaries but historically we owned some of our vessels in a consolidated joint venture arrangement.
We operate in the drybulk carriers business, which is further divided into handysize, supramax/ultramax, and other operating segments. Activities that do not relate to these business segments are accumulated in an “unallocated” segment. We historically operated a tanker business, which was further divided into medium range tankers, small tankers and other segments, however we completed the plan to discontinue the tanker business during December 2021 and have presented the tanker business as a discontinued operation.
In the drybulk business we are primarily focused on the handysize and supramax/ultramax segments. We have 15 handysize drybulk carriers and 16 supramax/ultramax drybulk carriers in our Fleet with sizes ranging from 28,240 dwt to 64,230 dwt. Our drybulk carriers transport a broad range of major and minor bulk and breakbulk commodities, including ores, coal, grains, forestry products, steel products and fertilizers, along worldwide shipping routes, and are currently employed either in the spot market or servicing COAs.
As of the date of this annual report, we operate our Fleet of 31 vessels consisting of 24 owned drybulk carriers and seven long-term chartered-in drybulk carriers (see the below Fleet table for details). As of the date of this annual report, our Fleet on the water has a total drybulk carrying capacity of approximately 1.1 million dwt.
We regard chartered-in vessels as part of our Fleet if the period of the charter that we initially commit to is 12 months or more. Once we have included such chartered-in vessels in our Fleet, we will continue to regard them as part of our Fleet until the end of their chartered-in period, including any period that the charter has been extended under an option, even if at a given time the remaining period of their charter may be less than 12 months. Additionally, certain of our chartered-in vessels have purchase options.
In addition to our Fleet, we will from time to time charter-in additional vessels for initial committed periods of less than 12 months. We may do this entirely for our own profit or loss, or we may do this in respect of pools that we commercially manage in which event the profit or loss associated with the vessel will be for the account of the pool. From time to time we have, on average, chartered between 9 to 18 vessels on a short-term basis to take advantage of opportunities in the market and to help service our cargo contracts alongside our Fleet.
In previous years we partnered with global partners to operate a portion of our drybulk carriers through joint ventures and may elect to do so again in the future. For more information on the vessels previously held through joint ventures and a description of the key terms of certain of these joint ventures, see the Fleet table and “—Our Joint Ventures” below.
We have previously and expect in the future from time to time to contract for the construction of newbuilding vessels or the acquisition of newbuilding contracts. We have previously contracted, and currently expect in the future to contract, to charter in, on delivery, newbuilding vessels under construction. We may also acquire secondhand vessels.
From time to time, we may buy and sell vessels when we consider market conditions make it appropriate to do so and if our tonnage requirements permit. We consider that our trading of vessels involves both the acquisition of vessels at times when we perceive prices to be weak and the sale of vessels when values rise. In determining when to acquire vessels we take into account our liquidity position, our expectation of fundamental developments in the drybulk shipping sectors, the level of liquidity in the secondhand and charter markets, the cash flow earned by the vessel in relation to its value, the vessel’s condition and technical specifications with particular regard to fuel consumption, expected remaining useful life, the credit quality of the charterer and duration and terms of charter contracts for vessels acquired with charters attached, as well as the overall diversification of our Fleet and customers.
We provide commercial management for our drybulk carriers and we also technically manage the majority of the vessels that we own. In addition, we operate a service in the drybulk sector where we ship bulk cargo in parcel sizes that may be significantly less than the full carrying capacity of a vessel, or even less than the carrying capacity of an individual hold on a vessel. Where we load more than one parcel of bulk cargo in a hold we will separate the parcels using steel plates and other dunnage materials. Wherever it makes commercial sense to do so, we use vessels from our Fleet to carry this type of cargo. We also will source vessels off the spot market to carry the cargo. We have operated this service for more than 40 years, with a consistent customer base for most or all of this time. In addition, following the closing of the tender offer, TMI and Grindrod have been jointly evaluating options to capitalize on available synergies from the combined fleet across insurance, commercial management, technical management and corporate activities.
For a breakdown and discussion of our revenues for each of the last three financial years, see “Item 5. Operating and Financial Review and Prospects—Results of Operations”.
Our Competitive Strengths
We believe that we possess a number of competitive strengths, including:
| | • | Established shipping track record in key geographic markets. The Grindrod Shipping business has been involved in various sectors of the shipping industry for more than 100 years. With a core presence and primary offices in Africa and Asia, we maintain a strong focus and local business relationships with critical end-users in geographic regions that have been key to drybulk demand growth. |
| | Quality fleet built to high specifications. We operate a quality fleet of drybulk carriers predominantly built in Japan with an average age of approximately eight years, including our long-term charter-in fleet. We believe that owning and maintaining a quality fleet of Japanese vessels reduces off-hire time and operating costs, improves safety and environmental performance and provides us with a competitive advantage in securing employment for our vessels. Additionally, we believe that quality vessels built in Japan are able to retain value over market cycles. Our quality fleet will also better allow us to cost effectively comply with increasing environmental regulations that may be applicable to our vessels. |
| | • | Vessel employment supported by cargo contracts and strong relationships with key counterparties . We continue to operate strategic cargo contracts and we believe that our focus on these contracts supports the employment and regional positioning of our vessels. We have also established strong long-term global relationships with shipping companies, charterers, shipyards, trading houses, brokers and commercial shipping lenders. |
| | • | Experienced management team. Our management team will be led by Edward Buttery, our newly appointed Chief Executive Officer, who will assume the new role effective April 1, 2023. Mr. Buttery is the Founder, Chief Executive Officer and Executive Director of Taylor Maritime Investments Limited and has extensive experience in the shipping and maritime finance fields over the last 17 years. Our management team collectively has over 200 years of combined shipping experience, and has developed industry relationships with charterers, lenders, shipbuilders, insurers and other industry participants. |
| | • | Long-standing risk management model and liquidity model. We operate a risk management model and a liquidity model that have been in place for many years and quantify the extent to which our financial position may be at risk to freight market movements and assess our liquidity position under various scenarios. We utilize these models to evaluate and attempt to mitigate market risk during any portion of a shipping cycle with a primary focus on maintaining acceptable levels of equity and liquidity in any potential market downturn. |
Our primary objectives are to prioritize risk management and balance sheet flexibility, while maintaining and enhancing our position as a successful owner and operator of drybulk carrier vessels. The key elements of our strategy are:
| • | Primarily focus on handysize and supramax/ultramax drybulk market. We intend to continue focusing our operations in the key drybulk market segments in which we have historically excelled. We completed our exit from the tanker segment in 2022 and do not anticipate reinvesting in the sector at this time. |
| • | Maintain balance sheet flexibility and liquidity. We continue to take a prudent approach in managing our Fleet to ensure balance sheet flexibility and liquidity, as we seek to strengthen our balance sheet over time by reducing net leverage. We expect to achieve this through a combination of vessel sales and operating cash flow. |
| • | Utilize a dynamic approach to fleet development . We believe that our approach to fleet management, which utilizes a combination of owned vessels, long-term charter-in vessels and short-term charter-in vessels, allows us significant flexibility to adjust our market exposure depending on market conditions. Our focus on Japanese-built vessels and our long-term charter-in fleet with attractive purchase options relative to prevailing market prices allows us to better manage our fleet renewal options while fulfilling our cargo contracts. |
| • | Leverage our commercial management expertise. We intend to optimize the employment of our drybulk carriers to maximize charter revenues while mitigating risk through a combination of charters, FFA’s and COA’s, when appropriate, to secure future earnings and create cash flow visibility. |
| • | Continue to grow our relationships with key industry players. We continue to maintain our relationships with key industry players in Japan which has historically provided us with access to attractive financing terms and high quality vessels for charters and acquisitions. |
The following tables set forth certain summary information regarding our Fleet as of the date of this annual report:
Drybulk Carriers - Owned Fleet (24 Vessels)
Vessel Name | | Built | | | Country of Build | | DWT | | | Type of Employment |
Handysize – Eco | | | | | | | | | | | | |
| IVS Tembe | | | 2016 | | | Japan | | | 37,740 | | | IVS Commercial (1) |
| IVS Sunbird | | | 2015 | | | Japan | | | 33,400 | | | IVS Handysize Pool |
| IVS Thanda | | | 2015 | | | Japan | | | 37,720 | | | IVS Commercial (1) |
| IVS Kestrel (2) | | | 2014 | | | Japan | | | 32,770 | | | IVS Handysize Pool |
| IVS Phinda | | | 2014 | | | Japan | | | 37,720 | | | IVS Commercial (1) |
| IVS Sparrowhawk | | | 2014 | | | Japan | | | 33,420 | | | IVS Handysize Pool |
Handysize | | | | | | | | | | | | |
| IVS Merlion | | | 2013 | | | China | | | 32,070 | | | IVS Handysize Pool |
| IVS Raffles | | | 2013 | | | China | | | 32,050 | | | IVS Handysize Pool |
| IVS Ibis | | | 2012 | | | Japan | | | 28,240 | | | IVS Handysize Pool |
| IVS Kinglet (3) | | | 2011 | | | Japan | | | 33,130 | | | IVS Handysize Pool |
| IVS Magpie (3) | | | 2011 | | | Japan | | | 28,240 | | | IVS Handysize Pool |
| IVS Orchard | | | 2011 | | | China | | | 32,530 | | | IVS Handysize Pool |
| IVS Knot (3) | | | 2010 | | | Japan | | | 33,140 | | | IVS Handysize Pool |
| IVS Sentosa (4) | | | 2010 | | | China | | | 32,700 | | | IVS Handysize Pool |
| IVS Kingbird | | | 2007 | | | Japan | | | 32,560 | | | IVS Handysize Pool |
Supramax/Ultramax – Eco | | | | | | | | | | | | |
| IVS Prestwick | | | 2019 | | | Japan | | | 61,300 | | | IVS Supramax Pool |
| IVS Okudogo | | | 2019 | | | Japan | | | 61,330 | | | IVS Supramax Pool |
| IVS Phoenix (3) | | | 2019 | | | Japan | | | 61,470 | | | IVS Supramax Pool |
| IVS Swinley Forest | | | 2017 | | | Japan | | | 60,490 | | | IVS Supramax Pool |
| IVS Gleneagles | | | 2016 | | | Japan | | | 58,070 | | | IVS Supramax Pool |
| IVS North Berwick | | | 2016 | | | Japan | | | 60,480 | | | IVS Supramax Pool |
| IVS Bosch Hoek | | | 2015 | | | Japan | | | 60,270 | | | IVS Supramax Pool |
| IVS Wentworth | | | 2015 | | | Japan | | | 58,090 | | | IVS Supramax Pool |
| IVS Pinehurst (5) | | | 2015 | | | Philippines (6) | | | 57,810 | | | IVS Supramax Pool |
Drybulk Carriers - Long-Term Charter-In Fleet (7 Vessels)
Vessel Name | | Built | | | Country
of Build | | | DWT | | | | | | Purchase
Option
Price
(Millions) | | | Type of Employment | |
Supramax/Ultramax – Eco | | | | | | | | | | | | | | | | | | |
| | 2021 | | | Japan | | | 64,230 | | | 2024-25 | | | - | | | IVS Supramax Pool | |
| | 2020 | | | Japan | | | 62,660 | | | 2023-24 | | | 25.2 | | | IVS Supramax Pool | |
| | 2020 | | | Japan | | | 62,660 | | | 2023-24 | | | $ | 25.2 | | | IVS Supramax Pool | |
| | 2016 | | | Japan | | | 60,400 | | | 2023-26 | | | $ | ~21.6 | | | IVS Supramax Pool | |
| | 2016 | | | Japan | | | 60,280 | | | 2023-26 | | | $ | - | | | IVS Supramax Pool | |
| | 2014 | | | Japan | | | 57,950 | | | 2023 | | | $ | - | | | IVS Supramax Pool | |
| | 2014 | | | Japan | | | 60,030 | | | 2023-24 | | | $ | ~13.6 | | | IVS Supramax Pool | |
| (1) | Commercially managed by Grindrod Shipping alongside the IVS Handysize Pool. |
| (2) | IVS Kestrel has been contracted for sale and is planned to deliver to the new owners on or about April 30, 2023 |
| (3) | IVS Knot , IVS Kinglet , IVS Magpie and IVS Phoenix have each undergone separate financing arrangements in which we sold these vessels but retained the right to control the use of these vessels for a period up to 2030, 2031, 2031 and 2036, respectively, and we have had an option to acquire IVS Knot , IVS Kinglet and IVS Magpie commencing in 2021 and we have an option to acquire the IVS Phoenix in 2023. We regard the vessels as owned since we have retained the right to control the use of the vessels. |
| (4) | IVS Sentosa has been contracted for sale and is planned to deliver to the new owners on or about March 31, 2023 |
| (5) | IVS Pinehurst has been contracted for sale and is planned to deliver to the new owners on or about May 31, 2023 |
| (6) | Constructed at Tsuneishi Cebu Shipyard (Philippines), a subsidiary of Tsuneishi Shipbuilding (Japan). |
| (7) | Expiration date range represents the earliest and latest re-delivery periods due to extension options. |
| (8) | Chartered-in until Q4 2024 with one one-year option to extend. |
| (9) | Chartered-in until Q4 2023 with one one-year options to extend. The purchase option is exercisable beginning in Q4 2022 and any time thereafter to expiry date, subject to contract terms and conditions. The purchase option price reduces with a linear depreciation of $1.0 million per year or prorate. |
| (10) | Chartered-in until Q3 2023 with one one-year options to extend. The purchase option is exercisable beginning in Q3 2022 and any time thereafter to expiry date, subject to contract terms and conditions. The purchase option price reduces with a linear depreciation of $1.0 million per year or prorate. |
| (11) | Chartered-in until Q3 2023 with two one-year options to extend and one nine-month option to extend. The purchase option is exercisable next in Q4 2023 subject to contract terms and conditions and includes an estimated Japanese Yen denominated component but excludes estimated 50/50 profit sharing with vessel owner. The Japanese Yen component has been converted to at a rate of 133 Yen to $1. |
| (12) | Chartered-in until Q3 2023 with two one-year options to extend and one nine-month option to extend. |
| (13) | Chartered-in for a period of 11 to 13 months commencing May 1, 2022. |
| (14) | Chartered-in until Q4 2023 one one-year options to extend. The purchase option is exercisable at any time prior to expiry date, subject to contract terms and conditions. The option includes an estimated Japanese Yen denominated component which has been converted to at a rate of 133 Yen to $1. |
We aim to manage our business in a manner that achieves a balance between maximizing revenue opportunities and protecting against declines in revenue. We operate our vessels in the spot market, on long- and short-term time charters and on occasion on bareboat charters. In addition to employing our vessels in these ways, we use FFAs and enter into COAs to manage our revenue risk and employment risk. Where we carry cargo under COAs, we may utilize our Fleet to do so or we may utilize vessels that we short-term charter-in that are not part of our Fleet. We currently employ our vessels primarily in the spot market and we do not have a significant amount of fixed revenue cover.
To increase vessel utilization and thereby revenue, vessel owners participate in commercial pools with vessels of a similar size. By operating a large number of vessels as an integrated transportation system, commercial pools offer customers greater flexibility and a higher level of service while achieving scheduling efficiencies. Pools employ experienced commercial managers and operators who have close working relationships with customers and brokers, while technical management is performed by each vessel owner or procured from third parties. The managers of the pools negotiate voyage charters and COAs and time charters of various lengths, usually less than 12 months, with customers. The size and scope of these pools enable them to enhance vessel utilization rates for pool vessels by securing backhaul voyages and COAs, thus generating higher effective TCE revenue than otherwise might be obtainable for vessels operating independently in the spot market, while providing a higher level of service offerings to customers.
A pool aggregates the revenue and agreed expenses, which are usually voyage related expenses, of all of the vessels in the pool and distributes the net earnings calculated on (i) the number of pool points for the vessel, and (ii) the number of days the vessel was available to earn revenue for the pool in a distribution period. Usually a single pool manager is responsible for both the administrative and commercial management of the participating vessels, including marketing the pool, negotiating charters, including voyage charters, short duration time charters and longer term COAs, conducting pool operations, including the distribution of pool cash earnings, and managing bunker purchases, port charges and administrative services for the vessels. For these services the pool manager charges a fee, which may be a flat rate per day per vessel in the pool, or a fixed percentage rate applied typically to the gross revenue earned by the pool, or a combination of both. The pool participants remain responsible for all other costs including the financing, insurance, manning and technical management of their owned vessels or payment of charter hire to the owners of chartered-in vessels they have entered into the pool. For information regarding our accounting policies with respect to pool arrangements, see Note 2.18 to the audited consolidated financial statements.
In 2013, we established two drybulk commercial management pools in the handysize and supramax/ultramax sectors that have each demonstrated an ability to outperform, on average, relative to their industry benchmarks since their inception.
Our IVS Handysize Pool includes all of the handysize vessels in our Fleet, including those previously held through joint ventures, except for the three approximately 37,700 dwt handysize vessels which are commercially managed as a group by the same in-house team that manages the IVS Handysize Pool. For more information on the vessels previously held through joint ventures, see the Fleet table and “—Our Joint Ventures” below. In addition, there are numerous other vessels that we have short-term chartered-in and one other vessel owned by another vessel owner in the IVS Handysize Pool that was redelivered on February 2, 2023
. This pool includes vessels of between approximately 28,000 dwt and 34,000 dwt, and currently trades primarily in the spot market. As pool managers we have the ability to contract pool vessels out on time charters for up to 12 months. The net earnings allocated to vessels in the IVS Handysize Pool are distributed on the basis of (i) the number of pool points for the vessel, which are based on vessel attributes such as cargo carrying capacity, fuel consumption and construction characteristics, and (ii) the number of days the vessel was available to earn revenue for the pool in a distribution period. While all of the vessels in the IVS Handysize Pool are generally similar in terms of pool point allocations, the number of days a vessel is available to earn revenue varies on the basis of when a vessel enters or exits the pool or upon the occurrence of other events such as drydocking or repairs. In light of the foregoing, this results in all vessels in the IVS Handysize Pool receiving net earnings distributions that generally reflect actual availability for use in the pool.
Our IVS Supramax Pool includes all of the supramax/ultramax vessels in our Fleet, including those previously held through joint ventures. For more information on the vessels previously held through joint ventures, see the Fleet table and “—Our Joint Ventures” below. There are no vessels owned by independent third parties in this pool. This pool includes vessels of between approximately 57,800 dwt and 64,300 dwt and currently trades in a combination of COAs and the spot market. As pool managers, we have the ability to contract pool vessels out on time charters for up to 12 months. The net earnings allocated to the vessels in the IVS Supramax Pool are distributed on the basis of (i) the number of pool points for the vessel, which are based on vessel attributes such as cargo carrying capacity, fuel consumption, and construction characteristics, and (ii) the number of days the vessel was available to earn revenue for the pool in a distribution period. While all of the vessels in the IVS Supramax Pool are generally similar in terms of pool point allocations, the number of days a vessel is available to earn revenue for the pool varies on the basis of when a vessel enters or exits the pool or upon the occurrence of other events such as drydocking or repairs. In light of the foregoing, this results in all vessels in the IVS Supramax Pool receiving net earnings distributions that generally reflect actual availability for use in the pool.
When we refer to a vessel operating in the spot market, we mean that we do not have long-term contracted employment for that vessel. The vessel’s commercial manager or the pool manager, as applicable, seeks employment for these vessels on a day-to-day basis. The spot market includes voyage charters. A voyage charter is generally a contract to carry a specific cargo from a load port to a discharge port for an agreed freight per ton of cargo or a specified total amount. Under voyage charters, we pay specific voyage expenses such as port, canal and bunker costs. The spot market also includes time charters of a short duration. Shipping rates are volatile and also fluctuate on a seasonal and year-to-year basis, and operating in the spot market exposes us to this volatility more than if we had long-term fixed contracted revenue.
In addition, we may enter long-term charters or COAs where the rate we charge varies according to fluctuations in the shipping market. Although these types of contracts run over a longer period, the charter rates may be reset at the start of each voyage or on a monthly or quarterly or other interval. A number of industry participants produce daily assessments of the spot market rates and indices are produced to reflect the changes in the spot market over time based on these assessments. Accordingly, these contracts are generally referred to as “index-linked” contracts. Like spot market contracts, index-linked contracts are also exposed to the volatility in the shipping markets. The Baltic Exchange is the primary producer of these indices.
Market fluctuations derive from imbalances in the availability of cargoes for shipment and the number of vessels available at any given time to transport these cargoes. Vessels operating in the spot market generate revenue that is less predictable than those under longer term time charters or those serving fixed rate COAs, but operating in the spot market may enable us to capture increased profit margins during periods of improvements in charter rates. As the costs of our Fleet are typically of a long-term, fixed nature, downturns in the spot markets and in the drybulk industry generally would result in a reduction in profit margins.
Our three approximately 37,700 dwt handysize vessels are currently primarily employed in the spot market and the vessels in the IVS Handysize Pool, are currently also employed in the spot market. The vessels in the IVS Supramax Pool currently trade in a combination of COAs and the spot market.
As noted above, our three approximately 37,700 dwt handysize vessels are commercially managed as a group by the same in-house team that manages the IVS Handysize Pool and currently operate primarily in the spot market.
We owned two medium range tankers of approximately 50,000 dwt, which were commercially managed by Mansel (an affiliate of Vitol that procures shipping for oil cargoes traded by Vitol) and operated in the spot market and on Vitol traded cargoes until they were sold in April 2021.
We commercially managed one approximately 16,900 dwt tanker, which primarily traded around the southern African coast, fulfilling obligations we have under COAs, as well as the spot cargo market until it was sold in April 2021.
Time charters provide a fixed and stable cash flow for a known period of time. Time charters also mitigate in part the volatility and seasonality of the spot market business. We may employ vessels under longer term time charter contracts as part of our overall management of our revenue and risks. We may also enter into time charter contracts with profit sharing agreements, which enable us to benefit when the spot market rates increase.
Our remaining medium range tanker vessel was bareboat chartered out until May 2022. The vessel was subsequently sold on June 1, 2022.
The following descriptions are only a summary of the material provisions of our material joint ventures and are qualified in their entirety by reference to the copies of the joint venture agreements and amendments thereto, which are included as exhibits to this annual report.
Prior to February 14, 2020, we, through our wholly owned subsidiary GSPL, owned an approximately 33.5% interest in IVS Bulk Pte. Ltd., or IVS Bulk, a joint venture with Sankaty European Investments III S.à.r.l, or Sankaty, and Regiment Capital Ltd, or Regiment. Effective February 14, 2020, we increased our ownership to 66.75%. The financials of IVS Bulk were consolidated into our financial statements following the acquisition of the additional 33.25% rather than being accounted for under the equity accounting method, as had previously been the case.
On December 1, 2020, a loan of $4.0 million provided by GSPL to IVS Bulk was converted into equity in line with the new shareholders agreement. The transaction increased GSPL’s shareholding by 2.11% in IVS Bulk from 66.75% to 68.86%.
Effective September 1, 2021, we acquired the remaining ordinary shares in IVS Bulk for a total purchase consideration of $46.3 million, comprising of $37.2 million for the ordinary equity shares and $9.1 million for the preference shares.
Leopard Tankers Pte. Ltd.
As of December 31, 2021, we owned a 50% interest in Leopard Tankers Pte. Ltd., or Leopard Tankers, a former joint venture with Vitol, or our joint venture partner. Leopard Tankers owned four 50,000 dwt tankers, which were commercially managed by Mansel, an affiliate of Vitol, which received a management fee. This joint venture terminated and we acquired two medium range “eco” tankers from the joint venture, namely
Leopard Sun
and
Leopard Moon
, in January and February 2019, respectively, and our joint venture partner acquired the remaining two vessels from Leopard Tankers in February and March 2019. The financial results of
Leopard Sun
and
Leopard Moon
were consolidated into our financial statements following delivery of these vessels to us. Leopard Tankers Pte. Ltd. and its subsidiaries were deregistered in 2022.
Management of Our Business
Overall responsibility for the oversight of the management of our company rests with our board of directors. We do all of the financial and administrative management of our business ourselves, contracting in human resource, financial, legal, tax and other specialist advice from reputable, arm’s length service providers when required. We and our wholly owned subsidiary GSSA each entered into a transitional services agreement with Former Parent in connection with the Spin-Off, under which Former Parent provides to us and our subsidiaries, among other things, corporate secretarial services, internal audit and information technology services. These transitional agreements have expired and we currently manage the relevant services ourselves. We and our wholly owned subsidiary GSSA each entered a related licensing agreement in respect of the use of certain intellectual property of Former Parent and GSSA remains party to a property lease agreement subject to termination on short-term notice.
Decisions about how to commercially employ our Fleet, and general commercial and strategic decisions relating to the conduct of our business, including participation in joint ventures, are made by our own management and employees, under guidance and authority from our board of directors in accordance with our governance framework.
We technically manage in-house the majority of our vessels that we own. We currently employ a team of 13 experienced and qualified managers plus 16 support staff in Singapore, Durban and Manila. This team includes three master mariners and seven Class 1 marine engineers who perform superintendent and technical management functions for the in-house managed vessels. Our technical management team is responsible for the technical operation and upkeep of these vessels, including procurement, crewing, maintenance, repairs and dry dockings, maintaining required vetting approvals and relevant inspections, and ensuring that our vessels under in-house management comply with the requirements of classification societies, as well as relevant government, flag state, environmental and other regulations.
A majority of the crews we employ are sourced from third-party crewing providers with whom we contract directly for the supply of crews to the vessels we manage in-house. Our technical team also operated the Grindrod Shipping Training Academy located in Durban from where we sourced some of our crewing requirements until it was sold in May 2021.
In addition, our in-house technical team also oversees the third-party technical managers who we have contracted to carry out technical management functions for the balance of our Fleet. During 2021, we used one outside technical management provider, LSC Ship Management, or LSC. LSC technically managed two tankers until the vessels were sold in April 2021.
Separately, we had one tanker chartered-out on bareboat charter, under the terms of which the charterers are obligated to conduct the technical management of the vessel which they did through ASP Ship Management Singapore Pte. Ltd., the third-party managers. The bareboat charter expired in May 2022 and the tanker was sold on June 1, 2022.
We believe that developing strong relationships with the end users of our services allows us to better satisfy their needs with appropriate vessels and solutions. A prospective customer’s financial condition, creditworthiness, and reliability track record are important factors in negotiating our vessels’ employment. Our customers with whom we contract as commercial managers of our own, our joint venture partners’ and third parties’ drybulk carriers include other shipping companies, international commodity trading houses, mining companies, industrial manufacturing companies, major oil companies, and traders of grains, steel and forestry products.
For the years ended December 31, 2022, 2021 and 2020, no single customer accounted for 10% or more of our drybulk business revenue. For the years ended December 31, 2022 and 2021, no single customer accounted for 10% or more of our tanker business revenue, however; for the year ended December 31, 2020, four customers accounted for 10% or more of our tankers business revenue in amounts of approximately $17.5 million, $14.9 million, $13.9 million and $9.1 million, respectively.
We operate our drybulk carriers in markets that have historically exhibited seasonal variations in demand and, as a result, in charter hire rates. This seasonality may result in volatility in our operating results to the extent that we enter into new charter agreements or renew existing agreements during a time when charter rates are weaker or we operate our vessels on the spot market or under time charters, which may result in quarter-to-quarter volatility in our operating results.
The drybulk sector is typically stronger in the fall and winter months in anticipation of increased consumption of coal and other raw materials in the northern hemisphere. The celebration of Chinese New Year in the first quarter of each year, also results in lower volumes of seaborne trade into China during this period.
In addition, unpredictable weather patterns tend to disrupt vessel routing and scheduling as well as the supplies of certain commodities.
Our vessels are employed in a highly competitive market that is capital intensive and highly fragmented. The competition in the market is based primarily on supply and demand and we compete for charters and COAs on the basis of price, vessel location, vessel specifications including fuel consumption, size, age, condition and country of build, our and our third-party commercial managers’ reputations, and, additional requirements of the charterers.
We compete primarily with other independent and state-owned drybulk vessel-owners. Our competitors may have more resources than us and may operate vessels that are able to consume cheaper fuels, in particular, any competitors who have installed or may install scrubbers in compliance with IMO 2020 regulations, and are newer, and therefore more attractive to charterers, than our vessels. Ownership and control of drybulk carriers is highly fragmented and is divided among a large number of players including publicly listed and privately owned shipping companies, mining companies, commodity trading houses, private equity and other investment funds and state-controlled owners. Due in part to the highly fragmented markets in which we operate, competitors with greater resources than us could enter the drybulk shipping industry and operate larger fleets through consolidations or acquisitions and may be able to offer lower charter rates and higher quality vessels than we are able to offer. See, “Item 3. Risk Factors—Risks Related to Our Industry—We operate in the highly competitive international shipping industry and we may not be able to compete for charters and COAs with new entrants or established companies with greater resources, and, as a result, we may be unable to employ our vessels profitably”.
Environmental and Other Regulations
Government regulation significantly affects the ownership and operation of our vessels. We are subject to international conventions and treaties and national, state and local laws and regulations relating to safety and health and environmental protection in force in the countries in which our vessels may operate or are registered. These regulations include requirements relating to the storage, handling, emission, transportation and discharge of hazardous and non-hazardous materials, and the remediation of contamination and liability for damage to natural resources. Compliance with such laws, regulations and other requirements may entail significant expense, including vessel modifications and implementation of specific operating procedures.
A variety of governmental, quasi-governmental and private organizations subject our vessels to both scheduled and unscheduled inspections. These entities include the local port authorities (applicable national authorities such as the United States Coast Guard, or USCG, harbor master or equivalent), classification societies, flag state administrations, charterers, and terminal operators. Certain of these entities require us to obtain permits, licenses, certificates and other authorizations for the operation of our vessels. Failure to maintain necessary permits or approvals could require us to incur substantial costs or result in the operation of one or more of our vessels being temporarily suspended or lead to the invalidation or reduction of our insurance coverage.
We believe that the heightened level of environmental and quality concerns among insurance underwriters, regulators and charterers is leading to greater inspection and safety requirements on all vessels and may accelerate the scrapping of older vessels throughout the industry. Increasing environmental concerns have created a demand for vessels that conform to the stricter environmental standards. We strive to maintain operating standards for all of our vessels that emphasize operational safety, quality maintenance, continuous training of our officers and crews and compliance with U.S. and international regulations. We believe that our vessels are operated in substantial compliance with applicable environmental laws and regulations and have all material permits, licenses, certificates or other authorizations necessary for the conduct of our operations. However, because such laws and regulations are frequently changed and may impose increasingly stricter requirements, we cannot predict the future cost of complying with these requirements, or the impact of these requirements on the resale value or useful lives of our vessels. In addition, a future serious marine incident that results in significant oil pollution, release of hazardous substances, loss of life, or otherwise causes significant adverse environmental impact, such as the 2010 BP plc
Deepwater Horizon
oil spill in the Gulf of Mexico, could result in additional legislation or regulations that could negatively affect our profitability.
International Maritime Organization
The International Maritime Organization, the United Nations agency for maritime safety and the prevention of pollution by vessels, or the IMO, has adopted MARPOL. MARPOL entered into force on October 2, 1983. It has been adopted by over 150 nations, including many of the jurisdictions in which our vessels will operate.
MARPOL is broken into six Annexes, each of which regulates a different source of pollution. Annex I relates to oil leakage or spilling; Annex II relates to noxious liquid substances carried in bulk; Annex III relates to harmful substances carried in packaged form; Annexes IV and V relate to sewage and garbage management, respectively; and Annex VI relates to air emissions.
In 2012, the IMO’s Marine Environment Protection Committee, or MEPC, adopted by resolution amendments to the International Code for the Construction and Equipment of Ships carrying Dangerous Chemicals in Bulk, or the IBC Code. The provisions of the IBC Code are mandatory under MARPOL and SOLAS. These amendments, which entered into force in June 2014, pertain to revised international certificates of fitness for the carriage of dangerous chemicals in bulk and identifying new products that fall under the IBC Code.
The MARPOL Annex I Condition Assessment Scheme, or CAS, sets out a framework of inspection and verification of the structural condition of certain oil tankers. In 2013, the MEPC adopted by resolution amendments to the CAS. These amendments, which became effective on October 1, 2014, complement inspections of bulk carriers and tankers set forth in the 2011 International Code on the Enhanced Programme of Inspections during Surveys of Bulk Carriers and Oil Tankers, or ESP Code, and enhance the programs of inspections for certain tankers.
In September of 1997, the IMO adopted Annex VI to MARPOL to address air pollution. Effective May 2005, Annex VI set limits on nitrogen oxide emissions from vessels whose diesel engines were constructed (or underwent major conversions) on or after January 1, 2000. It also prohibits “deliberate emissions” of “ozone depleting substances,” defined to include certain halons and chlorofluorocarbons. “Deliberate emissions” are not limited to times when the vessel is at sea; they can, for example, include discharges occurring in the course of the vessel’s repair and maintenance. Emissions of “volatile organic compounds” from certain vessels, and the shipboard incineration (from incinerators installed after January 1, 2000) of certain substances (such as polychlorinated biphenyls, PCBs), are also prohibited. Annex VI also includes a global cap on the sulfur content of fuel oil and allows for special areas to be established with more stringent controls of sulfur emissions known as ECAs.
MEPC adopted amendments to Annex VI on October 10, 2008, which entered into force on July 1, 2010. The amended Annex VI seeks to further reduce air pollution by, among other things, implementing a progressive reduction of the amount of sulfur contained in any fuel oil used on board vessels. As of January 1, 2012, the amended Annex VI required that fuel oil contain no more than 3.50% sulfur (from the previous cap of 4.50%). Pursuant to MEPC 70, the amended Annex VI requires that fuel oil contain no more than 0.5% sulfur (from the previous cap of 3.5%) as of January 1, 2020. In MEPC 72, MEPC further agreed to prohibit the carriage of non-compliant fuel after 2020, unless a vessel is fitted with an equivalent arrangement such as a scrubber. As of January 2020, vessels now have to either reduce sulfur from emissions through the installation and use of emission scrubbers or buy fuel with lower sulfur content that is more expensive than standard marine fuel. Consequently, complying with MEPC 70 could result in a significant capital expenditure or a significant increase in the cost of bunkers. We use compliant bunker fuel in our vessels and have not yet ordered and do not currently plan to order any emissions treating systems for fitting on our existing vessels, although we may do so in the future for our current and / or future vessels. While we believe that burning compliant fuel, rather than treating non-compliant fuel, is an appropriate commercial strategy, the net earnings of our vessels may be negatively impacted by a differentiated bunker fuel market in the future and our vessels may not be as attractive to charterers as vessels fitted with exhaust treatment systems.
Sulfur content standards are even stricter within certain ECAs. As of January 1, 2015, vessels operating within an ECA may not use fuel with sulfur content in excess of 0.10%. Amended Annex VI established procedures for designating new ECAs. The Baltic and North Seas, certain coastal areas of North America and the United States Caribbean Sea are all within designated ECAs. In addition, certain ports in China and South Korea are or will become subject to domestic ECAs in those countries. Ocean-going vessels in these areas are subject to stringent emission controls, which may cause us to incur additional costs. If other ECAs are approved by the IMO or other new or more stringent requirements relating to emissions from marine diesel engines or port operations by vessels are adopted by the U.S. Environmental Protection Agency, or the EPA, or the states or other national jurisdictions where we operate, compliance with these regulations could entail significant capital expenditures, operational changes, or otherwise increase the costs of our operations. For example, the amended Annex VI also establishes new tiers of stringent nitrogen oxide emissions standards for new marine engines, depending on their date of installation. The EPA promulgated equivalent (and in some senses stricter) emissions standards in late 2009. At MEPC 70 and MEPC 71, MEPC approved and adopted the North Sea and Baltic Sea as ECAs for nitrogen oxides, effective January 1, 2021.
As of January 1, 2023, MARPOL made mandatory certain measures relating to energy efficiency for vessels. Under these measures, by 2025, all new vessels built must be 30% more energy efficient than those built in 2014. This included the requirement that all new vessels utilize the Energy Efficiency Design Index, or EEDI, and all vessels develop and implement Ship Energy Efficiency Management Plans, or SEEMPs. We are in the process of implementing energy savings measures for our vessels, which will require financial expenditures, but ultimately result in lower fuel costs.
We believe that all our vessels are compliant in all material respects with these regulations that are currently in force. Additional or new conventions, laws and regulations may be adopted that could require the installation of expensive emission control systems and could adversely affect our business, financial condition, cash flows and results of operations.
The IMO adopted the BWM Convention, in February 2004. The BWM Convention’s implementing regulations call for a phased introduction of mandatory ballast water exchange requirements, to be replaced in time with mandatory concentration limits. All vessels will also have to carry a ballast water record book and an International Ballast Water Management Certificate. The BWM Convention entered into force 12 months after it was adopted by 30 states, the combined merchant fleets of which represent not less than 35% of the gross tonnage of the world’s merchant shipping. On September 8, 2016, this threshold was met (with 52 contracting parties making up 35.14%). Thus, the BWM Convention entered into force on September 8, 2017. However, at MEPC 71, MEPC decided that, while new vessels constructed after September 8, 2017 must comply on delivery with the BWM Convention, implementation of the BWM Convention would be delayed for existing vessels (constructed prior to September 8, 2017) for a further two years. For such existing vessels, installation of ballast water management systems, or BWMS, must take place at the first renewal survey following September 8, 2017 (the date the BWM Convention entered into force). Although requirements with respect to D-2 performance standards relating to mandatory concentration limits will be phased in based on renewal survey dates, all vessels must meet the standards by September 8, 2024. At MEPC 70, MEPC adopted updated “guidelines for approval of ballast water managements systems (G8)”. G8 updates previous guidelines concerning procedures to approve BWMS. The G8 guidelines became mandatory through the BWMS Code, which was adopted in MEPC 72 and entered into force in October 2019. MEPC 72 also agreed to develop guidelines for mandatory ballast water sampling to confirm that a vessel’s BWMS complies with standards set out in the BWM Convention prior to the vessel receiving its International Ballast Water Management Certificate. Once mid-ocean ballast exchange or ballast water treatment requirements become mandatory, the cost of compliance could increase for ocean carriers and the costs of ballast water treatments may be material. However, many countries already regulate the discharge of ballast water carried by vessels from country to country to prevent the introduction of invasive and harmful species via such discharges. The United States for example, requires vessels entering its waters from another country to conduct mid-ocean ballast exchange, or undertake some alternate measure, and to comply with certain reporting requirements. We believe the costs of such ballast water compliance may be material over time, however, it is difficult to predict the overall impact of such requirements on our operations.
Safety Management System Requirements
The IMO has also adopted SOLAS and the LL Convention, which impose a variety of standards that regulate the design and operational features of vessels. The IMO periodically revises the SOLAS and LL Convention standards. Amendments to SOLAS relating to safe manning of vessels that were adopted in May 2012 entered in force on January 1, 2014. The Convention on Limitation of Liability for Maritime Claims, or LLMC, was recently amended and the amendments went into effect on June 8, 2015. The amendments alter the limits of liability for loss of life or personal injury claims and property claims against vessel owners. We believe that all our vessels are in substantial compliance with SOLAS and LL Convention standards.
Our operations are also subject to environmental standards and requirements under Chapter IX of SOLAS set forth in the ISM Code. The ISM Code requires the owner of a vessel, or any person who has taken responsibility for operation of a vessel, to develop an extensive safety management system that includes, among other things, the adoption of a safety and environmental protection policy setting forth instructions and procedures for operating its vessels safely and describing procedures for responding to emergencies. We rely upon the safety management system that we or our technical managers have developed for compliance with the ISM Code. The failure of a vessel owner or bareboat charterer to comply with the ISM Code may subject such party to increased liability, may decrease available insurance coverage for the affected vessels and may result in a denial of access to, or detention in, certain ports.
The ISM Code requires that vessel operators obtain a safety management certificate for each vessel they operate. This certificate evidences compliance by a vessel’s management with the ISM Code requirements for a safety management system. No vessel can obtain a safety management certificate under the ISM Code unless its manager has been awarded a document of compliance, issued by classification societies under the authority of each flag state. We and/or our third-party technical manager have documents of compliance and safety management certificates for all of our vessels for which the certificates are required by the IMO. The document of compliance and safety management certificate are renewed every five years, but the document of compliance is subject to audit verification annually and the safety management certificate at least every 2.5 years.
The flag state, as defined by the United Nations Convention on Law of the Sea, has overall responsibility for implementing and enforcing a broad range of international maritime regulations with respect to all vessels granted the right to fly its flag. The “Shipping Industry Flag State Performance Table” published annually by the International Chamber of Shipping evaluates and reports on flag states based on factors such as ratification, implementation, and enforcement of principal international maritime treaties and regulations, supervision of statutory vessel surveys, and participation at IMO and International Labour Organization, or ILO, meetings. All of our owned vessels are currently flagged in Singapore except one supramax and three handysize bulk carriers that are subject to financing arrangements,
IVS Phoenix, IVS Knot
,
IVS Kinglet
and
IVS Magpie
, which are flagged in the Marshall Islands. Singapore flagged vessels have historically received a good assessment in the shipping industry. We recognize the importance of a credible flag state and do not intend to use flags of convenience or flag states with poor performance indicators. Noncompliance with the ISM Code or other IMO regulations may subject the vessel owner or bareboat charterer to increased liability, may lead to decreases in available insurance coverage for affected vessels and may result in the denial of access to, or detention in, some ports. The USCG and European Union authorities have indicated that vessels not in compliance with the ISM Code by the applicable deadlines will be prohibited from trading in U.S. and European Union ports, respectively. Each of our vessels are ISM Code certified. However, there can be no assurance that such certificate will be maintained.
Noncompliance with the ISM Code and other IMO regulations may subject the vessel owner or bareboat charterer to increased liability, may lead to decreases in, or invalidation of, available insurance coverage for affected vessels and may result in the denial of access to, or detention in, some ports.
Pollution Control and Liability Requirements
The IMO has negotiated international conventions that impose liability for oil pollution in international waters and the territorial waters of the signatory to such conventions. Many countries have ratified and follow the liability plan adopted by the IMO and set out in the CLC. Under this convention, and depending on whether the country in which the damage results is a party to the 1992 Protocol to the CLC, a vessel’s registered owner is strictly liable for pollution damage caused in the territorial waters of a contracting state by discharge of persistent oil, subject to certain exceptions. The 1992 Protocol changed certain limits on liability, expressed using the International Monetary Fund currency unit of Special Drawing Rights. The limits on liability have since been amended so that the compensation limits on liability were raised. The right to limit liability is forfeited under the CLC where the spill is caused by the vessel owner’s actual fault and under the 1992 Protocol where the spill is caused by the vessel owner’s intentional or reckless act or omission where the vessel owner knew pollution damage would probably result. The CLC requires vessels covered by it to maintain insurance covering the liability of the owner in a sum equivalent to an owner’s liability for a single incident. We believe that our protection and indemnity insurance will cover the liability under the plan adopted by the IMO.
The IMO adopted the International Convention on Civil Liability for Bunker Oil Pollution Damage, or the Bunker Convention, to impose strict liability on vessel owners for pollution damage in jurisdictional waters of ratifying states caused by discharges of bunker fuel. The Bunker Convention requires registered owners of vessels over 1,000 gross tons to maintain insurance for pollution damage in an amount equal to the limits of liability under the applicable national or international limitation regime (but not exceeding the amount calculated in accordance with the Convention on Limitation of Liability for Maritime Claims of 1976, as amended). With respect to non-ratifying states, liability for spills or releases of oil carried as fuel in a vessel’s bunkers typically is determined by the national or other domestic laws in the jurisdiction where the events or damages occur.
IMO regulations also require owners and operators of vessels to adopt shipboard oil pollution emergency plans and/or shipboard marine pollution emergency plans for noxious liquid substances in accordance with the guidelines developed by the IMO.
The IMO continues to review and introduce new regulations. It is impossible to predict what additional regulations, if any, may be passed by the IMO and what effect, if any, such regulations may have on our operations.
The U.S. Oil Pollution Act of 1990 and Comprehensive Environmental Response, Compensation and Liability Act
The U.S. Oil Pollution Act of 1990, or OPA, established an extensive regulatory and liability regime for the protection and cleanup of the environment from oil spills. OPA affects all “owners and operators” whose vessels trade in the United States, its territories and possessions or whose vessels operate in United States waters, which includes the United States’ territorial sea and its 200 nautical mile exclusive economic zone. The United States has also enacted the Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, which applies to the discharge of hazardous substances other than oil except in limited circumstances, whether on land or at sea. OPA and CERCLA both define “owner and operator” in the case of a vessel as any person owning, operating or chartering by demise the vessel. OPA applies to oil tankers, as well as non-tanker vessels that carry fuel oil, or bunkers, to power such vessels. CERCLA also applies to our operations.
Under OPA, vessel owners and operators are “responsible parties” and are jointly, severally and strictly liable (unless the spill results solely from the act or omission of a third party, an act of God or an act of war) for all containment and clean-up costs and other damages arising from discharges or threatened discharges of oil from their vessels. OPA defines these other damages broadly to include:
| • | injury to, destruction or loss of, or loss of use of, natural resources and the costs of assessment thereof; |
| • | injury to, or economic losses resulting from, the destruction of real and personal property; |
| • | net loss of taxes, royalties, rents, fees or net profit revenues resulting from injury, destruction or loss of real or personal property, or natural resources; |
| • | loss of subsistence use of natural resources that are injured, destroyed or lost; |
| • | lost profits or impairment of earning capacity due to injury, destruction or loss of real or personal property or natural resources; and |
| • | net cost of increased or additional public services necessitated by removal activities following a discharge of oil, such as protection from fire, safety or health hazards. |
OPA contains statutory caps on liability and damages; such caps do not apply to direct cleanup costs. Effective November 12, 2019, the USCG adjusted the limits of OPA liability for non-tank vessels, edible oil tank vessels, and any oil spill response vessels, to the greater of $1,200 per gross ton or $997,100 (subject to periodic adjustment for inflation). These limits of liability do not apply if an incident was proximately caused by the violation of an applicable U.S. federal safety, construction or operating regulation by a responsible party (or its agent, employee or a person acting pursuant to a contractual relationship), or a responsible party’s gross negligence or willful misconduct. The limitation on liability similarly does not apply if the responsible party fails or refuses to (i) report the incident where the responsible party knows or has reason to know of the incident; (ii) reasonably cooperate and assist as requested in connection with oil removal activities; or (iii) without sufficient cause, comply with an order issued under the Federal Water Pollution Act (Section 311 (c), (e)) or the Intervention on the High Seas Act.
CERCLA contains a similar liability regime whereby owners and operators of vessels are liable for cleanup, removal and remedial costs, as well as damage for injury to, or destruction or loss of, natural resources, including the reasonable costs associated with assessing same, and health assessments or health effects studies. There is no liability if the discharge of a hazardous substance results solely from the act or omission of a third party, an act of God or an act of war. Liability under CERCLA is limited to the greater of $300 per gross ton or $5 million for vessels carrying a hazardous substance as cargo and the greater of $300 per gross ton or $500,000 for any other vessel. These limits do not apply (rendering the responsible person liable for the total cost of response and damages) if the release or threat of release of a hazardous substance resulted from willful misconduct or negligence, or the primary cause of the release was a violation of applicable safety, construction or operating standards or regulations. The limitation on liability also does not apply if the responsible person fails or refuses to provide all reasonable cooperation and assistance as requested in connection with response activities where the vessel is subject to OPA.
OPA and CERCLA both require owners and operators of vessels to establish and maintain with the USCG evidence of financial responsibility sufficient to meet the maximum amount of liability to which the particular responsible person may be subject. Vessel owners and operators may satisfy their financial responsibility obligations by providing a proof of insurance, a surety bond, qualification as a self-insurer or a guarantee. We comply in all material respects with the USCG’s financial responsibility regulations by providing a certificate of responsibility evidencing sufficient self-insurance.
We currently maintain pollution liability coverage insurance in the amount of $1.0 billion per incident for each of our vessels. If the damages from a catastrophic spill were to exceed our insurance coverage it could have an adverse effect on our business and results of operations.
OPA specifically permits individual states to impose their own liability regimes with regard to oil pollution incidents occurring within their boundaries, provided they accept, at a minimum, the levels of liability established under OPA. Some states have enacted legislation providing for unlimited liability for oil spills. In some cases, states, which have enacted such legislation have not yet issued implementing regulations defining vessel owners’ responsibilities under these laws. We comply in all material respects with all existing applicable state regulations in the ports where our vessels call.
Significant oil spills, such as the 2010
Deepwater Horizon
oil spill in the Gulf of Mexico, may also result in additional legislative or regulatory initiatives, including the raising of liability caps under OPA or more stringent operational requirements. We cannot predict what additional requirements, if any, may be enacted and what effect, if any, such requirements may have on our operations.
Other Environmental Initiatives
The CWA prohibits the discharge of oil or other substances in U.S. navigable waters unless authorized by a duly-issued permit or exemption, and imposes strict liability in the form of penalties for any unauthorized discharges. The CWA also imposes substantial liability for the costs of removal, remediation and damages and complements the remedies available under OPA and CERCLA. In addition, many U.S. states that border a navigable waterway have enacted environmental pollution laws that impose strict liability on a person for removal costs and damages resulting from a discharge of oil or a release of a hazardous substance. These laws may be more stringent than U.S. federal law.
The EPA regulates the discharge of ballast water and other substances in U.S. waters under the CWA. EPA regulations require vessels 79 feet in length or longer (other than commercial fishing and recreational vessels) to comply with a Vessel General Permit, or VGP, that authorizes ballast water discharges and other discharges incidental to the operation of vessels. For a new vessel delivered to an owner or operator after September 19, 2009 to be covered by the VGP, the owner must submit a Notice of Intent, or NOI, at least 30 days before the vessel operates in U.S. waters. The VGP imposes technology and water-quality based effluent limits for certain types of discharges and establishes specific inspection, monitoring, record keeping and reporting requirements to ensure the effluent limits are met. The EPA renewed and revised the VGP, effective December 19, 2013. The VGP now contains numeric ballast water discharge limits for most vessels to reduce the risk of invasive species in U.S. waters and more stringent requirements for exhaust gas scrubbers and requires the use of environmentally acceptable lubricants.
The USCG regulations adopted under the U.S. National Invasive Species Act, or NISA, also impose mandatory ballast water management practices for all vessels equipped with ballast water tanks entering or operating in U.S. waters. As of June 21, 2012, the USCG adopted revised ballast water management regulations that established standards for allowable concentrations of living organisms in ballast water discharged from vessels in U.S. waters. The USCG must approve any technology before it is placed on a vessel.
Notwithstanding the foregoing, as of January 1, 2014, vessels are technically subject to the phasing-in of these standards. As a result, the USCG in the past provided waivers to vessels which could not install the then unapproved ballast water treatment technology, but has begun to deny requests for waivers in light of its recent approval of a handful of technologies. In March 2018 the USCG published guidance on the limited circumstances in which it would authorize extension of a vessel’s compliance date and further indicated that extensions will generally not be granted for more than twelve months. The EPA, on the other hand, has taken a different approach to enforcing ballast discharge standards under the VGP. On December 27, 2013, the EPA issued an enforcement response policy in connection with the new VGP in which the EPA indicated that it would take into account the reasons why vessels do not have the requisite technology installed, but will not grant any waivers.
It should also be noted that in October 2015, the Second Circuit Court of Appeals issued a ruling that directed the EPA to redraft the sections of the 2013 VGP that address ballast water. However, the Second Circuit stated that 2013 VGP, which was scheduled to expire in December 2018, will remain in effect until the EPA issues a new VGP.
On December 4, 2018, the Vessel Incidental Discharge Act, or VIDA, was enacted. VIDA establishes a new framework for the regulation of vessel incidental discharges (including ballast water) under the CWA. VIDA requires the EPA to develop performance standards for those discharges within two years of enactment and requires the USCG to develop implementation, compliance, and enforcement regulations within two years of the EPA’s promulgation of standards. The new regulations cannot be less stringent than the 2013 VGP or the USCG NISA regulations. Under VIDA, all provisions of the 2013 VGP remain in force and effect until the USCG regulations are finalized. In addition, VIDA requires the USCG to finalize a policy letter within one year that describes ballast water treatment systems approval testing methods and protocols. The EPA proposed Vessel Incidental Standards of Performance in October 2020 and is expected to publish the final standards in 2022, after which the USCG will have two years to publish its implementation, compliance and enforcement regulations. Once the USCG regulations are in effect, subject to certain exceptions in the Pacific Coast and Great Lakes, states and regions cannot develop or enforce more stringent standards unless they petition the EPA and can establish that the revised best management standard would reduce adverse impacts from discharges and is both economically achievable and operationally practical.
Compliance with the EPA and the USCG regulations could require the installation of equipment on our vessels to treat ballast water before it is discharged or the implementation of other port facility disposal arrangements or procedures at potentially substantial cost, or may otherwise restrict our vessels from entering U.S. waters. While we believe that our vessels have been or will be fitted with systems that will comply with the standards, those systems may not be approved. If they are not approved it could have an adverse material impact on our business, financial condition, and results of operations depending on the available ballast water treatment systems and the extent to which existing vessels must be modified to accommodate such systems. In addition, certain states have enacted more stringent discharge standards as conditions to their required certification of the VGP, and can continue to enforce those standards until the USCG VIDA regulations are finalized. Although VIDA clarifies some of the confusion regarding the differing United States regulatory schemes applicable to ballast water, it continues to remain unclear how the ballast water requirements set forth by the EPA, the USCG, and IMO BWM Convention, some of which are in effect and some which are pending, will co-exist.
The U.S. Clean Air Act of 1970, as amended by the Clean Air Act Amendments of 1977 and 1990, or the CAA, requires the EPA to promulgate standards applicable to emissions of volatile organic compounds and other air contaminants. Our vessels will be subject to vapor control and recovery requirements for certain cargoes when loading, unloading, taking on or discharging ballast, cleaning and conducting other operations in regulated port areas. Our vessels that operate in such port areas with restricted cargoes are equipped with vapor recovery systems that satisfy these requirements. The CAA also requires states to adopt State Implementation Plans, or SIPs, designed to attain national health-based air quality standards in primarily major metropolitan and/or industrial areas. Several SIPs regulate emissions resulting from vessel loading and unloading operations by requiring the installation of vapor control equipment. As indicated above, our vessels operating in covered port areas are equipped with vapor recovery systems that satisfy these existing requirements.
European Union Regulations
In October 2009, the European Union amended a directive to impose criminal sanctions for illicit ship-source discharges of polluting substances, including minor discharges, if committed with intent, recklessly or with serious negligence and the discharges individually or in the aggregate result in deterioration of the quality of water. Aiding and abetting the discharge of a polluting substance may also lead to criminal penalties. Member states were required to enact laws or regulations to comply with the directive by the end of 2010. Criminal liability for pollution may result in substantial penalties or fines and increased civil liability claims. The directive applies to all types of vessels, irrespective of their flag, but certain exceptions apply to warships or where human safety or that of the vessel is in danger.
The European Union has adopted several regulations and directives requiring, among other things, more frequent inspections of high-risk vessels, as determined by type, age, flag, and the number of times the vessel has been detained. The European Union also adopted and then extended a ban on substandard vessels and enacted a minimum ban period and a definitive ban for repeated offenses. The regulation also provided the European Union with greater authority and control over classification societies, by imposing more requirements on classification societies and providing for fines or penalty payments for organizations that failed to comply.
The EU Ship Recycling Regulation, or EU SRR, entered into force on December 31, 2013. The EU SRR brings forward the implementation of the provisions contained in the IMO’s Hong Kong International Convention for the Safe and Environmentally Sound Recycling of Ships, 2009, or the Hong Kong Convention, which has not yet entered into force. The EU SRR aims to prevent, reduce and, to the extent practicable, eliminate accidents, injuries and other adverse effects on human health and the environment caused by ship recycling. The EU SRR aims to ensure that hazardous waste from ship recycling is subject to environmentally sound management and also includes rules to ensure the proper management of hazardous materials on ships.
As of December 31, 2018 all ships not less than 500 gross tonnes and flagged under an EU member state may be recycled only in an EU-approved ship recycling facility. Beginning December 31, 2020, EU-flagged and non-EU-flagged ships calling at EU ports are also required to have onboard a verified inventory of hazardous materials with a statement of compliance issued by a representative organization.
Greenhouse Gas Regulations
Currently, the emissions of greenhouse, or GHGs, from international shipping are not subject to the Kyoto Protocol to the United Nations Framework Convention on Climate Change, which entered into force in 2005 and pursuant to which adopting countries have been required to implement national programs to reduce GHG emissions. The 2015 United Nations Convention on Climate Change Conference in Paris resulted in the Paris Agreement, which entered into force on November 4, 2016 and aims to limit global temperature rise below 2 degrees celsius above pre-industrial levels and to pursue efforts to limit temperature increase even further to 1.5 degrees celsius. However, neither the Paris Agreement nor the subsequent 2021 Glasgow Climate Agreement directly limit GHG emissions from vessels.
The IMO has taken a number of measures to address GHG emissions associated with international shipping. As of January 1, 2013, vessels were required to comply with new MEPC mandatory requirements relating to energy efficiency to address GHG emissions from vessels. In addition, MEPC 70 approved a “roadmap” for developing an IMO strategy by 2018 on reduction of GHG emissions from vessels. In April 2018, MEPC 72 adopted an initial strategy to reduce GHG emissions from shipping by at least 50% by 2050 compared to 2008 levels, while pursuing efforts towards phasing them out entirely as “a pathway of CO
2
emissions reduction consistent with the Paris Agreement temperature goals.” In November 2021, MEPC 77 indicated that the IMO’s goal of reducing shipping GHG emissions 50% by 2050 does not go far enough to address the impact of shipping on climate change and that the MEPC intends to initiate a revision of its GHG targets by 2023. Based on discussions at MEPC 78 and MEPC 79, the revised strategy may include strengthening the target to zero emissions by 2050 with potential intermediate targets at 2030 or 2040, as well as a basket of mid-term measures, such as a fuel standard or carbon pricing elements, to help achieve the targets.
During MEPC 76 in June 2021, the IMO adopted amendments to MARPOL Annex VI, introducing an Energy Efficiency Design Index for existing ships (EEXI) and Carbon Intensity Indicator (CII). The requirements entered into force on January 1, 2023. Guidelines on calculations, surveys and verification of the EEXI were finalized at MEPC 76. EEXI measures CO
2
emissions per transport work. The calculation of the EEXI follows the calculation of the well-known Energy Efficiency Design Index (EEDI), which applies to new ships and has been in force since 2013. Different vessel efficiency improvement measures to comply with EEXI are possible such as engine power limitation, shaft power limitation, engine derating, propulsion optimization, energy-saving devices.
CII is a new measure based on an operational approach that supports the IMO’s objective of reducing CO
2
emissions per transport work. CII is the operational carbon intensity indicator expressed in grams of CO
2
per deadweight-nautical mile and it is a measure of vessel efficiency of CO
2
emitted when transporting cargo. After the January 1, 2023, each ship should calculate its attained CII every year, based on the annual fuel consumption and annual distance travelled, which is collected under the IMO’s Data Collection System, or DCS. Ships will be given an annual CII rating ranging from “A” to “E,” with the rating thresholds becoming increasingly stringent from 2023 until 2030. Ships that receive ratings of “D” or “E” for three consecutive years must submit a corrective action plan showing how a “C” rating or above will be achieved.
In addition to IMO measures and targets, a number of initiatives and declarations seeking to reduce GHG emissions from the shipping sector were announced at the Glasgow Climate Change Conference of Parties, or COP26. For example, in the Declaration on Zero Emission Shipping, 14 countries committed to work with the IMO to place the shipping sector on a pathway to achieving full decarbonisation by 2050. In the Clydebank Declaration, 22 countries committed to establishing at least six zero-emission shipping routes by 2025. Moreover, the Dhaka-Glasgow Declaration calls for a mandatory GHG tax for the shipping sector to curb carbon emissions.
The European Union has also undertaken or proposed a number of measures to monitor and reduce GHG emissions from the shipping industry. In 2013 the European Commission set out a strategy for progressively integrating maritime emissions into the European Union’s policy for reducing its GHG emissions, with the first step being monitoring, reporting and verification of GHG emissions from large ships calling at European Union ports. Towards this end, in April 2015, a regulation was adopted requiring that large vessels (over 5,000 gross tons) calling at European Union ports from January 2018 collect and publish data on CO
2
emissions and other information. In July 2021, the European Union published proposed legislation to extend its emission trading system (the EU ETS) to the maritime transport sector. Under the proposal, ships over 5,000 gross tonnes that transport cargo to or from European Union ports would be required to purchase emissions allowances equivalent to emissions for all or a half of a covered voyage, depending on whether the voyage was between two European Union ports or included a non-European Union port. Although the proposal has not yet been adopted, the European Union Council and Parliament reached a preliminary agreement in December 2022, and the legislative framework is expected to be formally adopted by the European Union Parliament in 2023. Based on the legislative framework, beginning in 2024, shipping companies will be required to purchase and surrender 40% of their intra-European Union voyage emissions (20% for voyages into or out of the European Union), gradually increasing to 100% for intra-European Union voyages (50% for voyages into or out of the European Union) by 2026. The European Union has also published a proposed regulation (the FuelEU Maritime proposal) introducing increasingly stringent limits on the carbon intensity of energy used by vessels beginning 2025, with an aim toward promoting the use of renewable and low-carbon fuels. Similar to the EU ETS proposed framework, the FuelEU Maritime proposal applies to ships over 5,000 gross tonnes and covers 100% of the energy used on board when a ship is at a European Union port and on voyages between European Union ports, and 50% of the energy used on voyages into or out of the European Union. The European Parliament voted to adopt the FuelEU Maritime proposal in October 2022. We cannot predict the specific impacts of the EU ETS and the FuelEU Maritime proposal on us and on the shipping industry as a whole at this time.
In the United States, the EPA has issued a finding that GHG endanger the public health and safety, has adopted regulations to limit GHG gas emissions from certain mobile sources and has proposed regulations to limit GHG emissions from large stationary sources. Although the mobile source emissions regulations do not apply to GHG emissions from vessels, the EPA has received petitions from the California Attorney General and environmental groups to regulate GHG emissions from ocean-going vessels, which petitions have been denied to date. Furthermore, in the United States individual states can also enact environmental regulations. For example, California has introduced a cap-and-trade program for GHG emissions.
Any passage of climate control legislation or other regulatory initiatives by the IMO, European Union, the U.S. or other countries where we operate, or any treaty adopted at the international level to succeed the Kyoto Protocol, the Paris Agreement or the Glasgow Climate Agreement, that restrict emissions of GHG could require us to make significant financial expenditures which we cannot predict with certainty at this time. Even in the absence of climate control legislation, our business may be indirectly affected to the extent that climate change may result in sea level changes or more intense weather events such as those which may present a risk of damage or loss to vessels.
CO
2
Emissions Reporting
(1)
In April 2018, the IMO’s MEPC adopted an initial strategy for the reduction of GHG
emissions from ships, setting out a vision to reduce GHG emissions from international shipping and phase them out as soon as possible.
We strive to be a responsible operator in our industry and accordingly we are including certain CO
2
reporting in this annual report. Annual Efficiency Ratio, or AER, is a measure of carbon efficiency using the parameters of fuel consumption, distance travelled, and the design deadweight tonnage of a vessel. Energy Efficiency Operational Indicator, or EEOI, is a tool for measuring the CO
2
emissions in a given time period per unit of transport work performed. AER does not account for the tonnage of cargo actually carried, whereas EEOI does. AER and EEOI metrics are impacted by external factors such as charter speed, vessel operator’s instructions and weather, in conjunction with overall market factors such as cargo load sizes and fleet utilization rate. As such, variance in performance can be found in the reported emissions between two periods for the same vessel and between vessels of a similar size and type. Furthermore, there may be variations in methodology used by other companies and consequently it is not always practical to directly compare emissions from different companies. For example, some shipping companies report CO
2
in tons per kilometer rather than tons per nautical mile.
Our reporting methodology substantially is in line with the framework set out within the IMO's Data Collection System initiated in January 2019 and the January 2018 framework for voluntary reporting under the Singapore flag. It is expected that the shipping industry will continue to refine the performance measures for emissions and efficiency over time. The figures reported below represent our initial findings, and in future results may vary as the methodology and performance measures applied by the industry and by us evolve.
The information set forth below was recorded and calculated using Stratum Five “Podium” Performance software (2021: Bluetracker One Fleet Performance software). This information is in respect of our wholly owned vessels and vessels in our joint ventures during the relevant period, for the twelve month periods ended December 31, 2022 and 2021.
| | | 2022 | | | 2021 | |
General | | | | | | | | |
| Fleet average age mid-period (years) | | | 7.5 | | | | 7.0 | |
| CO 2 Emissions generated during the period (metric tonnes) | | | 317,809 | | | | 318,733 | |
Annual Efficiency Ratio for the period (grams CO 2 / deadweight ton-mile) (2) | | | | | | | | |
| All drybulk vessels | | | 6.27 | | | | 6.11 | |
| Handysize drybulk carriers | | | 7.86 | | | | 7.12 | |
| Supramax / ultramax drybulk carriers | | | 4.88 | | | | 5.09 | |
Energy Efficiency Operational Indicator for the period (grams CO 2 / cargo ton-mile) (3) | | | | | | | | |
| All drybulk vessels | | | 11.33 | | | | 10.74 | |
| Handysize drybulk carriers | | | 14.79 | | | | 12.34 | |
| Supramax / ultramax drybulk carriers | | | 8.27 | | | | 9.07 | |
| (1) | Our emissions data is based on the reporting tools and information reasonably available to Grindrod Shipping and its applicable third-party technical managers. Grindrod Shipping assesses such data from time to time and may adjust and restate data to reflect latest information. |
| (2) | AER is reported in unit grams of CO 2 per deadweight ton-mile and is calculated by dividing (i) mass of fuel consumed by type, converted to equivalent mass CO2 by (ii) the design deadweight tonnage of the vessel (in metric tons) multiplied by distance travelled, both laden and in ballast (in nautical miles). |
| (3) | EEOI is reported in unit grams of CO 2 per cargo ton-mile and is calculated by dividing (i) mass of fuel consumed by type, converted to equivalent mass of CO2 by (ii) cargo carried (in metric tons) multiplied by laden voyage distance (in nautical miles). This calculation is performed as per IMO MEPC.1/Circ.684 |
International Labour Organization
The International Labour Organization, or ILO, is a specialized agency of the UN with headquarters in Geneva, Switzerland. The ILO has adopted the Maritime Labor Convention 2006, or MLC 2006. A Maritime Labor Certificate and a Declaration of Maritime Labor Compliance will be required to ensure compliance with the MLC 2006 for all vessels above 500 gross tons in international trade. The MLC 2006 came into force on August 20, 2013. Amendments to MLC were adopted in 2014 and 2016. We are in substantial compliance with MLC 2006.
Vessel Security Regulations
Since the terrorist attacks of September 11, 2001, there have been a variety of initiatives intended to enhance vessel security. On November 25, 2002, MTSA came into effect. To implement certain portions of the MTSA, in July 2003, the USCG issued regulations requiring the implementation of certain security requirements aboard vessels operating in waters subject to the jurisdiction of the United States. The regulations also impose requirements on certain ports and facilities, some of which are regulated by the EPA.
Similarly, in December 2002, amendments to SOLAS created a new chapter of the convention dealing specifically with maritime security. The new Chapter XI-2 became effective in July 2004 and imposes various detailed security obligations on vessels and port authorities, and mandates compliance with the ISPS Code. The ISPS Code is designed to enhance the security of ports and vessels against terrorism. After July 1, 2004, to trade internationally, a vessel must attain an International Ship Security Certificate, or ISSC, from a recognized security organization approved by the vessel’s flag state. The following are among the various requirements, some of which are found in SOLAS:
| • | on-board installation of automatic identification systems to provide a means for the automatic transmission of safety-related information from among similarly equipped vessels and shore stations, including information on a vessel’s identity, position, course, speed and navigational status; |
| • | on-board installation of vessel security alert systems, which do not sound on the vessel but only alert the authorities on shore; |
| • | the development of a vessel security plan; |
| • | vessel identification number to be permanently marked on a vessel’s hull; |
| • | a continuous synopsis record kept onboard showing a vessel’s history including the name of the vessel, the state whose flag the vessel is entitled to fly, the date on which the vessel was registered with that state, the vessel’s identification number, the port at which the vessel is registered and the name of the registered owner(s) and their registered address; and |
| • | compliance with flag state security certification requirements. |
Any vessel operating without a valid certificate may be detained at port until it obtains an International Ship Security Certificate, or ISSC, or it may be expelled from port, or refused entry at port.
The USCG regulations, intended to align with international maritime security standards, exempt non-U.S. vessels from MTSA vessel security measures, provided such vessels have on board a valid ISSC that attests to the vessel’s compliance with SOLAS security requirements and the ISPS Code. We or our third-party technical managers, as applicable, implement the various security measures addressed by MTSA, SOLAS and the ISPS Code, and our Fleet complies in all material respects with applicable security requirements.
Inspection by Classification Societies
Every oceangoing vessel must be “classed” by a classification society. The classification society certifies that the vessel is “in class,” signifying that the vessel has been built and maintained in accordance with the rules of the classification society and complies with applicable rules and regulations of the vessel’s country of registry and the international conventions of which that country is a member. In addition, where surveys are required by international conventions and corresponding laws and ordinances of a flag state, the classification society will undertake them on application or by official order, acting on behalf of the authorities concerned.
The classification society also undertakes on request other surveys and checks that are required by regulations and requirements of the flag state. These surveys are subject to agreements made in each individual case and/or to the regulations of the country concerned.
For maintenance of the class certification, regular and extraordinary surveys of hull, machinery, including the electrical plant, and any special equipment classed are required to be performed as follows:
Annual Surveys.
For seagoing vessels, annual surveys are conducted for the hull and the machinery, including the electrical plant and where applicable for special equipment classed, at intervals of 12 months from the date of commencement of the class period indicated in the certificate.
Intermediate Surveys.
Extended annual surveys are referred to as intermediate surveys and typically are conducted two and one-half years after commissioning and each class renewal. Intermediate surveys may be carried out on the occasion of the second or third annual survey.
Class Renewal Surveys.
Class renewal surveys, also known as special surveys, are carried out for the vessel’s hull, machinery, including the electrical plant, and for any special equipment classed, at the intervals indicated by the character of classification for the hull. At the special survey the vessel is drydocked and is thoroughly examined, including audio-gauging to determine the thickness of the steel structures. Should the thickness be found to be less than class requirements, the classification society would prescribe steel renewals. The classification society may grant a one-year grace period for completion of the special survey. Substantial amounts of money may have to be spent for steel renewals to pass a special survey if the vessel experiences excessive wear and tear. In lieu of the special survey every four or five years, depending on whether a grace period was granted, a vessel owner has the option of arranging with the classification society for the vessel’s hull or machinery to be on a continuous survey cycle, in which every part of the vessel would be surveyed within a five-year cycle. Upon a vessel owner’s request, the surveys required for class renewal may be split according to an agreed schedule to extend over the entire period of class. This process is referred to as continuous class renewal.
All areas subject to survey as defined by the classification society are required to be surveyed at least once per class period, unless shorter intervals between surveys are prescribed elsewhere. The period between two subsequent surveys of each area must not exceed five years. Vessels under five years of age can waive drydocking in order to increase available days and decrease capital expenditures, provided the vessel is inspected underwater.
Most of our vessels are drydocked every 30 to 36 months for inspection of the underwater parts and for repairs related to inspections. If any defects are found, the classification surveyor will issue a “recommendation” which must be rectified by the vessel owner within prescribed time limits.
Most insurance underwriters make it a condition for insurance coverage that a vessel be certified as “in class” by a classification society which is a member of the International Association of Classification Societies, or the IACS. In 2012, the IACS issued draft harmonized Common Structural Rules, that align with the IMO goals standards, and were adopted in winter 2013. All our vessels are certified as being “in class” by the American Bureau of Shipping, or ABS, Det Norske Veritas, or DNV, Class NK, or NK, and Lloyd’s Register, or LR. All new and secondhand vessels that we acquire must be certified prior to their delivery under our standard purchase contracts and memoranda of agreement. If the vessel is not certified on the date of closing, we generally have no obligation to take delivery of the vessel except in circumstances where the damage is easily remedied, in which case we will take delivery of the vessel and have a claim for damages.
Risk of Loss and Liability Insurance
The operation of any drybulk vessel includes risks such as mechanical and structural failure, hull damage, collision, property loss, cargo loss or damage, business interruption due to political circumstances in foreign countries, piracy, hostilities and labor strikes. In addition, there is always an inherent possibility of marine disaster, including oil spills and other environmental incidents, and the liabilities arising from owning and operating vessels in international trade. OPA, which imposes virtually unlimited liability upon owners, operators and demise charterers of vessels trading in the United States exclusive economic zone for certain oil pollution incidents in the United States, has made liability insurance more expensive for vessel owners and operators trading in the United States market.
We maintain hull and machinery insurance, war risks insurance, protection and indemnity cover, and freight, demurrage and defence cover for our Fleet in amounts that we believe to be prudent to cover day-to-day risks in our operations. We do not maintain insurance for loss of hire or earnings arising out of insured peril events other than limited loss coverage relating to defined war risk events. However, we may not be able to achieve or maintain this level of coverage throughout a vessel’s useful life. In addition, while we believe that the insurance coverage that we have obtained is adequate, not all risks can be insured, and there can be no guarantee that any specific claim will be paid, or that we will always be able to obtain adequate insurance coverage at reasonable rates.
Hull and Machinery and War Risks Insurance
We maintain marine hull and machinery and war risks insurance, which will include the risk of actual or constructive total loss, for all of our owned vessels. We also maintain increased value coverage for our vessels. Under this increased value coverage, in the event of total loss of a vessel, we will be able to recover the sum insured under the increased value policy in addition to the sum insured under the hull and machinery policy. Increased value insurance also covers excess liabilities which are not recoverable under our hull and machinery policy by reason of under insurance. Each of our vessels is currently covered up to at least fair market value with deductibles of $162,500 per vessel per incident.
Protection and Indemnity Insurance
Protection and indemnity insurance is provided by mutual protection and indemnity associations, or P&I Associations, which insure liabilities to third parties in connection with our shipping activities. This includes third-party liability and other related expenses resulting from the injury or death of crew, passengers and other third parties, the loss or damage to cargo, claims arising from collisions with other vessels, damage to other third-party property, pollution arising from oil or other substances and salvage, towing and other related costs, including wreck removal. Our P&I coverage will be subject to and in accordance with the rules of the P&I Association in which the vessel is entered. Protection and indemnity insurance is a form of mutual indemnity insurance, extended by protection and indemnity mutual associations, or clubs. Except for pollution and passenger and crew claims, our coverage is unlimited but restricted to amounts as determined by law including laws pertaining to limitation of liability. Cover for pollution claims are limited to $1.0 billion and cover for passenger and crew claims are restricted to $3.0 billion.
Our protection and indemnity insurance coverage for pollution will be $1.0 billion per vessel per incident. The thirteen P&I Associations that comprise the International Group insure approximately 90% of the world’s commercial tonnage and have entered into a pool agreement to reinsure each association’s liabilities. Each P&I Association has capped its exposure to this pool agreement at a floating rate that is generally valued at approximately $6.5 billion. As a member of a P&I Association which is a member of the International Group, we are subject to calls payable to the associations based on the group’s claim records as well as the claim records of all other members of the individual associations and members of the pool of P&I Associations comprising the International Group.
Not all risks are insured and not all risks are insurable. The principal insurable risks which nonetheless remain uninsured across our Fleet are “loss of hire” and “strikes,” except in cases of loss of hire due to war risk event. Specifically, we do not insure these risks because the costs are regarded as disproportionate. These insurances provide, subject to a deductible, a limited indemnity for hire that would not be receivable by the vessel owner for reasons set forth in the policy. Should a vessel on time charter, where the vessel earns fixed hire day by day, suffer a serious mechanical breakdown, the daily hire will no longer be payable by the charterer for the period of off-hire. Under some circumstances, an event of force majeure may also permit the charterer to terminate the time charter or suspend payment of charter hire. The purpose of the loss of hire insurance is to secure the loss of hire during such periods. In the case of strikes insurance, if a vessel is being paid a fixed sum to perform a voyage and the vessel becomes strike bound at a loading or discharging port, the insurance covers the loss of earnings during such periods.
Permits and Authorizations
We are required by various governmental and quasi-governmental agencies to obtain certain permits, licenses and certificates with respect to our vessels. The kinds of permits, licenses and certificates required depend upon several factors, including the commodity transported, the waters in which the vessel operates, the nationality of the vessel’s crew and the age of a vessel. We believe that we have obtained all permits, licenses and certificates currently required to permit our vessels to operate our business as currently conducted. Additional laws and regulations, environmental or otherwise, may be adopted which could limit our ability to do business or increase the cost of us doing business.
We are an emerging growth company, as defined in the JOBS Act. As such, we are eligible to, and intend to, take advantage of certain exemptions from various reporting requirements that are applicable to public companies that are not emerging growth companies, including, but not limited to, the provisions of the Sarbanes-Oxley Act requiring that our independent registered public accounting firm provide an attestation report on the effectiveness of our internal control over financial reporting; and any rules that may be adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotation or a supplement to the auditor’s report on the financial statements. We currently prepare our financial statements in accordance with IFRS as issued by the IASB, which do not have separate provisions for publicly traded and private companies. However, in the event we convert to U.S. GAAP in the future while we are still an emerging growth company, we may be able to take advantage of the benefits of Section 107 of the JOBS Act, which provides that an emerging growth company can take advantage of the extended transition period provided in the Securities Act, for complying with new or revised accounting standards. We intend to continue to take advantage of these exemptions until we are no longer an emerging growth company. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the date of our first sale of equity securities pursuant to an effective registration statement under the Securities Act, (b) in which we have total annual gross revenue of at least $1.07 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our ordinary shares that are held by non-affiliates exceeds $700 million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. See “Item 3. Key Information—Risk Factors—Risks Relating to our Ordinary Shares—The Jumpstart Our Business Startups Act of 2012, or JOBS Act, will allow Grindrod Shipping to postpone the date by which it must comply with some of the laws and regulations intended to protect investors and to reduce the amount of information provided in Grindrod Shipping’s reports filed with the SEC, which could undermine investor confidence in Grindrod Shipping and adversely affect the market price of Grindrod Shipping’s ordinary shares.”
We are a “foreign private issuer” as defined by the rules under pursuant to Rule 405 under the Securities Act. Our status as a foreign private issuer exempts us from compliance with certain laws and regulations of the SEC and certain regulations of the NASDAQ, including the proxy rules, the short-swing profits recapture rules of Section 16 of the Exchange Act, and certain governance requirements, such as independent director oversight of the nomination of directors and executive compensation. In addition, we are not required to file annual, quarterly and current reports and financial statements with the SEC as frequently or as promptly as U.S. domestic companies registered under the Exchange Act and we are generally exempt from filing quarterly reports with the SEC. Furthermore, we are not subject to the requirements of Regulation FD (Fair Disclosure) promulgated under the Exchange Act, which restricts the selective disclosure of material information.
We may take advantage of these exemptions for foreign private issuers until such time as we are no longer a foreign private issuer. We are required to determine our status as a foreign private issuer on an annual basis at the end of our second fiscal quarter. We would cease to be a foreign private issuer at such time as more than 50% of our outstanding voting securities are held by U.S. residents and any of the following three circumstances applies: (1) the majority of our executive officers or directors are U.S. citizens or residents; (2) more than 50% of our assets are located in the United States; or (3) our business is administered principally in the United States. See “Item 3. Key Information—Risk Factors-Risks Relating to Our Ordinary Shares—Grindrod Shipping may lose its foreign private issuer status, which would then require it to comply with the Exchange Act’s domestic reporting regime and cause Grindrod Shipping to incur additional legal, accounting and other expenses.”
We may, from time to time, be involved in litigation and claims arising out of our operations in the normal course of business that may be brought against us, that could have a material adverse effect on our business, financial position, results of operations, cash flows or liquidity. From time to time we may face claims which fall outside the scope of our insurance coverage. In respect of such claims, we purchase FD&D insurance, which is discretionary coverage for the costs of defending or prosecuting such claims (for example, claims of a purely contractual nature, or collection of freight and demurrage). Those claims, even if covered by insurance and/or lacking merit, could result in the expenditure of significant financial and managerial resources.
| C. | Organizational Structure |
Grindrod Shipping is a company incorporated under the laws of Singapore. We directly own two subsidiaries through which business operations are conducted and staff are employed. One is a Singapore company and the other is a South African company. Each of our wholly owned vessels is held through separate, wholly owned subsidiaries of our Singapore subsidiary, each of which is incorporated in Singapore, except one incorporated in the Marshall Islands. Please see Exhibit 8.1 to this annual report for a list of our current subsidiaries.
| D. | Property, Plants and Equipment |
We do not own any material real property. We lease office space in several countries where we have staff or operations. Our largest offices are in Singapore, South Africa and the United Kingdom. Our main material assets consist of our vessels which are owned through several subsidiaries and two joint ventures. See “—Organizational Structure” above.
For a description of our Fleet, see “—History and Development of the Company” and “—Business Overview-Our Fleet” above.
| | UNRESOLVED STAFF COMMENTS |
| | OPERATING AND FINANCIAL REVIEW AND PROSPECTS |
You should read the following management’s discussion and analysis and results of operations and financial condition together with our consolidated financial statements, including the notes, and the other financial information appearing elsewhere in this annual report. Certain information contained in this discussion and analysis and elsewhere in this annual report includes forward-looking statements that involve risks and uncertainties. See “Cautionary Statement Regarding Forward-looking Statements” and “Item 3. Key Information
—
Risk Factors” for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in this annual report.
We are an international shipping company that owns, charters-in and operates a fleet of drybulk carriers. We currently own all of our vessels and we operate in the drybulk carriers business, which is further divided into handysize, supramax/ultramax, and other operating segments. Activities that do not relate to this business segment are accumulated in an “unallocated” segment. We historically operated a tanker business, which was further divided into medium range tankers, small tankers and other segments, however we completed the plan to discontinue the tanker business during December 2021 and have presented the tanker business as a discontinued operation. Prior period figures have been reclassified for the presentation of the tanker business as a discontinued operation.
Our handysize and supramax/ultramax operating fleet consists of 25 owned drybulk carriers and seven long-term chartered-in drybulk carriers. We have 15 handysize drybulk carriers and 17 supramax/ultramax drybulk carriers in our operating fleet with sizes ranging from 28,240 dwt to 64,230 dwt. Our drybulk carriers transport a broad range of major and minor bulk and breakbulk commodities, including ores, coal, grains, forestry products, steel products and fertilizers, along worldwide shipping routes, and are currently employed in pools of similarly sized vessels or in the spot market.
We sold two medium range tankers and one small tanker in 2021 and we sold the remaining medium range tanker in 2022. Our tankers carried petroleum products, which included both clean products, such as petrol, diesel, jet fuel and naptha, and dirty products, such as heavy fuel oil.
On February 15, 2023, the Company’s Board of Directors declared an interim quarterly cash dividend of $0.03 per ordinary share, paid on March 17, 2023, to all shareholders of record as of March 10, 2023 (the “Record Date”). As of March 10, 2023, there were 19,472,008 common shares of the Company outstanding.
Components of Our Operating Results
Revenue.
Revenue includes vessel revenue, ship sale revenue, and other revenue. Vessel revenue consists of charter hire revenue and freight revenue. Charter hire revenue primarily relates to time charter contracts and freight revenue primarily relates to voyage charter contracts and historically in pool distributions (which consist of distributions to us of net earnings relating to our vessels in pools operated by third parties). Ship sale revenue includes ship sales as well as the sale of bunkers and other consumables relating to ships sold. Other revenue includes management fees and other revenue.
We generate revenue by charging customers for their use of our vessels or for the transportation by us of their drybulk cargoes. Historically, these services generally have been provided by operating our vessels in commercial pools, in the spot market, and on time charters. We also manage our charter rate risk and employment risk by using forward freight arrangements and entering into COAs.
The table below illustrates in general the primary distinctions among these different employment arrangements.
| | | Commercial Pool | | Spot Market | | Time Charters |
| Typical contract length | | Varies | | Varies | | Varies |
| Charter hire rate basis (1) | | Varies | | Varies | | Daily |
| Voyage expenses | | Pool pays | | We or customer pays | | Customer pays |
| Vessel operating costs for owned vessels | | We pay | | We pay | | We pay |
| Charter hire costs for vessels chartered-in by us | | We pay | | We pay | | We pay |
| Off-hire (2) | | Pool does not pay | | Customer does not pay | | Customer does not pay |
| (1) | “Charter hire rate” refers to the basic payment from the charterer for the use of the vessel under time charter. |
| (2) | “Off-hire” refers to the time a vessel is not available for service due primarily to scheduled and unscheduled repairs or drydockings. For time chartered-in vessels, we do not pay the charter hire cost when the vessel is off-hire. And for time chartered-out vessels, the charterer is not obliged to pay us the charter hire when the vessel is off-hire. |
Cost of sales.
Cost of sales includes voyage expenses which represent the direct costs associated with operating a vessel between loading and discharge at the applicable ports and include pool distributions (which consist of net earnings payable to third-party and joint venture owners of vessels in previous years in the pools we manage), fuel expenses, port expenses, other expenses and freight forward agreements; vessel operating costs, which consist of crew expenses, repairs and maintenance, insurance, and other costs associated with the technical management of the Fleet; charter hire costs, which primarily relates to time charter contracts; depreciation of ships, drydocking and plant and equipment – owned assets; depreciation of ships and ship equipment – right-of-use assets; other expenses, which consist of container expenses, freight expenses, cargo handling, provision for onerous contracts, and other logistic purchases; and cost of ship sale, which consists of cost of sales on sale of ships classified as inventories and cost of sales on sale of bunkers and other consumables sold with a vessel.
Other operating (expense) income
. Other operating expense consisted primarily of foreign exchange loss, impairment loss on ships, impairments on intangibles and goodwill, impairment loss on right-of-use assets, impairment loss on the net assets of disposal groups, impairment loss on financial assets for expected credit losses and other operating expenses. Other operating income consists of reversals of impairment loss on ships, reversals of impairment loss on right-of-use assets, dividend income, profit on sale of business, gain on disposal of assets, foreign exchange gain and other income.
Administrative expense
. Administrative expense comprise general corporate overhead expenses, including personnel costs, property costs, audit fees, legal and professional fees, and other general administrative expenses. Personnel costs include, among other things, salaries and short- and long-term incentives, pension costs, fringe benefits, travel costs and health insurance.
Share of losses of joint ventures.
Share of losses of joint ventures relates to operating profits or losses attributable to our joint ventures. Our joint ventures, which include IVS Bulk for the period prior to February 14, 2020, are accounted for on an equity basis.
Interest income.
Interest income primarily relates to interest on loans to joint ventures; bank interests; and other interests.
Interest expense.
Interest expense primarily relates to interest on ship loans, interest on loans from related companies and interest on bank and non-bank loans and interest determined under IFRS 16 that relates to leases.
Income tax.
Income tax represents the sum of the tax currently payable, reversal of provisions for a tax related legal case and deferred tax. The tax currently payable is based on taxable profit for the year. Deferred tax is recognized on the differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable income.
Factors Affecting Our Results of Operations and Financial Condition
The principal factors which affect our results of operations and financial condition include:
| • | strength of world economies, in particularly in China and the rest of the Asia-Pacific region; |
| • | the effects of the COVID-19 pandemic on our operations and the demand and trading patterns for drybulk; and the duration of these effects; |
| • | cyclicality in the drybulk industry and volatility of charter rates which is impacted by supply and demand; |
| • | our ability to successfully compete in the drybulk markets and employ or procure the employment of our vessels at economically attractive rates; |
| • | changes in supply of drybulk vessels; |
| • | the duration of our charter contracts and market conditions when charters expire; |
| • | our decisions relating to vessel acquisitions and disposals and our ability to buy and sell vessels, and to charter-in vessels at prices we deem satisfactory; |
| • | the strength of and growth in the number of our customer relationships; |
| • | an increase in the price of bunker or other market-related increases to components of our costs of sales, including the costs associated with the IMO 2020 regulations limiting sulfur content in fuels; |
| • | depreciation on our vessels and potential impairment charges; |
| • | the amount of time and expense that we spend positioning our vessels and changes in trade routes for a variety of reasons, including as a result of additional trade tariffs imposed by China and the United States; |
| • | loss of operating days through accidents or other damage to our vessels, as well as a result of disruptions along our operating routes; |
| • | the failure of counterparties to fully perform their contracts with us; |
| • | the required maintenance capital expenditures relating to our vessels and other administrative expenses; |
| • | the amount of expense incurred, and time that our vessels spend, in drydock undergoing repairs; |
| • | the age, condition and specifications of our vessels; |
| • | the effective and efficient technical management of our vessels and our vessel operating costs; |
| • | our ability to satisfy the technical, health, safety and compliance standards of our customers; |
| • | our ability to access capital to finance our Fleet, including our ability to pay down our existing credit facilities if the fair market values of our vessels decline; |
| • | our level of debt and related interest expense; |
| • | fluctuations in interest rates, and foreign exchange rates, and the changes in the method pursuant to which the London Interbank Offered Rate and other benchmark rates are determined; |
| • | corruption, piracy, militant activities, political instability and terrorism in locations where we may operate; |
| • | losses or provisions for losses on uncollectible revenue; |
| • | the effectiveness of forward freight agreements, bunker swaps and other contracts we may enter into to manage our revenue and expenses and costs in unwinding them; |
| • | the cost and adequacy or otherwise of our insurance coverage; |
| • | fluctuations in foreign currency exchange rates; and |
Our consolidated financial statements and, unless otherwise indicated, other financial information concerning us included in this annual report, are presented in U.S. dollars. We have prepared our consolidated financial statements in accordance with IFRS as issued by the IASB. Our audited consolidated financial statements presented in this annual report represent the consolidated financial statements of the company as a separate publicly traded company on and subsequent to June 18, 2018.
Critical Accounting Policies and Estimates
Our consolidated financial statements and accompanying notes are prepared in accordance with IFRS. In many instances, the application of such principles requires management to make estimates or to apply subjective principles to particular facts and circumstances.
Critical accounting policies are those that reflect significant judgments of uncertainties and potentially result in materially different results under different assumptions and conditions. Described below are our critical accounting policies and estimates where we believe that had we made different estimations, judgments or interpretations from the ones we made, would have yielded the most significant differences in our consolidated financial statements.
See Note 2 to the consolidated financial statements for a summary of all of our significant accounting policies.
Owned vessels are measured at cost less accumulated depreciation and adjusted for any accumulated impairment losses or reversals of such losses. Cost comprises acquisition cost and costs directly related to the acquisition up until the time when the asset is ready for use, including interest expense incurred to finance the vessel during that period. The market average useful life of a vessel is estimated to range from 25 to 30 years at which point it would usually be scrapped. Our strategy is to maintain a young fleet compared to the market average. For accounting purposes, we estimate useful life as 15 years from date of delivery for new vessels. Vessels are depreciated on a straight-line basis to an estimated residual value over their useful life.
An increase in the useful life of the vessel or in its residual value would have the effect of decreasing the annual depreciation charge and, in the case of an increased useful life, extending it into later periods. A decrease in the useful life of the vessel or in its residual value would have the effect of increasing the annual depreciation charge.
Impairment and reversals of impairment of Vessels (including owned and right-of-use)
The carrying value of our vessels will not necessarily represent the fair market value of such vessels or the amount we could obtain if we were to sell any of our vessels. Pursuant to our bank credit facilities, prior to drawdown of loans under the credit facilities we submit to the lenders open-market, individual, charter-free valuations of the vessels collateralizing the relevant facility. Thereafter, we will regularly submit to the lenders valuations of our vessels done on the same basis in order to evidence our compliance with the collateral maintenance covenants under our bank credit facilities. These valuations as well as the valuations for the purposes of the bank credit facilities, are performed by an independent valuator not connected with the group, who has appropriate qualifications and relevant experience in the valuation of the vessels in the relevant sectors. We also obtain such valuations each quarter on all 100% owned vessels, joint venture owned vessels and all chartered-in vessels where there is a purchase option in our Fleet.
The valuations of our vessels can vary depending on the shipyards where they were built and the dates of delivery.
We evaluate the carrying amount of our vessels for events or indicators of potential impairment. We consider if we have contracted to divest the vessel for any reason, business plans such as if a joint venture that owns vessels comes to an end in accordance with its terms or if it no longer fits into our strategic planning and overall market conditions. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Recoverable amount is the higher of fair value less costs of disposal and value in use.
In developing a value in use calculation for a vessel, we make assumptions and estimates about vessels’ future performance, with the most significant assumptions relating to (i) charter rates on vessels which are based on management’s estimate of the average charter rates over the remaining life of the vessel to 15 years, (ii) off-hire days, which are based on historical off-hire statistics for our Fleet, (iii) operating costs, based on current levels escalated over time based on long-term trends, (iv) drydocking frequency, duration and cost, (v) estimated remaining useful life which is assessed as a total of 15 years from construction and (vi) estimated sale value of that vessel when the vessel reaches 15 years. We apply the U.S. dollar inflation rate to vessel operating costs (not including depreciation). The future cash flows are discounted to their present value using the current fiscal year’s discount rate to reflect the time value of money.
Although we believe that the assumptions used to evaluate potential impairment and reversals thereof are reasonable and appropriate, such assumptions are highly subjective. There can be no assurance as to how long long-term charter rates and vessel values (for owned vessels) will remain at their current levels, whether they will improve by any significant degree, or whether they will achieve the forecast charter rates estimated in the value in use calculations. Charter rates may remain at depressed levels for some time, which could adversely affect our revenue and profitability, and future assessments of vessel impairment.
For vessels that we have contracted to sell, the recoverable amount will be classified as inventories are determined based on estimated selling price less cost to sell, with fair value determined based on the market comparable approach that reflects recent transaction prices for similar vessels, with similar age and specifications. In valuing the vessels, the appraisers take into consideration the prevailing market conditions and make adjustments for differences where necessary before arriving at the most appropriate value for the vessels.
Management monitors developments in the market charter rates in order to assess the appropriateness of the charter rates that are utilized in the impairment analyses.
Based on our impairment analysis, a reversal of impairment loss on our ships of $1.7 million was recognized in “other operating income” for the year ended December 31, 2022. The reversal of impairment loss was largely due to the decision to sell one of the vessels in the 2022 year and previous impairments on that vessel were reversed due to the improved market in 2022.
Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021
Certain financial data on a consolidated basis and for our key segments was as follows for the years ended December 31, 2022 and 2021. This information was derived from our consolidated financial statements for the respective periods.
Consolidated Results of Operations
| | | Year ended
December 31, | |
(In thousands of U.S. dollars, other than per share data) | | 2022 | | | 2021 | |
Continuing operations | | | | | | | | |
Revenue | | $ | 460,460 | | | $ | 455,839 | |
Cost of sales | | | | | | | | |
| Voyage expenses | | | (91,104 | ) | | | (96,964 | ) |
| Vessel operating costs | | | (46,901 | ) | | | (43,958 | ) |
| Charter hire costs | | | (58,926 | ) | | | (75,381 | ) |
| Depreciation of ships, drydocking and plant and equipment– owned assets | | | (30,498 | ) | | | (25,866 | ) |
| Depreciation of ships and ship equipment – right-of-use assets | | | (35,676 | ) | | | (34,898 | ) |
| Other expenses | | | (696 | ) | | | (1,875 | ) |
| Cost of ship sale | | | (29,897 | ) | | | - | |
Gross profit | | | 166,762 | | | | 176,897 | |
| Other operating income | | | 341 | | | | 3,849 | |
| Administrative expense | | | (48,069 | ) | | | (36,089 | ) |
| Share of losses of joint ventures | | | (5 | ) | | | (31 | ) |
| Interest income | | | 2,228 | | | | 201 | |
| Interest expense | | | (17,133 | ) | | | (12,298 | ) |
Profit before taxation | | | 104,124 | | | | 132,529 | |
| Income tax (expense) benefit | | | (757 | ) | | | 118 | |
Profit for the period from continuing operations | | | 103,367 | | | | 132,647 | |
| | | | | | | | | |
Discontinued operation | | | | | | | | |
| Loss for the period from discontinued operation | | | - | | | | (3,165 | ) |
Profit for the period | | | 103,367 | | | | 129,482 | |
| | | | | | | | | |
Profit for the period attributable to: | | | | | | | | |
| Owners of the Company | | | 103,367 | | | | 118,925 | |
| Continuing operations | | | 103,367 | | | | 122,090 | |
| Discontinued operation | | | - | | | | (3,165 | ) |
| Non-controlling interests | | | - | | | | 10,557 | |
| | | | 103,367 | | | | 129,482 | |
Segment Results of Operations
(*)
| | | Year ended
December 31, | |
(In thousands of U.S. dollars) | | 2022 | | | 2021 | |
| Drybulk Carriers Business | | | | | | | | |
Handysize Segment | | | | | | | | |
| Revenue | | $ | 159,934 | | | $ | 158,210 | |
| Cost of sales | | | (93,418 | ) | | | (84,231 | ) |
| Gross Profit | | | 66,516 | | | | 73,979 | |
Supramax/Ultramax Segment | | | | | | | | |
| Revenue | | $ | 268,463 | | | $ | 292,257 | |
| Cost of sales | | | (172,588 | ) | | | (195,811 | ) |
| Gross Profit | | | 95,875 | | | | 96,446 | |
| * | Segment results of operations include the impact of the proportionate share of joint ventures, which differs from the statements of profit or loss in our consolidated financial statements which account for our investments in joint ventures under the equity method. |
Set forth below are selected historical and statistical data of our operating fleet for the years ended December 31, 2022 and 2021 that we believe may be useful in better understanding our operating fleet’s financial position and results of operations.
| | | Year ended December 31, | |
(In thousands of U.S. dollars) | | 2022 | | | 2021 | |
Drybulk Carriers Business | | | | | | | | |
Handysize Segment | | | | | | | | |
| Calendar days (1) | | | 6,091 | | | | 6,375 | |
| Available days (2) | | | 5,980 | | | | 6,239 | |
| Operating days (3) | | | 5,826 | | | | 6,115 | |
| Owned fleet operating days (4) | | | 5,210 | | | | 5,215 | |
| Short-term charter-in days (6) | | | 616 | | | | 900 | |
| Fleet utilization (7) | |
| 97.4 | %% % | |
| 98.0 | % |
| TCE per day (8) | | $ | 22,115 | | | $ | 21,336 | |
| Vessel operating costs per day (9) | | $ | 5,776 | | | $ | 5,670 | |
| | | | | | | | | |
Supramax/Ultramax Segment | | | | | | | | |
| Calendar days (1) | | | 8,210 | | | | 9,652 | |
| Available days (2) | | | 8,143 | | | | 9,555 | |
| Operating days (3) | | | 8,063 | | | | 9,429 | |
| Owned fleet operating days (4) | | | 3,345 | | | | 2,943 | |
| Long-term charter-in days (5) | | | 2,343 | | | | 2,674 | |
| Short-term charter-in days (6) | | | 2,375 | | | | 3,812 | |
| Fleet utilization (7) | |
| 99.0 | % | |
| 98.7 | % |
| TCE per day (8) | | $ | 25,788 | | | $ | 23,608 | |
| Vessel operating costs per day (9) | | $ | 5,297 | | | $ | 5,223 | |
| (1) | Calendar days : total calendar days the vessels were in our possession for the relevant period. Comparability of the calendar days are affected by the consolidation of the IVS Bulk vessels since February 2020. |
| (2) | Available days : total number of calendar days a vessel is in our possession for the relevant period after subtracting off-hire days for scheduled drydocking and special surveys. We use available days to measure the number of days in a relevant period during which vessels should be available for generating revenue. Comparability of the available days are affected by the consolidation of the IVS Bulk vessels since February 2020. |
| (3) | Operating days : the number of available days in the relevant period a vessel is controlled by us after subtracting the aggregate number of days that the vessel is off-hire due to a reason other than scheduled drydocking and special surveys, including unforeseen circumstances. We use operating days to measure the aggregate number of days in a relevant period during which vessels are actually available to generate revenue. Comparability of the operating days are affected by the consolidation of the IVS Bulk vessels since February 2020. |
| (4) | Owned fleet operating days : the number of operating days in which our owned fleet is operating for the relevant period. |
| (5) | Long-term charter-in days : the number of operating days for which our long-term charter-in fleet is operating for the relevant period. We regard chartered-in vessels as long-term charters if the period of the charter that we initially commit to is 12 months or more. Once we have included such chartered-in vessels in our Fleet, we will continue to regard them as part of our Fleet until the end of their chartered-in period, including any period that the charter has been extended under an option, even if at a given time the remaining period of their charter may be less than 12 months. |
| (6) | Short-term charter-in days : the number of operating days for which we have chartered-in third party vessels for durations of less than one year for the relevant period. |
| (7) | Fleet utilization : the percentage of time that vessels are available for generating revenue, determined by dividing the number of operating days during a relevant period by the number of available days during that period. We use fleet utilization to measure a company’s efficiency in employing its vessels. |
| (8) | TCE per day : vessel revenue less voyage expenses during a relevant period divided by the number of operating days during the period. The number of operating days used to calculate TCE revenue per day includes the proportionate share of our joint ventures’ operating days and includes charter-in days. See “—Non-GAAP Financial Measures” below for a discussion of TCE revenue and a reconciliation of revenue to TCE revenue. |
| (9) | Vessel operating costs per day : vessel operating costs per day represents vessel operating costs divided by the number of calendar days for owned vessels. The vessel operating costs and the number of calendar days used to calculate vessel operating costs per day includes the proportionate share of our joint ventures’ vessel operating costs and calendar days and excludes charter-in costs and charter-in days. See “—Non-GAAP Financial Measures” below for a discussion of vessel operating costs per day. |
We completed the plan to discontinue the medium range and small tanker segments during December 2021 and have presented the tanker business as a discontinued operation. We are now focused on the drybulk business which is presented as the continuing operations. Prior period figures have been reclassified to represent the change in our strategy.
Revenue.
Revenue increased by $4.7 million, or approximately 1.0%, from $455.8 million for the year ended December 31, 2021 to $460.5 million for the year ended December 31, 2022. The increase in revenue was primarily due to an increase in ship sale revenue partially offset by a decrease in vessel revenue which is the largest component of revenue. The largest component of revenue is vessel revenue. Vessel revenue decreased by $25.3 million, or approximately 5.6%, from $455.3 million for the year ended December 31, 2021 to $430.0 million for the year ended December 31, 2022, respectively. The decrease in vessel revenue was primarily due to a decrease in the operating days due to the redelivery of a number of short-term chartered-in vessels, partially offset by an increase in the average spot rate during the year.
Drybulk Business Revenue and Vessel Revenue
In the drybulk business, our handysize total revenue increased by $1.7 million, or approximately 1.1%, from $158.2 million for the year ended December 31, 2021 to $159.9 million for the year ended December 31, 2022. The handysize business experienced an increase in the spot rates due to the increase in the demand for drybulk tonnage, partially offset by the decrease in the number of short-term operating days. The supramax/ultramax total revenue decreased by $23.8 million, or approximately 8.1%, from $292.3 million for the year ended December 31, 2021 to $268.5 million for the year ended December 31, 2022. The decrease in the supramax/ultramax total revenue was primarily due to the decrease in the operating days as a result of the redelivery of a number of short-term chartered-in vessels with extension options that were chartered-in part way through 2020 at rates below the spot market, partially offset by an increase in the spot rates in 2022 due to an increase in the demand for drybulk tonnage.
Our handysize vessel revenue increased by $1.8 million, or approximately 1.1%, from $157.7 million for the year ended December 31, 2021 to $159.5 million for the year ended December 31, 2022. The increase in 2022 was primarily due to the same reasons set forth in the above paragraph. Our supramax/ultramax vessel revenue decreased by $23.8 million, or approximately 8.1%, from $292.2 million for the year ended December 31, 2021 to $268.4 million for the year ended December 31, 2022. The decrease in 2022 was primarily due to the same reasons set forth in the above paragraph.
Drybulk Business TCE Revenue
Handysize TCE per day increased by $779 per day, or approximately 3.7%, from $21,336 per day for the year ended December 31, 2021 to $22,115 per day for the year ended December 31, 2022 primarily due to an increase in the handysize spot market rates.
Supramax/ultramax TCE per day increased by $2,180 per day, or approximately 9.2%, from $23,608 per day for the year ended December 31, 2021 to $25,788 per day for the year ended December 31, 2021 primarily due to an increase in the supramax/ultramax spot market rates.
A demand for commodities and therefore drybulk tonnage, together with port disruptions brought about by China’s zero-COVID policy affected the available tonnage in the first half of 2022 and resulted in higher spot rates in the drybulk markets when compared to 2021. The rates decreased in the second half of 2022 as steel output and iron ore imports into China declined which was further affected by the inability of Australia and Brazil to supply the forecast volumes.
Cost of sales.
Total cost of sales increased by $14.8 million, or approximately 5.3%, from $278.9 million for the year ended December 31, 2021 to $293.7 million for the year ended December 31, 2022, mainly as a result of the increase in cost of ship sales. The largest component of cost of sales is voyage expenses, which decreased by $5.9 million from $97.0 million for the year ended December 31, 2021 to $91.1 million for the year ended December 31, 2022. This decrease in voyage expenses was primarily due to a decrease of US$3.4 million in pool distributions to third party pool participants in 2022 due to a smaller number of third party participants and increased returns of $14.9 million on forward freight agreements used to hedge against volatile spot rates, offset by increased fuel costs of $16.8 million. The increased fuel costs were partially offset by the decreasing number of freight voyages in 2022 which reduced the quantity of fuel purchased. Charter hire costs decreased by $16.5 million from $75.4 million for the year ended December 31, 2021 to $58.9 million for the year ended December 31, 2022. This decrease was due to the redelivery of the additional short-term vessels chartered-in at the end of 2020 and redelivered towards the end of 2021 and beginning of 2022, which resulted in the reduction of the short-term operating days. Vessel operating costs increased by $2.9 million from $44.0 million in the year to December 31, 2021 to $46.9 million in the year to December 31, 2022. The increase was primarily due to the increased number of owned supramax/ultramax operating days due to the acquisition of a long-term chartered-in vessel part way through 2021 and the exercising of a purchase option on a second chartered-in vessel in 2022 and additional costs incurred for repairs on older vessels. Depreciation of ships, dry-docking and plant and equipment – owned assets increased by $4.6 million from $25.9 million in the year to December 31, 2021, to $30.5 million in the year to December 31, 2022. The main reason for this increase was the acquisition of a supramax vessel part way through 2021, the exercising of a purchase option on a supramax vessel part way through 2022 and the reversal of an impairment loss on a handysize vessel, partially offset by the sale of a medium range tanker (included in the Other segment under a bareboat charter) in 2022. Depreciation of ships and ship equipment – right-of-use assets remaining relatively flat with an increase of $0.8 million from $34.9 million in the year to December 31, 2021 to $35.7 million in the year to December 31, 2022. Other expenses decreased by $1.2 million from $1.9 million in the year to December 31, 2021, to $0.7 million in the year to December 31, 2022. Cost of ship sale increased by $29.9 million from $0 million in the year to December 31, 2021 to $29.9 million in the year to December 31, 2022. This increase is due to the sale of a medium range tanker (included in the Other segment under a bareboat charter) compared to no ship sales in 2021.
Drybulk Business Cost of Sales
In the drybulk business, our handysize segment cost of sales increased by $9.2 million, or approximately 10.9%, from $84.2 million for the year ended December 31, 2021, to $93.4 million for the year ended December 31, 2022. This increase was primarily due to increased voyage expenses, depreciation of owned vessels and rising operating expenses as described below. Our handysize segment voyage expenses increased by $3.5 million, or approximately 12.9%, from $27.2 million for the year ended December 31, 2021, to $30.7 million for the year ended December 31, 2022. This increase was primarily due to an increase in the number of voyages and an increase in the value of the 2022 pool distribution to third party participants due to higher earnings. The charter hire costs in the handysize segment remained relatively flat with a small increase of $0.3 million, or approximately 2.5%, from $11.8 million for the year ended December 31, 2021, to $12.1 million for the year ended December 31, 2022. Our handysize vessel operating costs increased by $0.6 million, or approximately 1.9%, from $31.0 million for the year ended December 31, 2021, to $31.6 million for the year ended December 31, 2022. The increase was primarily due to increasing repair costs for some of the aging handyize vessels and increased crew repatriation costs due to increased flight costs, quarantine requirements and related expenses.
Our supramax/ultramax segment cost of sales decreased by $23.2 million, or approximately 11.8%, from $195.8 million for the year ended December 31, 2021 to $172.6 million for the year ended December 31, 2022. This decrease was primarily due to decreased charter hire costs and decreased voyage expenses as described below, partially offset by an increase in depreciation of owned vessels due to the acquisition of a vessel in 2021 and 2022 and increased depreciation on right-of-use assets due to the extension and capitalisation of certain short-term charters. Our supramax/ultramax segment voyage expenses decreased by $9.2 million, or approximately 13.2%, from $69.6 million for the year ended December 31, 2021, to $60.4 million for the year ended December 31, 2022. This decrease was primarily due to a lower number of operating days following the redelivery of the short-term chartered-in vessels and therefore a lower number of voyages in 2022. The charter hire costs in the supramax/ultramax segment decreased by $16.8 million, or approximately 26.4%, from $63.6 million for the year ended December 31, 2021, to $46.8 million for the year ended December 31, 2022. The decrease was due to the redelivery of several short-term chartered-in vessels that were contracted towards the end of 2020 (with extension periods) at rates that were below the current spot market. Our supramax/ultramax vessel operating costs increased by $2.4 million, or approximately 15.2%, from $15.8 million for the year ended December 31, 2021, to $18.2 million for the year ended December 31, 2022. The increase was primarily due to the acquisition of a vessel partway through 2021 and 2022 and increased crew repatriation costs due to increased flight costs, quarantine requirements and related expenses.
Drybulk Business Vessel Operating Costs Per Day
Handysize vessel operating costs per day increased by $106, or approximately 1.9%, from $5,670 per day for the year ended December 31, 2021 to $5,776 per day for the year ended December 31, 2022.
Supramax/ultramax vessel operating costs per day increased by $74, or approximately 1.4%, from $5,223 per day for the year ended December 31, 2021 to $5,297 per day for the year ended December 31, 2022.
These increases were primarily due to increased crew repatriation costs partly as a result of increased flight costs, quarantine requirements and related expenses.
During 2021 and 2022, the effects of the pandemic continued to have a negative impact on crew repatriation as we experienced continuing testing requirements and resulting quarantine costs and limited, expensive flights for necessary crew repatriation. In addition, logistics, the cost of supplying spares to vessels and the lack of availability of the spares required our technical department to hold increased quantities of stock on board the vessels.
Gross profit.
Gross profit decreased by $10.1 million, or 5.7%, from $176.9 million for the year ended December 31, 2021 to $166.8 million for the year ended December 31, 2021 primarily for the reasons described above.
Other operating income.
Other operating income decreased by $3.5 million from $3.8 million recorded in the year ended December 31, 2021, to $0.3 million recorded in the year ended December 31, 2022. In the year ended December 31, 2022, we recorded the reversal of impairment losses on vessels of $1.7 million and the impairment loss on a right-of-use ship of $1.0 million. For the year ended December 31, 2021, we recorded the reversal of impairment losses on vessels of $3.6 million, the reversal of impairment losses on right-of-use ships of $1.0 million and an impairment loss on goodwill and intangibles of $1.0 million. We recorded a foreign exchange loss of $0.5 million for the year ended December 31, 2022 and we incurred a foreign exchange gain of $0.1 million for the year ended December 31, 2021 as a result of unrealized and realized revaluations of foreign currency bank balances, vendor balances and customer balances at period end.
Administrative expense.
Administrative expense increased by $12.0 million, or approximately 33.2%, from $36.1 million for the year ended December 31, 2021 to $48.1 million for the year ended December 31, 2022 primarily due to the fees associated with the offer to shareholders to purchase their shares during the current year of $10.3 million and the settlement of the forfeitable share plan awards as part of the transaction agreement of $4.8 million, which was partially offset by a lower staff incentive accrual.
Interest income.
Interest income increased by $2.0 million from $0.2 million for the year ended December 31, 2021 to $2.2 million for the year ended December 31, 2022. Interest increased for the 12 months ended December 31, 2022 due to higher cash balances and higher interest rates, as well as interest earned on the Other investments.
Interest expense.
Interest expense increased by $4.8 million from $12.3 million for the year ended December 31, 2021 to $17.1 million for the year ended December 31, 2022, primarily due to the increase in interest rates. Interest expense on bank loans increased by $7.9 million from $6.2 million for the year ended December 31, 2021 to $14.1 million for the year ended December 31, 2022. Interest expense on bank loans reflect the payment of interest on debt that principally funds our vessels. Our bank loans outstanding decreased by $46.7 million from $245.7million as at December 31, 2021 to $199.0 million as at December 31, 2022 primary due to quarterly repayments and repayment due to ship sales. The weighted average effective interest rate on our outstanding debt increased substantially from 3.82% in 2021 to 8.16% in 2022. The increase in the weighted average effective interest rate was primarily due to the increase in LIBOR as a consequence of the rising inflation.
Income tax (expense) benefit.
Income tax (expense) benefit for the year decreased from a benefit of $0.1 million for the year ended December 31, 2021 to an expense of $0.8 million for the year ended December 31, 2022.
Profit for the year on continuing operations.
Our profit for the year ended December 31, 2022, decreased to $103.4 million from $132.6 million for the year ended December 31, 2021 for the same reasons set forth above.
Continuing and Discontinued Operations
Profit for the year.
Our profit for the year ended December 31, 2022, decreased to $103.4 million from $129.5 million for the year ended December 31, 2021 for the same reasons set forth above.
Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020
Certain financial data on a consolidated basis and for our key segments was as follows for the years ended December 31, 2021 and 2020. This information was derived from our consolidated financial statements for the respective periods.
Consolidated Results of Operations
| | | Year Ended December 31, | |
(In thousands of U.S. dollars) | | 2021 | | | 2020 | |
Continuing operations | | | | | | | | |
Revenue | | $ | 455,839 | | | $ | 210,682 | |
Cost of sales | | | | | | | | |
| Voyage expenses | | | (96,964 | ) | | | (81,840 | ) |
| Vessel operating costs | | | (43,958 | ) | | | (37,968 | ) |
| Charter hire costs | | | (75,381 | ) | | | (34,369 | ) |
| Depreciation of ships, drydocking and plant and equipment - owned assets | | | (25,866 | ) | | | (22,003 | ) |
| Depreciation of ships and ship equipment – right-of-use assets | | | (34,898 | ) | | | (24,674 | ) |
| Other expenses | | | (1,875 | ) | | | (398 | ) |
| Cost of ship sale | | | - | | | | (5,375 | ) |
Gross profit | | | 176,897 | | | | 4,055 | |
| Other operating income (expense) | | | 3,849 | | | | (293 | ) |
| Administrative expense | | | (36,089 | ) | | | (21,435 | ) |
| Share of losses of joint ventures | | | (31 | ) | | | (2,476 | ) |
| Interest income | | | 201 | | | | 467 | |
| Interest expense | | | (12,298 | ) | | | (15,106 | ) |
Profit (loss) before taxation | | | 132,529 | | | | (34,788 | ) |
| Income tax benefit (expense) | | | 118 | | | | (189 | ) |
Profit (loss) for the year from continuing operations | | $ | 132,647 | | | $ | (34,977 | ) |
| | | | | | | | | |
Discontinued operation | | | | | | | | |
| Loss for the year from discontinued operation | | | (3,165 | ) | | | (6,123 | ) |
Profit (loss) for the year | | | 129,482 | | | | (41,100 | ) |
Segment Results of Operations
(*)
| | | Year Ended December 31, | |
(In thousands of U.S. dollars) | | 2021 | | | 2020 | |
Drybulk Carriers Business | | | | | | | | |
Handysize Segment | | | | | | | | |
| Revenue | | $ | 158,210 | | | $ | 84,519 | |
| Cost of Sales | | | (84,231 | ) | | | (90,453 | ) |
| Gross profit (loss) | | | 73,979 | | | | (5,934 | ) |
Supramax/ultramax Segment | | | | | | | | |
| Revenue | | $ | 292,257 | | | $ | 124,672 | |
| Cost of Sales | | | (195,811 | ) | | | (121,284 | ) |
| Gross profit (loss) | | | 96,446 | | | | 3,388 | |
| * | Segment results of operations include the impact of the proportionate share of joint ventures, which differs from the statements of profit or loss in our consolidated financial statements which account for our investments in joint ventures under the equity method. |
Set forth below are selected historical and statistical data of our operating fleet for the years ended December 31, 2021 and 2020 that we believe may be useful in better understanding our operating fleet’s financial position and results of operations
(1)
.
| | | Year Ended December 31, | |
| | | 2021 | | | 2020 | |
Drybulk Carriers Business | | | | | | | | |
Handysize Segment | | | | | | | | |
| Calendar days (2) | | | 6,375 | | | | 6,882 | |
| Available days (3) | | | 6,239 | | | | 6,713 | |
| Operating days (4) | | | 6,115 | | | | 6,584 | |
| Owned fleet operating days (5) | | | 5,215 | | | | 5,354 | |
| Long-term charter-in days (6) | | | - | | | | - | |
| Short-term charter-in days (7) | | | 900 | | | | 1,230 | |
| Fleet utilization (8) | | | 98.0 | % | | | 98.1 | % |
| TCE per day (9) | | $ | 21,336 | | | $ | 6,629 | |
| Vessel operating costs per day (10) | | $ | 5,670 | | | $ | 5,030 | |
Supramax/ultramax Segment | | | | | | | | |
| Calendar days (2) | | | 9,652 | | | | 7,787 | |
| Available days (3) | | | 9,555 | | | | 7,736 | |
| Operating days (4) | | | 9,429 | | | | 7,526 | |
| Owned fleet operating days (5) | | | 2,943 | | | | 2,514 | |
| Long-term charter-in days (6) | | | 2,674 | | | | 2,261 | |
| Short-term charter-in days (7) | | | 3,812 | | | | 2,751 | |
| Fleet utilization (8) | | | 98.7 | % | | | 97.3 | % |
| TCE per day (9) | | $ | 23,608 | | | $ | 10,072 | |
| Vessel operating costs per day (10) | | $ | 5,223 | | | $ | 5,073 | |
| (1) | Segment results of operations include the proportionate share of joint ventures, which differs from the statements of profit or loss in our consolidated financial statements which account for our investments in joint ventures under the equity method. |
| (2) | Calendar days : total calendar days the vessels were in our possession for the relevant period. Comparability of the calendar days are affected by the consolidation of the IVS Bulk vessels since February 2020. |
| (3) | Available days : total number of calendar days a vessel is in our possession for the relevant period after subtracting off-hire days for scheduled drydocking and special surveys. We use available days to measure the number of days in a relevant period during which vessels should be available for generating revenue. Comparability of the available days are affected by the consolidation of the IVS Bulk vessels since February 2020. |
| (4) | Operating days : the number of available days in the relevant period a vessel is controlled by us after subtracting the aggregate number of days that the vessel is off-hire due to a reason other than scheduled drydocking and special surveys, including unforeseen circumstances. We use operating days to measure the aggregate number of days in a relevant period during which vessels are actually available to generate revenue. Comparability of the operating days are affected by the consolidation of the IVS Bulk vessels since February 2020. |
| (5) | Owned fleet operating days : the number of operating days in which our owned fleet is operating for the relevant period. |
| (6) | Long-term charter-in days : the number of operating days for which our long-term charter-in fleet is operating for the relevant period. We regard chartered-in vessels as long-term charters if the period of the charter that we initially commit to is 12 months or more. Once we have included such chartered-in vessels in our Fleet, we will continue to regard them as part of our Fleet until the end of their chartered-in period, including any period that the charter has been extended under an option, even if at a given time the remaining period of their charter may be less than 12 months. |
| (7) | Short-term charter-in days : the number of operating days for which we have chartered-in third party vessels for durations of less than one year for the relevant period. |
| (8) | Fleet utilization : the percentage of time that vessels are available for generating revenue, determined by dividing the number of operating days during a relevant period by the number of available days during that period. We use fleet utilization to measure a company’s efficiency in employing its vessels. |
| (9) | TCE per day : vessel revenue less voyage expenses during a relevant period divided by the number of operating days during the period. The number of operating days used to calculate TCE revenue per day includes the proportionate share of our joint ventures’ operating days and includes charter-in days. See “—Non-GAAP Financial Measures” above for a discussion of TCE revenue and a reconciliation of revenue to TCE revenue. |
| (10) | Vessel operating costs per day : vessel operating costs per day represents vessel operating costs divided by the number of calendar days for owned vessels. The vessel operating costs and the number of calendar days used to calculate vessel operating costs per day includes the proportionate share of our joint ventures’ vessel operating costs and calendar days and excludes charter-in costs and charter-in days. See “—Non-GAAP Financial Measures” above for a discussion of vessel operating costs per day. |
We completed the plan to discontinue the medium range and small tanker segments during December 2021 and have presented the tanker business as a discontinued operation. We are now focused on the drybulk business which is presented as the continuing operations. Prior period figures have been reclassified to represent the change in our strategy.
Revenue.
Revenue increased by $245.1 million, or approximately 116.3%, from $210.7 million for the year ended December 31, 2020 to $455.8 million for the year ended December 31, 2021. The increase in revenue was primarily due to an increase in spot rates in the drybulk market, partially offset by a decrease in ship sale revenue. The largest component of revenue is vessel revenue. Vessel revenue increased by $251.3 million, or approximately 123.2%, from $204.0 million for the year ended December 31, 2020 to $455.3 million for the year ended December 31, 2021, respectively. The increase in vessel revenue was primarily due to an increase in the demand for dry bulk tonnage as a result of the global fiscal stimulus that created demand for commodities and, together with delays and port disruptions, positively impacted the spot rates in the drybulk market.
Drybulk Business Revenue and Vessel Revenue
In the drybulk business, our handysize total revenue increased by $73.7 million, or approximately 87.2%, from $84.5 million for the year ended December 31, 2020 to $158.2 million for the year ended December 31, 2021. The handysize business experienced an increase in the spot rates due to the increase in the demand for drybulk tonnage, partially offset by the decrease in ship sale revenue and a decrease in the number of short-term operating days. The supramax/ultramax total revenue increased by $167.6 million, or approximately 134.4%, from $124.7 million for the year ended December 31, 2020 to $292.3 million for the year ended December 31, 2021. The increase in the supramax/ultramax total revenue was primarily due to an increase in the spot rates in 2021 due to an increase in the demand for drybulk tonnage as well as an increase in the operating days due to the delivery of two long-term chartered-in vessels in the last quarter of 2020 and a number of short-term chartered-in vessels with extension options that were chartered-in part way through 2020 at rates below the spot market.
Our handysize vessel revenue increased by $83.1 million, or approximately 111.4%, from $74.6 million for the year ended December 31, 2020 to $157.7 million for the year ended December 31, 2021. The increase in 2021 was primarily due to the same reasons set forth in the above paragraph. Our supramax/ultramax vessel revenue increased by $167.8 million, or approximately 134.9%, from $124.4 million for the year ended December 31, 2020 to $292.2 million for the year ended December 31, 2021. The increase in 2021 was primarily due to the same reasons set forth in the above paragraph.
Drybulk Business TCE Revenue
Handysize TCE per day increased by $14,707 per day, or approximately 221.9%, from $6,629 per day for the year ended December 31, 2020 to $21,336 per day for the year ended December 31, 2021 primarily due to an increase in the handysize spot market rates.
Supramax/ultramax TCE per day increased by $13,536 per day, or approximately 134.4%, from $10,072 per day for the year ended December 31, 2020 to $23,608 per day for the year ended December 31, 2021 primarily due to an increase in the supramax/ultramax spot market rates.
Global lockdowns due to the COVID-19 pandemic and the resultant decline in the demand for dry bulk tonnage negatively impacted the drybulk spot market during the year ended December 31, 2020. To revive the economy, governments provided fiscal and monetary stimulus programs that created a demand for commodities and therefore drybulk tonnage. Together with the port disruptions that affected the available tonnage this resulted in significantly higher spot rates in the drybulk markets during the year ended December 31, 2021.
Cost of sales.
Total cost of sales increased by $72.3 million, or approximately 35.0%, from $206.6 million for the year ended December 31, 2020 to $278.9 million for the year ended December 31, 2021. The largest component of cost of sales is voyage expenses, which increased by $15.2 million from $81.8 million for the year ended December 31, 2020 to $97.0 million for the year ended December 31, 2021. This increase in voyage expenses was primarily due to increased pool distributions to third party pool participants in 2021 due to higher spot rate earnings and an increase in fuel costs. Fuel costs were low in 2020 due to reduced demand during the global pandemic but increased significantly in 2021 due to supply constraints. The effect of the increase in fuel costs was partially offset by a decreasing number of freight voyages in 2021 thus reducing the quantity of fuel used. Charter hire costs increased by $41.0 million from $34.4 million for the year ended December 31, 2020 to $75.4 million for the year ended December 31, 2021. This increase was due to the additional number of short-term vessels chartered-in at the end of 2020 for periods of 11 to 12 months with extension options and the higher spot rate for short-term chartered-in dry bulk vessels. Vessel operating costs increased by $6.0 million from $38.0 million in the year to December 31, 2020 to $44.0 million in the year to December 31, 2021. The increase was primarily due to the increased number of supramax/ultramax operating days, partially offset by the reduced number of owned handysize operating days and additional costs incurred for repairs and crew repatriation costs as described in the paragraphs below. Depreciation of ships, dry-docking and plant and equipment – owned assets increased by $3.9 million from $22.0 million in the year to December 31, 2020 to $25.9 million in the year to December 31, 2021. The main reason for this increase was the acquisition of a supramax vessel in 2021 and the reversal of an impairment loss on a handysize vessel in 2021, partially offset by the sale of a handysize vessel towards the end of 2020. Depreciation of ships and ship equipment – right-of-use assets increased by $10.2 million from $24.7 million in the year to December 31, 2020 to $34.9 million in the year to December 31, 2021. The main reason for this increase was due to the delivery of the two long-term chartered-in vessels at the end of 2020 and an extension of a short-term lease that resulted in the capitalisation of the charter contract. Other expenses increased by $1.5 million from $0.4 million in the year to December 31, 2020 to $1.9 million in the year to December 31, 2021. Cost of ship sale decreased by $5.4 million from $5.4 million in the year to December 31, 2020 to $0 million in the year to December 31, 2021. This decrease is due to no drybulk vessels sales in 2021 compared to the sale of a handysize drybulk carrier in 2020.
Drybulk Business Cost of Sales
In the drybulk business, our handysize segment cost of sales decreased by $6.3 million, or approximately 7.0%, from $90.5 million for the year ended December 31, 2020 to $84.2 million for the year ended December 31, 2021. This decrease was primarily due to the sale of a wholly owned handysize vessel and a handysize vessel that was owned through a joint venture in 2020 compared to no ship sales in 2021 and decreased voyage expenses, which was partially offset by increased charter costs, depreciation of owned vessels and rising operating expenses as described below. Our handysize segment voyage expenses decreased by $3.8 million, or approximately 12.3%, from $31.0 million for the year ended December 31, 2020 to $27.2 million for the year ended December 31, 2021. This decrease was primarily due to a decrease in the number of voyages and a decrease in the pool distributions to third party pool participants in our handysize pool due to a decrease in the number of third party participants, partially offset by an increase in the value of the distribution 2021 due to higher earnings. The charter hire costs in the handysize segment increased by $3.0 million, or approximately 34.1%, from $8.8 million for the year ended December 31, 2020 to $11.8 million for the year ended December 31, 2021. The charter-in cost per day was higher in 2021 due to increased global demand for drybulk tonnage. Our handysize vessel operating costs increased by $2.6 million, or approximately 9.2%, from $28.4 million for the year ended December 31, 2020 to $31.0 million for the year ended December 31, 2021. The increase was primarily due to increasing repair costs for some of the aging handyize vessels and increased crew repatriation costs due to COVID-19 travel restrictions, quarantine requirements and related costs, partially offset by the reduced number of owned vessels as a result of the sale of a vessel in 2020.
Our supramax/ultramax segment cost of sales increased by $74.5 million, or approximately 61.4%, from $121.3 million for the year ended December 31, 2020 to $195.8 million for the year ended December 31, 2021. This increase was primarily due to higher spot rates for short-term chartered-in vessels, an increase in depreciation of owned vessels due to the acquisition of a vessel, increased depreciation on right-of-use assets due to the extension and capitalisation of certain short-term charters and higher operating costs and voyage costs as described below. Our supramax/ultramax segment voyage expenses increased by $21.1 million, or approximately 43.5%, from $48.5 million for the year ended December 31, 2020 to $69.6 million for the year ended December 31, 2021. This increase was primarily due to a higher number of operating days available from the short-term vessels and therefore a higher number of voyages in 2021. The charter hire costs in the supramax/ultramax segment increased by $38.1 million, or approximately 149.4%, from $25.5 million for the year ended December 31, 2020 to $63.6 million for the year ended December 31, 2021. The increase was due to a higher number of short- term charter-in days in 2021 at a higher charter-in cost per day due to increased global demand for drybulk tonnage. Our supramax/ultramax vessel operating costs increased by $2.2 million, or approximately 16.2%, from $13.6 million for the year ended December 31, 2020 to $15.8 million for the year ended December 31, 2021. The increase was primarily due to the acquisition of a vessel in 2021 and increased crew repatriation costs due to COVID-19 travel restrictions, quarantine requirements and related costs.
Drybulk Business Vessel Operating Costs Per Day
Handysize vessel operating costs per day increased by $640, or approximately 12.7%, from $5,030 per day for the year ended December 31, 2020 to $5,670 per day for the year ended December 31, 2021.
Supramax/ultramax vessel operating costs per day increased by $150, or approximately 3.0%, from $5,073 per day for the year ended December 31, 2020 to $5,223 per day for the year ended December 31, 2021.
These increases were primarily due to increased crew repatriation costs partly as a result of COVID-19 travel restrictions, quarantine requirements and related costs partially offset by the repair costs on a small number of vessels in 2020 arising from the change over from high sulphur fuel to low sulphur fuel.
In the first half of 2020, employment contracts for crew were extended to protect the crew from exposure to COVID-19 and to continue the operation of the vessels. This resulted in temporary cost savings on the crew repatriation. These savings were reversed in the second half of 2020 as the costs of flights increased, vessels were deviated to facilitate repatriation of existing crew and collect replacement crew from accessible ports, additional costs of COVID-19 testing were incurred and cost for the purchase of personal protective equipment were incurred. During 2021, the effects of the pandemic continued to have a negative impact on crew repatriation as we experienced fluctuating and costly quarantine, vaccination and testing requirements and limited, expensive flights for necessary crew repatriation. In addition, logistics for supplying spares to vessels and the lack of availability of the spares required our technical department to hold increased quantities of stock on board the vessels.
Gross profit.
Gross profit increased by $172.8 million, or 4,214.6%, from $4.1 million for the year ended December 31, 2020 to $176.9 million for the year ended December 31, 2021 primarily for the reasons described above.
Other operating income (expense).
Other operating income (expense) increased by $4.1 million from an expense of $0.3 million recorded in the year ended December 31, 2021 to $3.8 million recorded in the year ended December 31, 2021. In the year ended December 31, 2021, we recorded the reversal of impairment losses on vessels of $3.6 million, the reversal of impairment losses on right-of-use ships of $1.0 million and an impairment loss on goodwill and intangibles of $1.0 million. For the year ended December 31, 2020, we recorded impairment losses on vessel of $5.1 million. We recorded a foreign exchange gain of $4.9 million and for the year ended December 31, 2020 and we incurred a foreign exchange gain of $0.1 million for the year ended December 31, 2021 as a result of unrealized and realized revaluations of foreign currency bank balances, vendor balances and customer balances at period end.
Administrative expense.
Administrative expense increased by $14.7 million, or approximately 68.7%, from $21.4 million for the year ended December 31, 2020 to $36.1 million for the year ended December 31, 2021 primarily due to higher staff incentive costs following the increase in profit and increased legal, professional and insurance costs.
Share of losses of joint ventures.
Share of losses of joint ventures decreased from a loss of $2.5 million for the year ended December 31, 2020 to $0 million for the year ended December 31, 2021. Following the consolidation of IVS Bulk in February 2020 and the sale of the
IVS Triview
in November 2020, we no longer have any vessels in unconsolidated joint venture structures. Our drybulk joint ventures were impacted by lower spot market rates in 2020.
Interest income.
Interest income decreased by $0.3 million from $0.5 million for the year ended December 31, 2020 to $0.2 million for the year ended December 31, 2021. Interest on loans to our joint ventures decreased for the 12 months ended December 31, 2021 due to loan repayments by joint ventures in the period ended December 31, 2020.
Interest expense.
Interest expense decreased by $2.8 million from $15.1 million for the year ended December 31, 2020 to $12.3 million for the year ended December 31, 2021, primarily due to the repayment of the $35.8 million senior secured credit facility used to fund the acquisition of IVS Bulk which incurred interest at a relatively higher interest rate and the repayment of loans on the sale of vessels, partially offset by the marginal increase in LIBOR. Interest expense on bank loans decreased by $0.9 million from $7.1 million for the year ended December 31, 2020 to $6.2 million for the year ended December 31, 2021. Interest expense on bank loans reflect the payment of interest on debt that principally funds our vessels. Our bank loans outstanding decreased from $278.4 million as at December 31, 2020 to $245.7 million as at December 31, 2021 primary due to quarterly repayments and repayment due to ship sales. The weighted average effective interest rate on our outstanding debt increased marginally from 3.71% in 2020 to 3.82% in 2021. The increase in the weighted average effective interest rate was primarily due to the increase in LIBOR as a consequence of the rising inflation.
Income tax benefit (expense).
Income tax benefit (expense) for the year remained flat at and expense of $0.2 million for the year ended December 31, 2020 and a benefit of $0.1 million for the year ended December 31, 2021.
Profit (loss) for the year on continuing operations.
Our profit for the year ended December 31, 2020 increased to $132.6 million from a loss of $35.0 million for the year ended December 31, 2020 for the same reasons set forth above.
Loss for the year on discontinued operation.
Our loss for the year ended December 31, 2021 was $3.2 million compared to a loss of $6.1 million for the year ended December 31, 2020, primarily due to the impairment losses recognized on tankers of $11.1 million for the year ended December 31, 2020 compared to impairment losses recognized on the net disposal group of $2.6 million offset by a tax benefit of $2.7 million recognized on a previously reported legal case that was settled in our favor for the year ended December 31, 2021.
Continuing and Discontinued Operations
Profit (loss) for the year.
Our loss for the year ended December 31, 2021 increased to a profit of $129.5 million from a loss of $41.1 million for the year ended December 31, 2020 for the same reasons set forth above.
Non-GAAP Financial Measures
The financial information included in this annual report includes certain “non-GAAP financial measures” as such term is defined in SEC regulations governing the use of non-GAAP financial measures. Generally, a non-GAAP financial measure is a numerical measure of a company’s operating performance, financial position or cash flows that excludes or includes amounts that are included in, or excluded from, the most directly comparable measure calculated and presented in accordance with IFRS. For example, non-GAAP financial measures may exclude the impact of certain unique and/or non-operating items such as acquisitions, divestitures, restructuring charges, large write-offs or items outside of management’s control. Management believes that the non-GAAP financial measures described below provide investors and analysts useful insight into our financial position and operating performance.
TCE Revenue and TCE per day.
TCE revenue is defined as vessel revenue less voyage expenses. Such TCE revenue, divided by the number of our operating days during the period, is TCE per day. Vessel revenue and voyage expenses as reported for our operating segments include a proportionate share of vessel revenue and voyage expenses attributable to our joint ventures based on our proportionate ownership of the joint ventures for the period the joint venture existed during a relevant period. The number of operating days used to calculate TCE per day also includes the proportionate share of our joint ventures’ operating days for the period the joint venture existed during in a relevant period and also includes charter-in days.
TCE per day is a common shipping industry performance measure used primarily to compare daily earnings generated by vessels on time charters with daily earnings generated by vessels on voyage charters, because charter hire rates for vessels on voyage charters have to cover voyage costs and are generally not expressed in per-day amounts while charter hire rates for vessels on time charters do not cover voyage costs and generally are expressed in per day amounts.
Below is a reconciliation from revenue to TCE revenue for the years ended December 31, 2022, 2021, and 2020.
| | | Year Ended December 31, | |
| | | 2022 | | | 2021 | | | 2020 | |
(In thousands of U.S. dollars) | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Vessel revenue | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Handysize | | | 159,524 | | | | (30,683 | ) | | | 128,841 | | | | 157,707 | | | | (27,235 | ) | | | 130,472 | | | | 74,641 | | | | (30,995 | ) | | | 43,646 | |
| Supramax/ultramax | | | 268,352 | | | | (60,420 | ) | | | 207,932 | | | | 292,179 | | | | (69,600 | ) | | | 222,579 | | | | 124,352 | | | | (48,547 | ) | | | 75,805 | |
| Other | | | 2,082 | | | | | | | | | | | | 5,372 | | | | | | | | | | | | 5,463 | | | | | | | | | |
| Ship sale revenue | | | 29,981 | | | | | | | | | | | | - | | | | | | | | | | | | 5,178 | | | | | | | | | |
| Other revenue | | | 521 | | | | | | | | | | | | 581 | | | | | | | | | | | | 1,526 | | | | | | | | | |
| Adjustments (*) | | | - | | | | | | | | | | | | - | | | | | | | | | | | | (478 | ) | | | | | | | | |
| Revenue | | | 460,460 | | | | | | | | | | | | 455,839 | | | | | | | | | | | | 210,682 | | | | | | | | | |
| * | Vessel revenue earned and voyage expenses incurred by the joint-ventures are included within the operating segment information on a proportionate consolidation basis for the period the joint venture existed during the relevant period. Accordingly, joint-ventures’ proportionate financial information are adjusted out to reconcile to the consolidated financial statements. |
Vessel operating costs per day.
Vessel operating costs per day represents vessel operating costs divided by the number of calendar days for owned vessels during the period. The vessel operating costs and the number of calendar days used to calculate vessel operating costs per day includes the proportionate share of our joint ventures’ vessel operating costs and calendar days for the period the joint venture existed during the relevant period and excludes charter-in costs and charter-in days.
Vessel operating costs per day is a non-GAAP performance measure commonly used in the shipping industry to provide an understanding of the daily technical management costs relating to the running of owned vessels.
EBITDA and Adjusted EBITDA.
EBITDA is defined as earnings before income tax (expense) benefit, interest income, interest expense, share of losses of joint ventures and depreciation and amortization. Adjusted EBITDA is EBITDA adjusted to exclude the items set forth in the table below, which represent certain non-recurring, non-operating or other items that we believe are not indicative of the ongoing performance of our core operations.
EBITDA and Adjusted EBITDA are used by analysts in the shipping industry as common performance measures to compare results across peers. EBITDA and Adjusted EBITDA are not items recognized by IFRS, and should not be considered in isolation or used as alternatives to loss for the period or any other indicator of our operating performance.
Our presentation of EBITDA and Adjusted EBITDA is intended to supplement investors’ understanding of our operating performance by providing information regarding our ongoing performance that exclude items we believe do not directly affect our core operations and enhancing the comparability of our ongoing performance across periods. Our management considers EBITDA and Adjusted EBITDA to be useful to investors because such performance measures provide information regarding the profitability of our core operations and facilitate comparison of our operating performance to the operating performance of our peers. Additionally, our management uses EBITDA and Adjusted EBITDA as measures when reviewing our operating performance. While we believe these measures are useful to investors, the definitions of EBITDA and Adjusted EBITDA used by us may not be comparable to similar measures used by other companies.
The table below presents the reconciliation between profit (loss) for the year from continuing operations to EBITDA from continuing operations and Adjusted EBITDA from continuing operations for the years ended December 31, 2022, 2021 and 2020:
| | | Year Ended December 31, | |
(In thousands of U.S. dollars) | | 2022 | | | 2021 | | | 2020 | |
Profit (loss) for the period from continuing operations | | $ | 103,367 | | | $ | 132,647 | | | $ | (34,977 | ) |
| Adjusted for: | | | | | | | | | | | | |
| Income tax expense (benefit) | | | 757 | | | | (118 | ) | | | 189 | |
| Interest income | | | (2,228 | ) | | | (201 | ) | | | (467 | ) |
| Interest expense | | | 17,133 | | | | 12,298 | | | | 15,106 | |
| Share of losses of joint ventures | | | 5 | | | | 31 | | | | 2,476 | |
| Depreciation and amortization | | | 67,275 | | | | 61,919 | | | | 47,808 | |
| | | | | | | | | | | | | |
EBITDA from continuing operations | | $ | 186,309 | | | $ | 206,576 | | | $ | 30,135 | |
| | | | | | | | | | | | | |
| Adjusted for | | | | | | | | | | | | |
| (Reversal of) impairment loss recognized on ships | | | (1,707 | ) | | | (3,557 | ) | | | 5,148 | |
| Impairment loss (Reversal of) recognized on right-of-use assets | | | 985 | | | | (1,046 | ) | | | - | |
| Impairment loss recognized on goodwill and intangibles | | | - | | | | 965 | | | | - | |
| Share based compensation | | | 8,134 | | | | 3,330 | | | | 1,847 | |
| Secondary registration and offering related expenses | | | - | | | | 633 | | | | - | |
| Tender offer and related expenses | | | 10,307 | | | | - | | | | - | |
| | | | | | | | | | | | | |
ADJUSTED EBITDA from continuing operations | | $ | 204,028 | | | $ | 206,901 | | | $ | 37,130 | |
Adjusted net income (loss) and Adjusted Earnings (loss) per share
. Adjusted net income (loss) is defined as Profit (loss) for the period attributable to the owners of the Company adjusted for (reversal of) impairment loss recognized on ships, impairment loss recognized on goodwill and intangibles, impairment loss (reversal of) recognized on right-of-use assets, impairment loss on net disposal group, loss on disposal of business, share based compensation and non-recurring expenditure. Adjusted Earnings (loss) per share represents this figure divided by the weighted average number of ordinary shares outstanding for the period.
Adjusted net income (loss) is used by management for forecasting, making operational and strategic decisions, and evaluating current company performance. It is also one of the inputs used to calculate the variable amount that will be returned to shareholders in the form of quarterly dividends and/or share repurchases. Adjusted net income (loss) is not recognized by IFRS, and should not be considered in isolation or used as alternatives to profit (loss) for the period or any other indicator of our operating performance.
Our presentation of Adjusted net income (loss) is intended to supplement investors’ understanding of our operating performance by providing information regarding our ongoing performance that exclude items we believe do not directly affect our core operations and enhancing the comparability of our ongoing performance across periods. We consider Adjusted net income (loss) to be useful to management and investors because it eliminates items that are unrelated to the overall operating performance and that may vary significantly from period to period. Identifying these elements will facilitate comparison of our operating performance to the operating performance of our peers. The definitions of Adjusted net income (loss) used by us may not be comparable to similar measures used by other companies.
The table below presents the reconciliation between Profit (loss) for the period attributable to the owners of the Company for continuing operations to Adjusted net income (loss) for the years ended December 31, 2022, 2021 and 2020:
| | | Year Ended December 31, | |
(In thousands of U.S. dollars, other than per share data) | | 2022 | | | 2021 | | | 2020 | |
Profit (loss) for the period attributable to owners of the Company for continuing operations | | $ | 103,367 | | | $ | 122,090 | | | $ | (32,672 | ) |
| Adjusted for: | | | | | | | | | | | | |
| (Reversal of) impairment loss recognized on ships | | | (1,707 | ) | | | (3,557 | ) | | | 5,148 | |
| Impairment loss recognized on goodwill and intangibles | | | - | | | | 965 | | | | - | |
| Impairment loss (reversal of) recognized on right-of-use assets | | | 985 | | | | (1,046 | ) | | | - | |
| Share based compensation | | | 8,134 | | | | 3,330 | | | | 1,847 | |
| Secondary registration and offering related expenses | | | - | | | | 633 | | | | - | |
| Tender offer and related expenses | | | 10,307 | | | | - | | | | - | |
| | | | | | | | | | | | | |
Adjusted net income (loss) for continuing operations | | | 121,086 | | | | 122,415 | | | | (25,677 | ) |
| | | | | | | | | | | | | |
| Weighted average number of shares on which profit/(loss) per share has been calculated | | | 18,949,972 | | | | 19,150,787 | | | | 18,966,414 | |
| Effect of dilutive potential ordinary shares | | | - | | | | 861,168 | | | | - | |
| Weighted average number of ordinary shares for the purpose of calculating diluted profit/(loss) per share | | | 18,949,972 | | | | 20,011,955 | | | | 18,966,414 | |
| | | | | | | | | | | | | |
| Basic profit (loss) per share for continuing operations | | $ | 5.45 | | | $ | 6.38 | | | $ | (1.72 | ) |
| Diluted profit (loss) per share for continuing operations | | $ | 5.45 | | | $ | 6.10 | | | $ | (1.72 | ) |
| | | | | | | | | | | | | |
| Basic Adjusted earnings (loss) per share for continuing operations | | $ | 6.39 | | | $ | 6.39 | | | $ | (1.35 | ) |
| Diluted Adjusted earnings (loss) per share for continuing operations | | $ | 6.39 | | | $ | 6.12 | | | $ | (1.35 | ) |
Headline earnings (loss) and Headline earnings (loss) per share.
The JSE requires that we calculate and publicly disclose Headline earnings (loss) per share and diluted Headline earnings (loss) per share. Headline earnings (loss) per share is calculated using net income which has been determined based on IFRS. Accordingly, this may differ to the Headline earnings (loss) per share calculation of other companies listed on the JSE because such companies may report their financial results under a different financial reporting framework such as U.S. GAAP.
Headline earnings (loss) for the period represents Profit (loss) for the period attributable to owners of the Company adjusted for the re-measurements that are more closely aligned to the operating or trading results as set forth below, and Headline earnings (loss) per share represents this figure divided by the weighted average number of ordinary shares outstanding for the period.
The table below presents a reconciliation between Profit (loss) for the year to Headline earnings (loss) for the years ended December 31, 2022, 2021 and 2020:
| | | Year ended December 31, | |
(In thousands of U.S. dollars, other than per share data) | | 2022 | | | 2021 | | | 2020 | |
Profit (loss) for the period attributable to owners of the Company | | $ | 103,367 | | | $ | 118,925 | | | $ | (38,795 | ) |
| Adjusted for: | | | | | | | | | | | | |
| (Reversal of) impairment loss recognized on ships | | | (1,707 | ) | | | (3,557 | ) | | | 16,282 | |
| Impairment loss (reversal of) recognized on right-of-use assets | | | 985 | | | | (1,046 | ) | | | - | |
| Impairment loss recognized on goodwill and intangibles | | | - | | | | 965 | | | | - | |
| Impairment loss recognized on assets of disposal group | | | - | | | | 2,551 | | | | 576 | |
| Impairment loss recognized on office equipment, furniture and fittings and motor vehicles | | | - | | | | 1 | | | | 138 | |
| Loss on disposals of business | | | - | | | | 26 | | | | - | |
| Headline earnings (loss) | | $ | 102,645 | | | $ | 117,865 | | | $ | (21,799 | ) |
| | | | | | | | | | | | | |
| Weighted average number of shares on which profit (loss) per share has been calculated | | | 18,949,972 | | | | 19,150,787 | | | | 18,966,414 | |
| Effect of dilutive potential ordinary shares | | | - | | | | 861,168 | | | | - | |
| Weighted average number of ordinary shares for the purpose of calculating diluted profit (loss) per share | | | 18,949,972 | | | | 20,011,955 | | | | 18,966,414 | |
| | | | | | | | | | | | | |
| Basic profit (loss) per share | | $ | 5.45 | | | $ | 6.21 | | | $ | (2.05 | ) |
| Diluted profit (loss) per share | | $ | 5.45 | | | $ | 5.94 | | | $ | (2.05 | ) |
| | | | | | | | | | | | | |
| Basic headline earnings (loss) per share | | $ | 5.42 | | | $ | 6.15 | | | $ | (1.15 | ) |
| Diluted headline earnings (loss) per share | | $ | 5.42 | | | $ | 5.89 | | | $ | (1.15 | ) |
Liquidity and Capital Resources
We operate in a capital intensive industry. Our primary short-term liquidity needs relate to working capital requirements relating to voyages in progress, corporate overhead, payments of interest, quarterly principal payments under our credit facilities, dividend payments, share repurchases, exercising of purchase options in long-term charter contracts and any balloon payments on loans coming due in the next 12 months, while our long-term liquidity needs are expected to primarily relate to drydock payments, installment payments on new building construction contracts, investment in new and secondhand vessels, exercising of purchase options in long-term charter contracts and final balloon payments relating to our credit facilities. We anticipate that our primary sources of funds for our short-term liquidity needs will be cash flows from operations, which includes proceeds from the sale of vessels and borrowings. Generally, our long-term sources of funds will be from cash from operations, long-term borrowings and other debt or equity financings.
As of the date of this annual report, we have purchase options to acquire four vessels. We have options to purchase the
IVS Naruo
, the
IVS Hayakita
, the
IVS Pebble Beach
and the
IVS Atsugi
that have or are expected to first enter into the exercise periods under their respective charter parties in December 2020, November 2021, September 2021, September 2022 and January 2023 respectively. See “Item 4. Information on the Company—Business Overview—Our Fleet”. The prices of these purchase options range from approximately $13.6 million to $25.2 million, subject to exchange rates and adjustments, where an option is exercisable on more than one date, based on the remaining time balance of the charter. In each case, such purchase option is subject to certain other adjustments and conditions and will expire at the completion of the applicable time charter.
In 2021 we experienced a significant increase in demand for drybulk tonnage which, together with the reduced supply of new vessels into the market and increased port congestion, resulted in a strong spot market. These favourable conditions continued through the first half of 2022 and the increased earnings improved liquidity and strengthened our balance sheet providing us with sufficient free cash to pay dividends, repurchase shares, expand our Fleet and to reduce our debt obligation. On December 5, 2022, we paid a special dividend of $97.0 million in terms of the Transaction Implementation Agreement between ourselves and Taylor Maritime Investments Limited following a successful conclusion of the voluntary cash offer for all the issued ordinary shares of the company.
We manage liquidity risk by monitoring forecast and actual cash flows and ensuring that adequate borrowing facilities are maintained. Our management may, from time to time, at their discretion raise or borrow monies for our requirements as they deem fit. There are measures in place to preserve cash, maintain adequate financing to meet our obligations and comply with existing loan covenants imposed by the banks. The covenant levels are monitored continuously to identify any potential covenant issues so that solutions such as waivers or modifications to the loan covenants to obtain more favorable terms can be implemented in advance. We may seek to accomplish any of these independently or in conjunction with one or more of these actions. Based on the 12 months cash flow forecast prepared by management from the date of this annual report, our Board of Directors has no reason to believe that we will not continue as a going concern and has assessed that that there is no material uncertainty related to these conditions and there is no substantial doubt about our ability to continue as a going concern. We have plans in place to sell certain vessels, exercise certain purchase options, repay certain loans, protect existing covenants on term loans and maintain adequate liquidity.
The following table presents cash flow information for each of the years ended December 31, 2022, 2021 and 2020.
| | | Year Ended December 31, | |
(In thousands of U.S. dollars) | | 2022 | | | 2021 | | | 2020 | |
Net cash flows generated from operating activities (1) | | $ | 186,029 | | | $ | 204,852 | | | $ | 70,384 | |
| Net cash generated from (used in) investing activities | | | 98 | | | | 1,066 | | | | (22,559 | ) |
| Net cash flows from financing activities | | | (243,142 | ) | | | (139,076 | ) | | | (41,983 | ) |
Net (decrease) increase in cash and cash equivalents | | | (57,015 | ) | | | 66,842 | | | | 5,842 | |
| Cash and cash equivalents, beginning of year | | | 104,243 | | | | 37,942 | | | | 32,527 | |
| Effect of exchange rate changes on the balance of cash held in foreign currencies | | | (667 | ) | | | (541 | ) | | | (427 | ) |
Cash and cash equivalents, end of year | | $ | 46,561 | | | $ | 104,243 | | | $ | 37,942 | |
| (1) | Net cash flows generated from operating activities includes capital expenditure on ships of $9,306,000, $33,455,000 and $9,021,000 and proceeds from disposal of ships of $29,509,000, $47,819,000 and $40,366,000 for the years ended December 31, 2022, 2021 and 2020. |
Net cash flows generated from operating activities.
Net cash flows generated from operating activities was $186.0 million for the 12 months ended December 31, 2022, $204.9 million for the 12 months ended December 31, 2021 and $70.4 million for the 12 months ended December 31, 2020. Net cash flows generated from operating activities for the 12 months ended December 31, 2022 includes capital expenditure on vessels of $9.3 million and proceeds from vessel sales of $29.5 million. Net cash flows generated from operating activities for the 12 months ended December 31, 2021 includes capital expenditure on vessels of $33.5 million and proceeds from vessel sales of $47.8 million. Net cash flows generated from operating activities for the 12 months ended December 31, 2020 includes capital expenditure on vessels of $9.0 million and proceeds from vessel sales of $40.4 million.
Net cash flows generated from operating activities decreased by $18.9 million due to an inflow of $186.0 million for the year ended December 31, 2022 as compared to an inflow of $204.9 million for the year ended December 31, 2021, primarily due to a decrease in proceeds on the sale of ships of $18.3 million, a decrease in cash generated through operating activities of $12.6 million as a result of the decrease in operating days, negative movements in working capital of $11.2 million and an increase in interest paid of $2.9 million due to increasing interest rates, partially offset by an decrease in capital expenditure on vessels of $24.1 million and an increase in interest received of $1.6 million.
Net cash flows generated from operating activities increased by $134.5 million due to an inflow of $204.9 million for the year ended December 31, 2021 as compared to an inflow of $70.4 million for the year ended December 31, 2020, primarily due to an increase in cash generated through operating activities of $161.1 million as a result of the strong drybulk markets in 2021, an increase in proceeds on the sale of ships of $7.4 million and a decrease in interest paid of $3.3 million, partially offset by an increase in capital expenditure on vessels of $24.4 million and negative movements in working capital of $12.0 million.
Net cash generated from (used in) investing activities.
Net cash generated from (used in) investing activities was an inflow of $0.1 million for the 12 months ended December 31, 2022, an inflow of $1.1 million and an outflow of $22.6 million for the 12 months ended December 31, 2021 and 2020, respectively. Net cash generated from investing activities in the 12 months ended December 31, 2022 were relatively immaterial receipts from the sale of plant and equipment of $0.3 million that were offset by purchases of plant and equipment of $0.1 million and intangible assets of $0.1 million. Net cash generated from investing activities in the 12 months ended December 31, 2021 were relatively immaterial receipts from a joint venture loan of $0.8 million and dividends received from a joint venture of $0.2 million. Net cash used in investing activities in the 12 months ended December 31, 2020 was impacted by the acquisition of 33.25% of IVS Bulk (net of cash acquired) of $28.3 million, repayment of related parties of $2.1 million partially offset by the receipt of loan repayments from joint ventures of $5.1 million and the dividends and distributions from joint ventures of $3.1 million.
Net cash flows from investing activities decreased by $1.0 million for the 12 months ended December 31, 2022 compared to the 12 months ended December 31, 2021 primarily due to the repayment of joint venture loans of $0.8 million received in the prior year compared to net minor purchases and sales of plant and equipment in the current year. Net cash flows from investing activities increased by $23.6 million for the 12 months ended December 31, 2021 compared to the 12 months ended December 31, 2020 primarily due to the acquisition of a controlling interest in IVS Bulk of $28.3 million and a payment of $2.1 million to related parties in the 2020 year which was partially offset by the recovery of joint venture loans which decreased by $4.3 million and distributions received from joint ventures which decreased by $2.9 million.
Net cash flows (used in) generated from financing activities.
Net cash flows used in financing activities was an outflow of $243.1 million for the 12 months ended December 31, 2022, an outflow of $139.1 million for the 12 months ended December 31, 2021 and an outflow of $42.0 million for the 12 months ended December 31, 2020. Net cash flows used in financing activities in the 12 months ended December 31, 2022 was primarily impacted by the repayment of $49.9 million in existing debt, the repayment of $56.9 million in lease liabilities and dividends paid of $135.9 million. Net cash flows used in financing activities in the 12 months ended December 31, 2021 was primarily impacted by the repayment of $82.1 million in existing debt, the acquisition of the non-controlling interest in IVS Bulk of $46.6 million, the repayment of $36.0 million in lease liabilities, dividends paid of $13.6 million and the acquisition of treasury shares of $11.9 million, offset by a net inflow of $48.0 million from the incurrence of new debt and the release of restricted cash of $3.1 million,. Net cash flows used in financing activities in the 12 months ended December 31, 2020 was primarily impacted by $74.9 million repayment of existing debt (including repayment of debt as a result of ship sales) and $28.0 million repayment of lease liabilities, offset by a net inflow of $60.7 million from the incurrence of new debt.
Net cash flows used in financing activities increased by $104.1 million from an outflow of $139.1 million for the year ended December 31, 2021 to an outflow of $243.1 million for the year ended December 31, 2022 primarily due increased dividend payments of $122.3 million, a decrease in the long-term interest bearing debt raised of $48.0 million and an increase in the repayments on lease liabilities of $20.9 million, partially offset by a decrease in the acquisition of the non-controlling interest in IVS Bulk of $46.6 million, the acquisition of treasury shares in 2021 of $11.9 million, and a decrease in the repayment of the principal portion of long-term interest-bearing debt of $32.3 million.
Net cash flows used in financing activities increased by $97.1 million from an outflow of $42.0 million for the year ended December 31, 2020 to an outflow of $139.1 million for the year ended December 31, 2021 primarily due to the acquisition of the non-controlling interest in IVS Bulk of $46.6 million, a dividend payment of $13.5 million, the acquisition of treasury shares of $11.9 million, a decrease in the long-term interest bearing debt raised of $12.7, an increase in the repayment of the principal portion of long-term interest-bearing debt of $7.2 million and an increase in the repayments on lease liabilities of $8.1 million, partially offset by a reduction in restricted cash of $3.1 million.
Restricted cash
. The above cash flow figures in this “Cash Flow Discussion” exclude restricted cash of $10.0
million which is pledged to certain banks to secure loans and other credit facilities. As of December 31, 2022, we had cash and bank balances (including restricted cash) of $56.6 million.
We make capital expenditures from time to time in connection with drydocking activities and maintenance in the ordinary course and in order to comply with environmental and other governmental regulations and in connection with our vessel acquisitions. We may in the future enter into newbuilding contracts or contracts to acquire newbuildings, or resale contracts, or to acquire second hand vessels.
On May 17, 2021, we repaid the full remaining balance of $25.8 million of the $35.8 million senior secured credit facility previously entered into in connection with our February 2020 acquisition of shares in IVS Bulk. The facility was repaid in full and the security under the facility was released.
On September 1, 2021, we acquired the remaining ordinary shares in IVS Bulk for a total purchase consideration of $37.2 million as discussed above under “Item 4. Information on the Company—Our Joint Ventures”. IVS Bulk concurrently redeemed in full $27.3 million preferred share capital using available cash in the IVS Bulk structure. The Company received $18.2 million from the redemption and Sankaty received $9.1 million.
On September 16, 2021, the Company completed the acquisition of the 2019 Japanese-built ultramax bulk carrier
IVS Phoenix
for $23.5 million and the concurrent financing for $25.0 million.
On May 10, 2022, we exercised the purchase option on the chartered-in 2015-built supramax bulk carrier,
IVS Pinehurst
, for an amount of $18.0 million with delivery planned on or about June 18, 2022. The vessel will remain chartered-in at her original contract rate until delivery to us.
In addition to acquisitions that we may undertake in future periods, we will incur additional expenditures due to drydockings for our Fleet. The location of the drydock will be decided when the vessel is scheduled to drydock. We estimate our drydocking costs, including capitalized costs incurred during drydocking related to vessels and vessel equipment, and scheduled off-hire days for our Fleet through 2023 and 2024 to be:
Year | | | Estimated
Drydocking
Cost | | | Estimated
Off-hire Days |
| | | | (U.S. dollars) | | | |
| 2023 | | $ | 10.8 million | | | 220.00 days |
| 2024 | | $ | 8.1 million | | | 180.00 days |
Actual costs will vary based on various factors, including where the drydockings are actually performed. We expect to fund these costs with cash from operations. These costs do not include drydock expense items that are reflected in vessel operating costs or costs associated with the installation of ballast water treatment systems.
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.
For the years ended December 31, 2022, 2021 and 2020, we incurred a total of $7.2 million, $8.8 million, and $8.6 million of drydocking costs, respectively, excluding costs incurred during drydocking that were capitalized to vessel assets or vessel equipment.
During 2022, eight of our vessels completed their scheduled drydockings. We estimate that 12 of our vessels will be drydocked in 2023 and 10 of our vessels will be drydocked in 2024.
Description of Indebtedness
Below is a summary of our significant debt obligations.
$100.0 Million Senior Secured Credit Facility
On May 8, 2018, GSPL entered into a $100.0 million senior secured credit facility with Crédit Agricole Corporate and Investment Bank, DVB Bank SE Singapore Branch and Standard Chartered Bank, Singapore Branch originally relating to 11 handysize drybulk carriers and five tankers, and now relating to six remaining vessels. The facility bears interest at LIBOR plus a margin of 2.95% per annum. The facility is made up of two tranches (A and B) of up to $10.0 million and up to $90.0 million respectively. Tranche A matures on May 15, 2022 and Tranche B matures on May 15, 2023. The facility is secured by, among other things (a) first priority mortgages over each of the remaining vessels, each owned by a subsidiary of GSPL, (b) a guarantee from each of the GSPL subsidiaries owning the remaining six vessels, as well as Grindrod Shipping, and (c) security over the shares in the GSPL subsidiaries owning the remaining six vessels. On December 14, 2018, GSPL, as borrower, and Grindrod Shipping, as corporate guarantor and the subsidiaries owning the vessels, as owner guarantors, entered into a side letter to, among other things, release the proceeds of the sale of
IVS Kanda
from a collateral account under the facility, and amend certain terms of the credit facility relating to mandatory prepayments with the proceeds of a sale of a vessel and the minimum required security cover. On June 28, 2019, GSPL, as borrower, Grindrod Shipping, as corporate guarantor and the subsidiaries owning the vessels, as owner guarantors, entered into a second side letter to amend the minimum book value net worth covenant and introduce a new working capital covenant as set out further in “—Loan Covenants” below, and clarify the calculations of the covenants following the implementation of IFRS16. On April 16, 2020, the parties to the facility agreement entered into further amendments the purpose of which was to amend the definitions of consolidated current assets and consolidated current liabilities for purposes of the working capital covenant, such that the determination of the consolidated current assets and consolidated current liabilities of Grindrod Shipping excludes any adjustments made for IFRS 16. On December 31, 2020, the parties to the facility agreement entered into further amendments the purpose of which was to provide relief on the book value net worth covenant, the debt to market adjusted tangible fixed asset ratio and the working capital covenant as set out further in “—Loan Covenants” below. On June 7, 2021, the parties to the facility agreement entered into further amendments the purpose of which was to acknowledge the change of lenders from DVB Bank SE Singapore Branch and Standard Chartered Bank, Singapore Branch to NIBC Bank N.V. and to amend the book value net worth covenant as set out further in “—Loan Covenants” below. The covenants applicable to this facility are the same as the covenants that apply to the $29.9 million senior secured credit facility described below. As of December 31, 2022, $10.1 million was outstanding on this facility.
$114.1 Million Senior Secured Credit Facility (increased to $120.0 Million)
On February 10, 2020, Grindrod Shipping and IVS Bulk, as joint and several borrowers, entered into a $114.1 million senior secured term loan facility with Credit Agricole Corporate and Investment Bank and Hamburg Commercial Bank AG relating to all of the vessels owned by the subsidiaries of IVS Bulk, other than the
IVS North Berwick
, being a total of 11 drybulk vessels. The facility was drawn in full on February 13, 2020, for the purpose of refinancing the existing indebtedness of the IVS Bulk subsidiaries, other than the subsidiary that owns the
IVS North Berwick
, refinancing other indebtedness of IVS Bulk and for general corporate purposes. The facility bears interest at LIBOR plus a margin of 3.10% per annum and matures on February 13, 2025. The facility is secured by, among other things, (a) first priority mortgage over each of the 11 vessels owned by IVS Bulk’s subsidiaries other than the
IVS North Berwick
, (b) a guarantee from each of the IVS Bulk subsidiaries other than the subsidiary that owns the
IVS North Berwick
, and (c) security over the shares in the IVS Bulk subsidiaries other than the subsidiary owning the
IVS North Berwick
. Grindrod Shipping has provided an undertaking to Sankaty, the other shareholder in IVS Bulk, that Grindrod Shipping will not directly borrow under this facility, and to the extent Grindrod Shipping has not borrowed under this facility but are nevertheless required, as a joint and several borrower, to make payments to the lenders, Sankaty has provided Grindrod Shipping with an indemnity for its share of such payment, so that as between us and Sankaty the net payment is borne in proportion to each of our shareholding in IVS Bulk. On December 29, 2020, the parties to the facility agreement entered into an amendment the purpose of which was to provide relief on the book value net worth covenant, the debt to market adjusted tangible fixed asset ratio and the working capital covenant as set out further in “—Loan Covenants” below. On September 10, 2021, the parties to the facility agreement entered into an amendment and restatement agreement the purpose of which was to increase the size of the facility to $120.0 million (increasing the amount then available for drawdown by $23.0 million). The covenants applicable to this facility are the same as the covenants that apply to the $100.0 million senior secured credit facility described above. As of December 31, 2022, $102.5 million was outstanding on this facility.
$13.1 Million Senior Secured Credit Facility
On January 31, 2020, IVS Bulk and its subsidiary that owns the drybulk vessel the
IVS North Berwick
entered into a $13.1 million senior secured term loan facility with Showa Leasing Co., Ltd. relating to the
IVS North Berwick
. The facility was drawn in full on February 13, 2020, the proceeds of which were used primarily to refinance the existing indebtedness of the IVS Bulk subsidiary that owns the
IVS North Berwick
. The facility bears interest at LIBOR plus a margin of 2.75% per annum and matures on February 13, 2025. The facility is secured by, among other things (a) first priority mortgage over the
IVS North Berwick
, (b) a guarantee from IVS Bulk, and (c) security over the shares in the IVS Bulk subsidiary owning the
IVS North Berwick
. As of December 31, 2022, $10.2 million was outstanding on this facility.
Combined $31.4 Million Senior Secured Credit Facility
On July 29, 2019, each of the subsidiaries owning
IVS Okudogo
and
IVS Prestwick
, entered into a separate term loan facility, as borrower, with The IYO Bank, each for an amount up to approximately $15.7 million, the proceeds of which were used to finance a portion of the purchase price of
IVS Okudogo
on her delivery on August 8, 2019, and of
IVS Prestwick
, on her delivery on September 26, 2019, respectively. Grindrod Shipping is a party, as guarantor, to each of these agreements. On August 27, 2019, the respective parties to each of these two facilities entered into an addendum to the relevant facility agreement, in each case to clarify matters relating to the balloon payment. The facilities each have a seven-year term, are repayable in quarterly installments with a balloon payment at the end of the repayment schedule, bear interest at a rate of LIBOR plus 2.00% per annum and are secured by, amongst other security, a mortgage over the relevant vessel and, in each case, a mortgage over the vessel
IVS Ibis
and a guarantee by Grindrod Shipping. As of December 31, 2022, a total of $24.7 million was outstanding on these facilities.
GSPL has other borrowings that relate to $64.0 million in financing arrangements entered into with third parties with respect to four of the vessels we regard as owned, namely
IVS Knot
,
IVS Kinglet
,
IVS Magpie
and
IVS Phoenix
. The arrangements commenced on June 26, 2019, September 19, 2019, November 20, 2019 and September 16, 2021, respectively, the loans are payable monthly in advance and bear interest at a rate of LIBOR plus 1.7% per annum and LIBOR plus 1.75%. The loans mature on June 25, 2030, October 18, 2031, November 19, 2031 and August 16, 2036. As of December 31, 2022, the outstanding balances in relation to these borrowings was $51.0 million.
On June 28, 2019, the parties to the relevant agreements entered into amendments to our $100.0 million senior secured credit facility, the purpose of which was to lower the amount of the minimum book value net worth covenant, introduce a new working capital covenant and clarify, for purposes of calculating financial covenants, the treatment of assets and liabilities that has been reflected in our financial statements from January 1, 2019 as a consequence of the adoption of IFRS 16. On April 16, 2020, the parties to the relevant agreements entered into further amendments to our $100.0 million senior secured credit facility, the purpose of which was to amend the definitions of consolidated current assets and consolidated current liabilities for purposes of the working capital covenant described below, in each case such that the determination of the consolidated current assets and consolidated current liabilities of Grindrod Shipping excludes any adjustments made for IFRS 16. Further, in respect of these facilities, the lenders agreed to the following covenant amendments during 2020:
| • | the reduction of the cash covenant to be tested as at June 30, 2020 and September 30, 2020 from $30 million to $20 million; and |
| • | the determination of current liabilities will exclude the amount owed under the $35.8 million senior secured credit facility for purposes of testing, as at June 30, 2020 and September 30, 2020, the covenant that requires our current assets to exceed our current liabilities. |
On December 29, 2020 and December 31, 2020, the parties to the relevant agreements entered into further amendments to our $114.1 million senior secured credit facility and our $100.0 million senior secured credit facility, respectively, in which the lenders agreed to the following covenant amendments:
| • | the book value net worth for the purposes of testing, as at December 31, 2020 shall not be lower than US$225 million; |
| • | the ratio of debt to market adjusted tangible fixed assets for the purposes of testing, as at December 31, 2020 shall be not more than 80%; |
| • | the determination of current liabilities shall exclude the amount owed to the $35.8 million senior secured credit facility for purposes of testing, as at December 31, 2020, the working capital covenant that requires our current assets to exceed our current liabilities. |
On December 29, 2020 and June 7, 2021, the parties to the relevant agreements entered into further amendments to our $114.1 million senior secured credit facility and our $100.0 million senior secured credit facility, respectively, in which the lenders agreed to the following covenant amendments:
| • | the book value net worth for the purposes of testing, as at January 1, 2021 and thereafter shall not be lower than US$200 million; |
On September 10, 2021, the parties to the relevant agreements entered into an amendment and restatement agreement to our $114.1 million senior secured credit facility to increase the amount of the facility and as the IVS Bulk group was 100% owned by the Group, to remove the financial covenant requirement for the consolidated group of IVS Bulk and its subsidiaries.
The $114.1 million senior secured credit facility and the $100.0 million senior secured credit facility described above contain, among other conditions and obligations, the following amended financial covenants the most stringent of which require us and our subsidiaries, to maintain on a consolidated basis:
| • | book value net worth of the lower of (a) the aggregate of $200 million from January 1, 2021 thereafter plus 25% of the amount of positive retained earnings plus 50% of each capital raise and (b) $275 million. For purposes of the forgoing, “positive retained earnings” means the positive retained earnings of Grindrod Shipping and its subsidiaries on a consolidated basis tested bi-annually at each June 30 and December 31, and “capital raise” means the dollar amount (or equivalent amount in dollars) of the proceeds of any equity capital raised by Grindrod Shipping (without giving effect to any capital raised by its subsidiaries), as evidenced in the latest accounts as of each June 30 or December 31; |
| • | cash and cash equivalents (which may, depending on the facility, include cash restricted in certain security accounts) of not less than $30 million; |
| • | a ratio of debt to market adjusted tangible fixed assets of not more than 75%. For purposes of the foregoing, the definition of “debt” excludes lease obligations recognized under IFRS 16 and the definition of “tangible fixed assets” excludes right-of-use assets relating to ships; and |
| • | positive working capital, such that consolidated current assets (excluding any adjustments made for IFRS 16) must exceed the consolidated current liabilities (excluding any adjustments for IFRS 16) as evidenced in the latest accounts as of each June 30 and December 31. |
Further, the credit facilities referred to above contained provisions requiring a minimum value of the collateral for each relevant facility, such that the aggregate fair market value of the vessels securing the relevant facility plus any additional security securing that facility divided by the relevant debt amount results in at least a specified minimum amount (depending on the relevant facility agreement and the type and age of the vessels securing the loan), with the relevant minimum amount ranging between 125% and 145%.
The credit facilities referred to above also contain, among other conditions, restrictive covenants which could or would restrict our ability, amongst other restrictions, to:
| • | incur additional indebtedness on the relevant vessels securing that facility; |
| • | sell any collateral vessel (unless a corresponding amount under the relevant facility were prepaid in accordance with its terms); |
| • | upon the happening of an event of default or potential event of default, make additional investments or acquisitions; |
| • | upon the happening of an event of default or potential event of default, pay dividends; or |
| • | effect a change of ownership or control of the relevant borrower group under each facility. |
A violation of any of the financial or restrictive covenants, or various other provisions, contained in the credit facilities described above and under “—Off-Balance Sheet Arrangements” below may constitute an event of default under the relevant credit facility, which, unless cured (if permitted, and capable of being cured), or waived or modified by the relevant banks, provides those banks with the right to, among other things (and as the case may be), require the relevant borrowers or other obligors to post additional collateral, enhance their equity and liquidity, increase the interest payable, pay down the relevant indebtedness to a level where compliance with relevant loan covenants are met, sell vessels, reclassify indebtedness as current liabilities, accelerate indebtedness, enforce security on fleet vessels and the other assets securing the credit facilities, and make demand under guarantees, which would impair our ability to continue to conduct our business.
Furthermore, the credit facilities contain cross-default provisions. A cross-default provision in one facility means that an event of default under one or more other facilities could, subject to any applicable thresholds, result in an event of default occurring under the first facility. Because of the presence of cross-default provisions in the facilities, the refusal of the lenders under any credit facilities to grant or extend a waiver could result in certain indebtedness being accelerated, even if the other lenders under the other credit facilities have waived defaults under their respective credit facilities. If any of our secured indebtedness is accelerated in full or in part, it could be difficult in the current financing environment for us to refinance the relevant debt or obtain additional financing in such circumstances and we could lose vessels and other assets securing the credit facilities if the lenders foreclose their security, which would adversely affect our ability to conduct our business.
Moreover, in connection with any waivers of or amendments to the credit facilities that have been obtained, or may be obtained in the future, the banks may impose additional operating and financial restrictions or modify the terms of the existing credit facilities. These restrictions may further restrict our ability to, among other things, pay dividends, make capital expenditures or incur additional indebtedness, including through the issuance of guarantees. In addition, the banks may require the payment of additional fees, require prepayment of a portion of the indebtedness owed to them, accelerate the amortization schedule for facility indebtedness and increase the interest rates charged on outstanding indebtedness.
As of December 31, 2022, Grindrod Shipping, GSPL, the borrowers and the other GSPL subsidiaries were in compliance with all of the financial and restrictive covenants contained in our credit facilities.
See Note 25 to our consolidated financial statements for further details regarding the credit facilities.
Our results of operations depend primarily on the charter hire rates that we are able to realize for our vessels, which depend on demand and supply dynamics characterizing the drybulk market at any given time. For other trends affecting our business, please see other discussions under “—Factors Affecting our Results of Operations and Financial Condition” above.
Off Balance Sheet Arrangements
We are committed to make certain charter hire payments to third parties for chartered-in vessels. IFRS 16 requires us to recognize, on a discounted basis, the rights and obligations created by the commitment to lease assets on the balance sheet. Leases with term of lease less than 12 months or of low value would be considered as off balance sheet arrangements.
Please see “—Contractual Obligations and Contingencies” below for these and our other contractual obligations and commitments.
Contractual Obligations and Contingencies
Our contractual obligations and commercial commitments consist primarily of long-term debt, time charter agreements, capital expenditure on vessels and, from time to time, newbuilding commitments.
The following table summarizes our contractual obligations as of December 31, 2022:
| | | Payments Due by Period | |
(In thousands of U.S. dollars) | | Total | | | Less Than
1 Year | | | 1–3 Years | | | 3–5 Years | | | More than
5 Years | |
| Secured bank loans and other borrowings (1) | | | 198,968 | | | | 33,330 | | | | 110,744 | | | | 28,065 | | | | 26,829 | |
| Interest on secured bank loans and other borrowings (2) | | | 41,546 | | | | 11,925 | | | | 17,248 | | | | 5,293 | | | | 7,080 | |
| Capital expenditure on vessels (1) | | | 1,399 | | | | 1,399 | | | | - | | | | - | | | | - | |
| Lease liabilities (3) | | | 26,113 | | | | 22,058 | | | | 4,055 | | | | - | | | | - | |
| Total contractual obligations | | | 268,026 | | | | 68,712 | | | | 132,047 | | | | 33,358 | | | | 33,909 | |
| (1) | These obligations are disclosed in Notes 25 and 43 of the consolidated financial statements. |
| (2) | Interest is based on LIBOR assumption of 4.6% per annum for secured bank loans and other borrowings. |
| (3) | Include obligations under certain time charter agreements. Please see Note 24 of the consolidated financial statements. |
Recent Accounting Pronouncements
From January 1, 2023, we applied a number of new IFRSs and amendments to IFRSs issued by the IASB that are mandatorily effective for an accounting period that begins on or after January 1, 2023. The adoption of these new and revised IFRSs has not resulted in significant changes to our accounting policies and has no material effect on the amounts reported for the current or prior periods.
ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
The table below details the names of, and information about, the directors of Grindrod Shipping. At our next annual general meeting, Ms. Brosnan, Messrs Klemme, Buttery, French, Hatton, Maltby and Schaar will retire from office pursuant to Regulation 106 of the Constitution of the Company and will be eligible to and, we expect, will stand for re-election.
Name | | Age | | Position | | Term Expires |
| Rebecca Brosnan (1) | | 43 | | Director | | Next Annual General Meeting, by rotation |
| Edward Buttery (1) | | 38 | | Director | | Next Annual General Meeting, by rotation |
| Gordon French (1) | | 58 | | Director | | Next Annual General Meeting, by rotation |
| Alan Hatton (1) | | 45 | | Director | | Next Annual General Meeting, by rotation |
| Charles Maltby (1) | | 51 | | Director | | Next Annual General Meeting, by rotation |
| Kurt Klemme (1) | | 54 | | Director | | Next Annual General Meeting, by rotation |
| Cullen Schaar (1) | | 39 | | Director | | Next Annual General Meeting, by rotation |
| Paul Over (2) | | 66 | | Director | | Next Annual General Meeting, by rotation |
| Stephen Griffiths (3) | | 62 | | Director | | Will retire effective on March 31, 2023 |
| John Herholdt (4) | | 74 | | Director | | Will retire effective on March 31, 2023 |
| Quah Ban Huat (4) | | 56 | | Director | | Will retire effective on March 31, 2023 |
| Murray Grindrod (4) | | 55 | | Director | | Resigned effective on December 6, 2022 |
| Michael Hankinson (4) | | 73 | | Director | | Resigned effective on December 6, 2022 |
| Martyn Wade (5) | | 63 | | Director | | Retired effective on April 30, 2022 |
| | | | | | | |
| (1) | Ms. Brosnan, Messrs Buttery, Klemme, Maltby and Schaar were appointed by the Directors of the Company on December 6, 2022. Mr. Alan Hatton and Mr. Gordon French were appointed by the Directors of the Company on December 14, 2022 and March 20, 2023 respectively. Collectively, all of the seven new Non-executive directors shall hold office only until the next Annual General Meeting. They are all required to retire at the Annual General Meeting of the Company pursuant to Regulation 106 of the Constitution and shall be eligible for re-election but shall not be taken into account in determining the number of Directors who are to retire by rotation at such meeting. |
| (2) | At each Annual General Meeting subsequent to the first Annual General Meeting, one-third of the directors for the time being (or, if their number is not a multiple of three the number nearest to one-third) shall retire from office by rotation. The directors to retire in every year shall be those, subject to retirement by rotation, who have been longest in office since their last re-election or appointment and so that as between persons who became or were last re-elected directors on the same day, those to retire shall (unless they otherwise agree among themselves) be determined by lot. A retiring director shall be eligible for re-election. Mr. Paul Over will retire by rotation pursuant to Regulation 101 of the Company’s Constitution in the next Annual General Meeting. |
| (3) | Mr. Stephen Griffiths will retire as Chief Financial Officer & Interim Chief Executive Offer effective on March 31, 2023 as he plans to relocate to United Kingdom. Mr. Griffiths will also retire from his board position in the Company. |
| (4) | Messrs Herholdt and Quah will retire on March 31, 2023 and relinquish their respective positions as Chairman of the Compensation and Nomination Committee and Chairman of the Audit and Risk Committee. Messrs Michael John Hankinson and Murray Paul Grindrod both resigned on December 6, 2022 pursuant to the Transaction Implementation Agreement with Taylor Maritime Investments Ltd. |
| (5) | Mr. Martyn Wade retired as Chief Executive Officer of the Company effective on April 30, 2022. |
Rebecca Brosnan
has served as a member of our board of directors since December 6, 2022 and is a member of the Audit and Risk Committee. Ms. Brosnan has over 20 years of experience in investment banking, financial markets, commodities and is currently the Chief Financial Officer & Head of Strategy of Diginex, an ESG and sustainability technology business and serves as the IFC Nominated Director on the Board of the City Bank, a listed commercial bank in Bangladesh. Previously, Ms. Brosnan was the COO & CFO of Mother’s Choice and Head of Asia Commodities and Head of Strategy at the Hong Kong Stock Exchange.
Edward Buttery
has served as a member of our board of directors and as a member of the Compensation and Nomination Committee since December 6, 2022. Mr. Buttery will relinquish his position as a Compensation and Nomination Committee member and will be appointed as the new Chief Executive Officer of the Company effective on April 1, 2023. Mr. Buttery is the Founder, Chief Executive Officer and Executive Director of Taylor Maritime Investments Limited and has extensive experience in the shipping and maritime finance fields over the last 17 years. Prior to Taylor, Mr. Buttery was a Chartering Manager at Pacific Basin, Deputy COO of Asia Maritime Pacific, and a member of the ship finance team at Nordea Bank.
Gordon French
has served as a member of our board of directors since March 20, 2023 and is a member of the Audit and Risk Committee. Mr. French will be appointed as the new Audit and Risk Committee Chairman effective on April 1, 2023. Mr. French was the Head of Global Banking and Markets for Asia-Pacific at HSBC based in Hong Kong responsible for all Global Banking and Market’s businesses in the region: Global Banking, Global Markets, Securities Services, Global Liquidity and Cash Management and Balance Sheet Management.
Having served 33 years, Mr. French retired from his role at HSBC at the end of 2020.
He represented HSBC on various regulatory and exchange committees and he was also the inaugural Chairman of HSBC Bank (Singapore) Limited from April 2016 to June 2017.
Stephen Griffiths
has served as a member of our board of directors and as our Chief Financial Officer since November 7, 2017 and also served as Interim Chief Executive Officer since April, 1 2022. He has also served as our Chief Financial Officer of Former Parent’s shipping business from April 2009 until the Spin-Off. Mr. Griffiths joined Grindrod Limited in 2004 as Group Finance Manager. Previously, Mr. Griffiths worked for the Reunert Group from 1989 to 2003 in financial management roles. Mr. Griffiths qualified as a Chartered Accountant (South Africa) in 1985 and completed his articles at Hudson, Langham, Morrison and Co. Mr. Griffiths will retire from the board and as Chief Financial Officer and Interim Chief Executive Officer on March 31, 2023.
Alan Hatton
has served as a member of our board of directors since December 14, 2022. Mr. Hatton has over 15 years of leadership experience in the maritime industry and is currently the Managing Director of Foreguard Shipping, a privately-owned ship owner and operator of vessels in the chemical, offshore and gas sectors. Mr. Hatton started his career as an M&A banker at DrKW and Lazard and subsequently held CEO positions at publicly listed and private ship owning and operating companies.
John Herholdt
has served as a member of our board of directors since November 6, 2017 and is the Chairman of the Compensation and Nomination Committee. Mr. Herholdt will retire on March 31, 2023 and relinquish both his positions as board member and Chairman of the Compensation and Nomination Committee. Between 2012 and 2015, Mr. Herholdt consulted the Maitland Group. From 1987 to 2012 Mr. Herholdt served as a London based senior partner of the Maitland Group with offices in Europe, South Africa, North America and elsewhere. He also served as a Director on the boards of several of its subsidiaries. The London office of Shepstone and Wylie was established by Mr. Herholdt in 1985 and in 1987 merged the Shepstone and Wylie operation with that of Maitlands, then the offshore arm of the South African law firm Webber Wentzel. He remained associated with Shepstone and Wylie until 2012. In 1984, Mr. Herholdt joined the South African law firm Shepstone and Wylie as a senior partner in the maritime department, acting primarily for vessel owners and P&I Clubs. In 1979, Mr. Herholdt was appointed a Director of Leo Raphaely and Sons, an international commodity trading firm. From 1972 to 1979, Mr. Herholdt was a partner of the law firm Goodrickes and specialized in maritime and commodities law. His responsibilities included all maritime and commodity issues, as well as, legal, commercial, and tax matters. Mr. Herholdt obtained his Bachelor of Arts in Law Degree in 1969 and his Bachelor of Laws degree in 1971, and was admitted as an attorney of the Supreme Court of South Africa in 1972.
Kurt Klemme
has served as a member of our board of directors since December 6, 2022 and is the Chairman of the Board of Directors, member of the Audit and Risk Committee and member of the Compensation and Nomination Committee. Dr. Klemme has nearly 25 years of experience in the shipping industry and is presently the Managing Director of Reederei Nord GmbH Germany and Group Managing Director of the international Reederei Nord Holdings. He has worked in a variety of leadership positions with the group during the past 20 years. Currently, he is also Chairman of the German Shipowners’ Defence Association.
Charles Maltby
has served as a member of our board of directors since December 6, 2022 and is a member of the Compensation and Nomination Committee. Mr. Maltby has over 20 years of experience in the shipping industry and is currently the Chief Executive Officer of BW Epic Kosan, which is the world’s leading owner and operator of modern high-quality fully pressurised, semi-refrigerated, and ethylene capable gas carriers. Prior to that, Mr. Maltby held leadership positions at Pacific Basin and the transportation divisions of BHP Billiton.
Quah Ban Huat
has served as a member of our board of directors since November 2, 2017 and is the Chairman of the Audit and Risk Committee. Mr. Quah will retire on March 31, 2023 and relinquish both his positions as board member and Chairman of the Audit and Risk Committee. He is a principal advisor at KPMG Corporate Finance and specializes in mergers & acquisitions, structuring and financing. In addition, he is also a director of Samudera Shipping Line Ltd and Primeur Holdings Pte. Ltd. and its subsidiary. Prior to that, Mr. Quah served as a director on the boards of AP Oil International from 2010 to 2021, mDR Ltd from 2014 to 2017 and Croesus Asset Management Pte. Ltd. (the trustee manager of Croesus Retail Trust) from 2012 to 2017. Prior to this he held various key finance positions including Regional Business Area Controller at Deutsche Bank for its Asia Pacific Money Markets and Treasury operations, Group Finance Director at the IMC Group, Chief Financial Officer at City Gas Pte. Ltd. and Rickmers Trust Management Pte. Ltd. (the trustee manager of Rickmers Maritime Trust). Mr. Quah qualified as an accountant with the Institute of Chartered Accountants of England and Wales and the Association of Certified Chartered Accountants. He completed his articles with Benjamin Taylor & Co and was a manager at the banking division of Coopers and Lybrand prior to joining Deutsche Bank in London.
Paul Over
has served as a member of our board of directors since February 17, 2022 and is based in Hong Kong. Paul Over joined the London shipbroking company of Eggar Forrester Ltd in 1976 after being at sea with Kristian Jebsen A/S. He then joined Jardine, Matheson & Co., Limited, working first for their London based shipbroking company, Howe Robinson, before transferring to Hong Kong in 1980 to the ship owning division of the group. He left Jardines in 1984 to join the Continental Grain Company in Hong Kong where he was responsible for their Far East and Australian freight activities. Mr. Over joined Pacific Basin on its inception in 1987 as a founder and subsequent COO of the listed entity before retiring from that position in 2007. He held positions as independent non-executive director within the Baltic Exchange as a Director, Vice Chairman of the main company and as Chairman of its Freight Futures subsidiary Baltic Exchange Derivatives Trading Ltd. He also held independent non-executive director positions with Carisbrooke Shipping Ltd., Runciman Investments Ltd., Epic Gas Pte. Ltd. and the London P&I Club and has retired as a non-executive director of Asia Maritime Pacific of Hong Kong. He is currently an independent non-executive director of Taylor Maritime (HK) Ltd as well as being a current member of the Owners Board of the UK P&I Club.
Cullen Schaar
has served as a member of our board of directors since December 6, 2022 and is a member of the Compensation and Nomination Committee since February 10, 2023. Mr. Schaar will be appointed as the new Compensation and Nomination Committee Chairman effective on April 1, 2023. Mr. Schaar has over 15 years of experience investing in the maritime industry and is a private investor in the finance, energy, and transportation sectors. Prior to that, Mr. Schaar was President of Indigena Capital LP, Interim Chief Financial Officer and Director of Epic Gas Ltd, and an investment professional at Jefferies Financial Group, Inc.
The table below details the names of, and information about, the individuals who serve as Executive Officers:
Name | | Age | | Position |
| Stephen Griffiths (1) | | 62 | | Chief Financial Officer and Interim Chief Executive Officer |
| (1) | Stephen Griffiths will retire effective March 31, 2023. On April 1, 2023 he will be succeeded by Edward Buttery as Chief Executive Officer and Deborah Davel as Chief Financial Officer. |
The business address of the persons noted above is Grindrod Shipping’s executive office at #03-01 Southpoint, 200 Cantonment Road, Singapore 089763.
Compensation of Directors and Senior Management
We paid an aggregate cash compensation of $25,7 million to our Executive Officers and non-executive directors in 2022. For the year ended December 31, 2022, each non-executive director, other than the chairman of the board, was compensated with a fee of $85,000 for his or her services as one of our directors and an additional fee of $40,000 for his or her services as chairman of one of the board committees or an additional fee of $20,000 for his or her services as a member of one of the board committees; the chairman of the board receives a total annual fee of $175,000 for his or her services, inclusive of any such services as a director and as a committee chairman or member. In addition, there was a grant of Forfeitable Share Plan awards based on a one-off amount to each Non-executive director, which takes into account their contributions for the financial years ended 31 December 2020, 31 December 2021 and 31 December 2022 to (i) Mr. Michael John Hankinson of US$237,500; (ii) Mr. John Peter Herholdt of US$165,000; (iii) Mr. Quah Ban Huat of US$165,000; (iv) Mr. Murray Paul Grindrod of US$75,000; and (v) Mr. Paul Charles Over of US$31,875. The quantity of the FSP awards was based on the weighted average share price of US$17.53 at the date of grant of the FSP award.
Our Executive Officers are remunerated in accordance with their contracts of employment. In addition, Executive Officers were eligible for variable compensation under our forfeitable share plan for achieving company-wide objectives and for their individual contribution to our results and objectives. In 2018 we granted awards of 743,000 forfeitable ordinary shares with a value of $7.6 million to our employees, including our Chief Executive Officer and our Chief Financial Officer. In respect of these awards, $3.2 million, $1.5 million and $0.8 million was expensed in our 2019, 2020 and 2021 statement of profit or loss and other comprehensive income, respectively, and further expenses in respect of these awards will be recorded in subsequent financial periods pro rata to the vesting period. Included in the 2018 awards of 743,000 forfeitable ordinary shares are 180,000 and 100,000 forfeitable ordinary shares that we awarded to our Chief Executive Officer and our Chief Financial Officer, respectively, and which, in each case, vested in three equal tranches, on March 1, 2020, March 1, 2021 and 2022. During 2019, awards of 15,000 ordinary shares were forfeited by employees.
In 2020 we granted awards of 225,000 forfeitable ordinary shares with a value of $0.7 million to our employees, including our Chief Executive Officer and our Chief Financial Officer. In respect of these awards, $0.3 million and $0.2 million were expensed in our 2020 and 2021 statement of profit or loss and other comprehensive income, and further expenses in respect of this new tranche of awards will be recorded in subsequent financial periods pro rata to the vesting period. Included in the 2020 awards of 225,000 forfeitable ordinary shares are 73,000 and 37,000 forfeitable ordinary shares that we awarded to our Chief Executive Officer and our Chief Financial Officer, respectively. The Chief Executive Officer’s awards vested in two equal tranches, on March 1, 2021 and 2022 whilst the Chief Financial Officer’s awards will vest in three equal tranches, the first and second having vested on March 1, 2021 and 2022 and the subsequent vesting on March 1, 2023. During 2020, awards of 20,000 ordinary shares were forfeited by employees from the grant of 2020 awards and awards of 40,000 were forfeited from the grant of the 2018 awards.
In 2021 we granted awards of 516,000 forfeitable ordinary shares with a value of $6.1 million to our employees, including our Chief Executive Officer and our Chief Financial Officer. In respect of these awards, $2.3 million was expensed in our 2021 statement of profit or loss and other comprehensive income, and further expenses in respect of this new tranche of awards will be recorded in subsequent financial periods pro rata to the vesting period. Included in the 2021 awards of 516,000 forfeitable ordinary shares are 160,000 and 80,000 forfeitable ordinary shares that we awarded to our Chief Executive Officer and our Chief Financial Officer, respectively. The Chief Executive Officer’s and the Chief Financial Officer’s awards will vest in three equal tranches, the first having vested on March 1, 2022 and the subsequent vesting on March 1, 2023 and 2024. During 2021, awards of 1,334 ordinary shares were forfeited from the grant of the 2018 awards.
In 2022 we granted awards of 179,300 forfeitable ordinary shares with a value of $4.6 million to our employees, including our Chief Financial Officer and Interim Chief Executive Officer. In respect of these awards, $2.139 million was expensed in our 2022 statement of profit or loss and other comprehensive income, and further expenses in respect of this new tranche of awards will be recorded in subsequent financial periods pro rata to the vesting period. Included in the 2022 awards of 179,300 forfeitable ordinary shares are 35,000 forfeitable ordinary shares that we awarded to our Chief Financial Officer and Interim Chief Executive Officer. The Chief Financial Officer and Interim Chief Executive Officer’s awards was to vest in three equal tranches, on March 1, 2024, 2025 and 2026; but were all accelerated to vest under the Awards Election Opportunity due to the tender offer from Taylor Maritime Investments Ltd. During 2022, awards of 106,667 ordinary shares were forfeited from the grant of the FSP awards in 2021.
The following description is only a summary of the material provisions of the forfeitable share plan and is governed in it entirely by the forfeitable share plan which is included as an exhibit to this annual report. We adopted the forfeitable share plan to provide selected employees with the opportunity to receive compensatory equity awards of our ordinary shares and to serve as a retention mechanism and recruitment tool. The forfeitable share plan also provided participants with the opportunity to share in the success of the company and aligns forfeitable share plan participant interests with the interests of our shareholders. The forfeitable share plan was administered by the compensation and nomination committee. Participants received grants of forfeitable ordinary shares, subject to applicable time and/or performance vesting conditions and other terms, that settled in ordinary shares when vested and were forfeited, in part in or in full, upon certain termination of employment events if not previously vested. Under the terms of the forfeitable share plan, the aggregate number of ordinary shares that may be granted and not yet vested under the forfeitable share plan at any one time shall not exceed 5% of the number of shares in issue (excluding treasury shares) as determined in reference to the day preceding the award.
It is to be noted that the forfeitable share plan award was settled on November 29, 2022 upon the Company’s acceptance of the tender offer from Taylor Maritime Investments Limited. The forfeitable share plan has since been terminated.
Grindrod Shipping’s board of directors comprises eleven directors, including eight independent non-executive members, as determined in accordance with the prevailing Code of Corporate Governance issued by the Monetary Authority of Singapore, which is the 2018 Singapore Corporate Governance Code. Each of Grindrod Shipping’s directors is elected by Grindrod Shipping’s shareholders or appointed by the directors pursuant to Grindrod Shipping’s constitution. In addition, Mr. Quah is also a director of Samudera Shipping Line Ltd. To the extent that Mr. Quah’s service as a member of the board of directors of Samudera Shipping Line Ltd. presents a conflict of interest with respect to any matters involving us, Mr. Quah has agreed to inform our board of directors of any such conflict and recuse himself from any proceedings or vote relating to such matters. In addition, Mr. Over is also a director of Taylor Maritime (HK)
Limited
. To the extent that Mr. Over’s service as a member of the board of directors of Taylor Maritime (HK)
Limited
, presents a conflict of interest with respect to any matters involving us, Mr. Over has agreed to inform our board of directors of any such conflict and recuse himself from any proceedings or vote relating to such matters. In addition, Mr. Buttery is currently both the Chief Executive Officer and a director of Taylor Maritime Investments Limited. To the extent that Mr. Buttery’s service as a member of the board of directors of Taylor Maritime Investments Limited and as its Chief Executive Officer present a conflict of interest with respect to any matters involving us, Mr. Buttery has agreed that he must, as soon as is practicable after he is aware of such interest, declare the nature of his interest at a board meeting or send a written notice to the company containing details on the nature, character and extent of his interest in the transaction or proposed transaction with the Company; and also recuse himself from any proceedings or vote relating to such matters.
At our first annual general meeting, which was held on May 29, 2019, all of the directors, other than the Chief Executive Officer and the Chief Financial Officer, retired from office and were eligible to and stood for re-election. At each subsequent annual general meeting, one-third of the directors then in office, or if their number is not a multiple of three, the number nearest to one-third, shall retire from office by rotation, provided no director holding office as Chief Executive Officer or Chief Financial Officer shall be subject to retirement by rotation or be taken into account in determining the number of directors to retire. In addition, any director who has been appointed by the directors to fill a vacancy during any given year will be required to retire from office at the next annual general meeting and shall be eligible for re-election at such meeting. Directors holding office as Chief Executive Officer or Chief Financial Officer shall resign from their directorship upon no longer holding such positions.
The directors to retire by rotation in every year shall be those who have been longest serving in office since their last re-election or appointment. Where directors were re-elected or appointed on the same day, those to retire shall be agreed amongst themselves or be determined by lot.
A director shall vacate his office upon his resignation, removal, bankruptcy, becoming mentally disordered or disqualification. A director may only be removed from office by or according to resolution of the shareholders.
No director is entitled to any severance benefits on termination of his or her service as a director.
Grindrod Shipping has established two committees of the board of directors: the audit and risk committee and the compensation and nomination committee.
The members of the audit and risk committee are Messrs. Quah (chairman), French, Klemme; and Ms. Brosnan. The audit and risk committee, among other things, oversees our financial reporting, risk management, related party transactions and internal controls (in relation to financial, operational, compliance and information technology controls), engages our external auditors and oversees our internal audit activities, tax policies and effectiveness of our legal and compliance systems.
Compensation and Nomination Committee
The members of the compensation and nomination committee are Messrs. Herholdt (chairman), Buttery, Klemme, Maltby and Schaar. The compensation and nomination committee oversees our compensation policy and the executive compensation policy, approves awards of stock based incentives, approves the individual package of the chief executive officer, reviews and monitors the nomination and appointment process and composition of the board of directors and succession planning of the board, the committees of the board of directors and the performance of the board.
Corporate Governance Practices
Pursuant to an exception under NASDAQ listing standards available to foreign private issuers, we are not required to comply with many of the corporate governance practices followed by U.S. companies under the NASDAQ listing standards. Accordingly, we are exempt from many of NASDAQ’s corporate governance practices. We are incorporated under the laws of Singapore and have elected to voluntarily comply with the relevant guidelines of the 2018 Singapore Corporate Governance Code. In connection with the listing of our ordinary shares on NASDAQ, we certified to NASDAQ that our corporate governance practices are in compliance with, and are not prohibited by, Singapore law. We also agreed or elected to comply with certain JSE corporate governance requirements in addition to complying with the applicable Singapore Corporate Governance Code and NASDAQ listing standards. Set forth below is a list of the significant differences between our corporate governance practices and NASDAQ listing standards applicable to listed U.S. companies.
Independence of Directors.
NASDAQ requires that a U.S.-listed company maintain a majority of independent directors. Our board of directors consists of eleven directors, four of whom are the members of our audit and risk committee and are considered “independent” under Rule 10A-3 promulgated under the Exchange Act as it applies to us under the rules of NASDAQ. Under the 2018 Singapore Corporate Governance Code, only one-third of our board of directors is required to be independent if the chairman of our board of directors is independent. However, the determination of independence under the 2018 Singapore Corporate Governance Code is different from NASDAQ standards. Under the 2018 Singapore Corporate Governance Code, eight of our directors, Messrs. Klemme (Chairman), French, Hatton, Herholdt, Matlby, Quah, and Schaar and Ms. Brosnan are considered independent.
Compensation and Nomination Committee.
NASDAQ requires that a U.S.-listed company have a compensation committee consisting only of independent directors and that director nominees be selected or recommended for the board’s selection by either a vote in which only independent directors participate or a nominations committee comprised solely of independent directors. Under the 2018 Singapore Corporate Governance Code, a company’s remuneration committee and nominating committee, which we combine as our compensation and nomination committee, are not required to consist entirely of independent directors. The 2018 Singapore Corporate Governance Code requires each of these committees be comprised of at least three directors, a majority of whom should be independent (including the chairman or chairmen of such committee or committees), and that all members of the remuneration committee be non-executive directors. Our compensation and nomination committee currently consists of Messrs. Herholdt, Buttery, Matlby, and Cullen , all of whom are independent and non-executive directors under the 2018 Singapore Corporate Governance Code; save for Mr. Buttery who is a non-independent director; who will relinquish his position as member of the Compensation and Nomination Committee effective on March 31, 2023. Mr. Herholdt will resign as chairman of the Compensation and Nomination Committee on March 31, 2023 and Mr. Schaar will be the new chairman of the Compensation and Nomination Committee on April 1, 2023.
Audit and Risk Committee.
NASDAQ requires that a U.S.-listed company have an audit committee comprised of at least three members, all of whom shall be entirely independent directors. The 2018 Singapore Corporate Governance Code requires an audit committee to be comprised of at least three directors, a majority of whom should be independent (including the chairman of such committee), and that all members of the audit committee be non-executive directors. Our audit and risk committee currently consists of Messrs. Quah, Klemme and French and Ms. Brosnan, all of whom are independent and non-executive directors under the 2018 Singapore Corporate Governance Code and “independent” under Rule 10A-3 promulgated under the Exchange Act. Mr. Quah will resign as chairman of the Audit and Risk Committee on March 31, 2023 and Mr. French will be the new chairman of the Audit and Risk Committee on April 1, 2023.
Executive Sessions.
NASDAQ requires that the independent directors of a U.S. listed company have regularly scheduled meetings at which only independent directors are present, or executive sessions. The 2018 Singapore Corporate Governance Code provides that the independent directors should meet periodically without the presence of the other directors.
Quorum.
NASDAQ requires that a U.S.-listed company’s bylaws provide for a quorum of at least 33 1/3 percent of the outstanding shares of the company’s common voting stock. Our constitution provides that shareholders holding an aggregate not less than 15 percent of the issued and fully paid shares in the capital of the company, present in person or by proxy, shall be a quorum. The 2018 Singapore Corporate Governance Code does not prescribe a quorum requirement.
As of December 31, 2022, we had approximately 607 employees, of which approximately 509 seagoing staff serve on the vessels that we manage and 98 provide general management, financial management, and commercial and technical management to the vessels that we manage. Our seafarers are represented by collective bargaining agreements but we have not experienced a work stoppage in the past few years. Seafarers employed by our vessel managers are unionized under various jurisdictions and are employed under various collective bargaining agreements which does expose us to a risk of potential labor unrest at times when those collective bargaining agreements are being re-negotiated.
Share Ownership of Directors and Executive Officers
The following sets forth, to the knowledge of Grindrod Shipping’s management, the total amount of ordinary shares directly or indirectly owned by Grindrod Shipping’s current Directors based on 19,472,008 ordinary shares outstanding as of March 1, 2023.
| | Direct interest in
Grindrod Shipping
Ordinary Shares | | | Direct Percentage
Ownership | | | Indirect interest
in
Grindrod
Shipping
Ordinary Shares | | | Indirect
Percentage
Ownership | |
| Edward Buttery | | | - | | | | - | | | | 18,894 | | | | | * |
| | No other directors or executive officers of the Company own any shares in the Company. |
| | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS |
Good Falkirk (MI) Limited acquired more than 50% of our outstanding ordinary shares in November 2022; and this has resulted in a change in control of Grindrod Shipping with Good Falkirk (MI) Limited as the controlling shareholder of Grindrod Shipping.
A list of the individuals and organizations holding, to the knowledge of Grindrod Shipping’s management, directly or indirectly, 5% or more of our issued share capital, as of the latest practicable date, is set forth below.
| | | Ordinary shares beneficially
owned as of | |
| | | March 1, 2022 | |
Beneficial owner | | Grindrod Shipping Ordinary Shares (1) | | | | |
| Good Falkirk (MI) Limited | | | 16,206,365 | | | | 83.23 | % |
| (1) | On October 12, 2022, Good Falkirk (MI) Limited as Offeror, TMI and the Company, announced that they had entered into the TIA, providing for a voluntary conditional cash offer, the TMI Offer, to be made by the Offeror for all the issued ordinary shares in the capital of the Company other than shares held by the Offeror and shares held in treasury, in accordance with Rule 15 of The Singapore Code on Take-overs and Mergers and Regulations 14D and 14E under the Exchange Act. The formal offer documentation to be issued in respect of the TMI Offer dated October 28, 2022 (the “Offer to Purchase”) containing the terms of the TMI Offer together with the relevant documents was circulated to all shareholders of the Company. |
In the Offer to Purchase, a proposal (the “Award Election Opportunity”) was made by the Offeror and the Company to the holders of outstanding awards which were unvested or vested but remained unsettled (“FSA Holders”) and which were granted under the Grindrod Shipping Holdings Ltd. 2018 Forfeitable Share Plan. On December 1, 2022, 161,984 new ordinary shares were issued to fulfil the outstanding Company Forfeitable Shares. The share capital increased by 161,984 shares to 19,472,008 shares outstanding as of the date of this annual report.
There are 475,515 outstanding Company Forfeitable Shares, pursuant to which all 475,515 Shares were accelerated and issued to the Offeror as all of the FSA Holders have accepted the Award Election Opportunity.
On December 19, 2022, a total of 16,206,365 Shares are held by the Offeror and its affiliates or have been validly tendered to the Offeror (including the Shares that have been validly tendered during the Subsequent Offering Period), representing 83.23% of the outstanding Shares (including the number of Shares resulting from the valid vesting and settlement in full of the Company Forfeitable Shares).
In addition, since January 1, 2020, we have been notified of the following significant changes in the percentage ownership of major shareholders: On February 14, 2022, QVT Financial LP, QVT Financial GP LLC, QVT Associates GP LLC and QVT Family Office Fund LP (the “QVT Entities”) notified us that as of December 31, 2021, the QVT Entities beneficially owned 0% of our ordinary shares; the QVT Entities had previously notified us that each QVT Entity could be deemed to beneficially own 6.68% of our ordinary shares as of December 31, 2020, 6.83% of our ordinary shares as of December 31, 2019 and 6.01% of our ordinary shares as of December 31, 2018. On February 10, 2022, Ninety One SA (Pty) Limited (“Ninety One”) notified us that as of January 31, 2022, it held 0.03% of our ordinary shares; Ninety One had previously notified us that it beneficially owned 5.05% of our ordinary shares as of December 31, 2020. On February 3, 2022, Industrial Partnership Investments Proprietary Limited and Remgro Limited (the “Remgro Entities”) notified us that as of January 28, 2022, the Remgro Entities beneficially owned 0% of our ordinary shares; the Remgro Entities had previously notified us that as of June 18, 2018 they each could be deemed to beneficially own 22.7% of our ordinary shares. On September 28, 2021, Grindrod Limited notified us that as of September 22, 2021, it beneficially owned 0% of our ordinary shares; Grindrod Limited had previously notified us that it (directly, and through its subsidiary, Grindrod (South Africa) Proprietary Limited) beneficially owned 9.7% of our ordinary shares as of September 8, 2020. On December 1, 2022, Grindrod Investments Proprietary Limited, Nailsea Investments Proprietary Limited, Nailsea Trust and Walter James Grindrod (the “Grindrod Investment Persons”) notified us that as of November 28, 2022, the Grindrod Investment Persons owned 0% of our ordinary shares; the Grindrod Investment Persons had previously notified us that as of June 18, 2018, they each could be deemed to beneficially own 10.1% of our ordinary shares.
| (2) | Percentage amounts based on 19,472,008 ordinary shares outstanding (excluding treasury shares) as of March 1, 2023. It is to be noted that Good Falkirk (MI) Limited does not hold voting rights which are different from those that are held by Grindrod Shipping’s other shareholders. |
None of the above shareholders hold voting rights which are different from those that are held by Grindrod Shipping’s other shareholders.
Grindrod Shipping’s ordinary shares trade in the United States on NASDAQ under the symbol “GRIN”. The principal non-United States trading market for the ordinary shares of Grindrod Shipping is the JSE, on which the ordinary shares trade on the main board of the JSE, with a share code of GSH and under the abbreviated name GRINSHIP. Since Grindrod Shipping is a Singapore company, a principal register of members is maintained by Grindrod Shipping in Singapore. In addition, Continental Stock Transfer & Trust Company acts as Grindrod Shipping’s transfer agent and maintains Grindrod Shipping’s branch register of members, which is located in the United States. In South Africa, Computershare (Pty) Ltd acts as the administrative depository agent and maintains an administrative depository register reflecting the dematerialised shares trading on the JSE. All Grindrod Shipping ordinary shares reflected on the South African administrative depository register are held electronically through the Strate System at all times. See “Item 10. Additional Information—General” for additional information about the Singapore register, branch register and shareholder rights.
As of December 31, 2022, Cede & Co, a nominee of The Depository Trust Company, is the record holder of 19,472,008 ordinary shares. As of March 10, 2023 the ordinary shares held by Cede & Co. include 10,930,158, or 56.13% (based on 19,472,008 ordinary shares outstanding, excluding treasury shares), ordinary shares held by beneficial owners in the United States.
Related Party Transactions
For a description of our material joint ventures, see “Item 4. Information on the Company—Business Overview—Our Joint Ventures”.
For a description of our financing arrangements with certain of our joint ventures, see “Item 4. Information on the Company—Business Overview—Our Joint Ventures”, “Item 5. Operating and Financial Review and Prospects—Off Balance Sheet Arrangements” and Notes 10 to our consolidated financial statements.
For further information on the TMI Offer and risks relating to TMI’s control of the Company, see “Item 4. History and Development of the Company—History and Development of the Company” and “Item 3. Key Information—Risk Factors—Taylor Maritime Investments Limited indirectly controls us and its interests may conflict with ours or yours in the future.”
Interests of Experts and Counsel
Reference is made to Item 18 for a list of all financial statements filed as part of this annual report. For information on legal proceedings, please refer to “Item 4. Information on the Company—Business Overview—Legal Proceedings”.
Dividend Policy and Dividend Distributions
We intend, subject to operating needs and other circumstances, to return approximately 30% of our adjusted net income (adjusted for extraordinary items) to shareholders through a combination of quarterly dividends and/or share repurchases. The Company intends to pay a minimum quarterly base dividend of $0.03 per share and an additional variable component, that will consist of additional dividends and/or share repurchases. We expect that the return to shareholders will be primarily in the form of dividends, though the Company retains the right to adjust the allocation to maximize value to shareholders based on market conditions, share price levels, share liquidity, and other related matters.
The declaration and payment of dividends, if any, are subject to the discretion of our board of directors. The timing and amount of any dividends declared will depend on, among other things: (i) our earnings, financial condition and cash requirements and available sources of liquidity, (ii) decisions in relation to our growth and leverage strategies, (iii) provisions of Singapore law governing the payment of dividends, (iv) restrictive covenants in our existing and future debt instruments and (v) global financial conditions. Our board of directors may review and amend our dividend policy from time to time and we may stop paying dividends at any time and cannot assure you that we will pay any dividends, including any minimum quarterly base dividend amount, in the future or of the amount of any such dividends.
We are currently evaluating the dividend distribution for the first quarter of 2023 and there is no assurance at this time that a dividend will be paid.
For the avoidance of doubt, the payment of any dividends is not guaranteed, and the payment of dividend is subject at all times to the requirements and restrictions set out in the Company’s Constitution and Singapore Companies Act 1967. See “Item 3. Key Information—Risk Factors-Grindrod Shipping may not have sufficient distributable profits to pay dividends or otherwise distribute cash or assets to shareholders” and “Item 10. Additional Information—Dividends”.
Please refer to “Item 5. Operating and Financial Review and Prospects—Recent Developments”.
Offer and Listing Details
The ordinary shares of Grindrod Shipping are listed on NASDAQ under the symbol “GRIN” and on the JSE under the symbol “GSH”.
The ordinary shares of Grindrod Shipping are listed on NASDAQ under the symbol “GRIN” and on the JSE under the symbol “GSH”.
For the purposes of this section, references to “shareholders” mean those shareholders whose names and number of shares are entered in Grindrod Shipping’s principal or branch register of members. Only persons who are registered in Grindrod Shipping’s principal or branch register of members are recognized under Singapore law as shareholders of Grindrod Shipping with legal standing to institute shareholder actions against Grindrod Shipping or otherwise seek to enforce their rights as shareholders. Grindrod Shipping’s branch register of members is maintained by its transfer agent, Continental Stock Transfer & Trust Company, located in the United States. In South Africa, Computershare (Pty) Ltd maintains an administrative depository register to facilitate trading on the JSE.
The ordinary shares of Grindrod Shipping are held through The Depository Trust Company, or DTC. Accordingly, DTC, or its nominee, Cede & Co., is the shareholder of record registered in Grindrod Shipping’s branch register of members. The beneficial interests in the ordinary shares are reflected in position listings of the DTC participants for shares held through DTC or its nominee (for shareholders trading on NASDAQ) and on the administrative depository register located in South Africa (for shareholders trading on the JSE). Non-South Africa residents (and those South Africa residents complying with applicable exchange control regulations) are able to reposition their Grindrod Shipping ordinary shares reflected in the administrative depository register located in South Africa to an account with a U.S. broker-dealer that is a DTC participant. Shareholders who wish to reposition their Grindrod Shipping ordinary shares to an account with a U.S. broker-dealer should contact their South African broker or CSDP for more information about repositioning their ordinary shares between the South African administrative depository register and an account with a U.S. broker-dealer that is a DTC participant.
A holder of dematerialised interests in Grindrod Shipping’s shares may become a registered shareholder by exchanging its interest in the shares for certificated shares (if requested) and being registered in Grindrod Shipping’s register of members. The procedures by which a holder of dematerialised interests may exchange such interests for certificated shares (if requested) are determined by DTC and Continental Stock Transfer & Trust Company, in accordance with their internal policies and guidelines regulating the withdrawal and exchange of dematerialised interests for certificated shares (if requested), and following such an exchange Continental Stock Transfer & Trust Company will perform the procedures to register the shareholder in the branch register.
Shares may only be traded on the JSE in electronic form as dematerialised shares and trade for electronic settlement in terms of the Strate System (an electronic custody, clearing and settlement environment, managed by Strate), for all share transactions concluded on the JSE and off-market (and in terms of which transactions in securities are settled and transfers of beneficial ownership in securities are recorded electronically). Dematerialised shares are shares that have been dematerialised (the process whereby physical share certificates are replaced with electronic records evidencing ownership of shares for the purpose of Strate). Accordingly, all beneficial holders of Grindrod Shipping’s ordinary shares reflected on the South African administrative depository register must appoint a CSDP for shares traded on the JSE, directly or through a broker, to hold the dematerialised Grindrod Shipping shares on their behalf.
If (a) the name of any person is without sufficient cause entered in or omitted from the register of members; or (b) default is made or there is unnecessary delay in entering in the register of members the fact of any person having ceased to be a member, the person aggrieved or any member of the company or the company, may apply to the Singapore courts for rectification of the register of members. The Singapore courts may either refuse the application or order rectification of the register of members, and may direct the company to pay any damages sustained by any party to the application. The Singapore courts will not entertain any application for the rectification of a register of members in respect of an entry which was made in the register of members more than 30 years before the date of the application.
Comparison of Shareholder Rights
For a description of our material joint ventures, see “Item 4. Information on the Company—Business Overview—Our Joint Ventures”.
For a description of our material loan agreements, see “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Loan Agreements”.
Exchange controls in South Africa are administered by the South African Reserve Bank, or SARB, in terms of the Exchange Control Regulations, 1961, and regulate transactions involving South African residents. The purpose of exchange controls is to mitigate the decline of foreign capital reserves in South Africa. We expect that South African exchange controls will continue to operate in the foreseeable future. The Government of South Africa has, however, committed itself to relaxing exchange controls gradually and significant relaxation has occurred in recent years. See “Item 10. Additional Information—General” in this Annual Report.
Residents in the CMA (comprising South Africa, the Republic of Namibia, the Kingdom of Lesotho and the Kingdom of Swaziland) or offshore subsidiaries of a resident in the CMA may not reposition their ordinary shares from the South African administrative depository register to an account with a U.S. broker-dealer or otherwise beneficially own or hold any Grindrod Shipping ordinary shares whether through a U.S. broker-dealer or directly on the principal or branch register unless specific approval has been obtained from the SARB by such persons for any subscription, purchase or beneficial holding or ownership, or as otherwise permitted under the South African Exchange Control Regulations or the rulings promulgated thereunder.
There are no exchange control restrictions in effect in Singapore.
Material U.S. Federal Income Tax Considerations
The following is a discussion of the material U.S. federal income tax considerations applicable to us and to beneficial owners of our ordinary shares. This discussion is based upon provisions of the Code, the Treasury regulations promulgated under the Code, as amended, or the Treasury regulations, and administrative rulings and court decisions, all as in effect or in existence on the date of this annual report and all of which are subject to change or differing interpretations, possibly with retroactive effect. Any such change could result in U.S. federal income tax consequences that are materially different from those described below. Moreover, any change after the date of this annual report in any of the factual matters set forth in this filing or in our or our subsidiaries’ conduct, practices or activities may affect the considerations discussed below. We are under no obligation to update the discussion to reflect future changes in law or changes in any of the foregoing factual matters that may later come to our attention.
This discussion is for general information purposes only, does not purport to be a comprehensive description of all of the U.S. federal income tax considerations applicable to us or beneficial owners of ordinary shares and does not address any tax laws other than U.S. federal income tax laws. Potential investors are encouraged to consult their tax advisers concerning the overall tax consequences arising in their own particular situations under U.S. federal, state, local and non-U.S. laws. The conclusions expressed in this discussion are not binding on the IRS or any court, and there is no assurance that the IRS or a court would not reach a contrary conclusion. No ruling from the IRS or opinion of counsel has been obtained or will be requested regarding any matter affecting us or prospective holders of our ordinary shares.
Treatment as a Corporation
We are treated as a non-U.S. corporation for U.S. federal income tax purposes. As such, we are subject to U.S. federal income tax on our income to the extent it is from sources within the United States or is Effectively Connected Income as discussed below. U.S. Holders (as defined below) are not directly subject to U.S. federal income tax on their shares of our income, but rather will be subject to U.S. federal income tax on distributions received from us and dispositions of ordinary shares as described below.
Taxation of Operating Income
Under the Code, income derived from, or in connection with, the use (or hiring or leasing for use) of a vessel, or the performance of services directly related to the use of a vessel, is treated as “Transportation Income.” Transportation Income that is attributable to transportation that either begins or ends, but that does not both begin and end, in the United States is considered to be 50% derived from sources within the United States, or U.S. Source International Transportation Income. Transportation Income attributable to transportation that both begins and ends in the United States is considered to be 100% derived from sources within the United States, or U.S. Source Domestic Transportation Income. Transportation Income that is attributable to transportation exclusively between non-U.S. destinations is considered to be 100% derived from sources outside the United States. Transportation Income derived from sources outside the United States generally is not subject to U.S. federal income tax.
We expect that we and our subsidiaries will earn income that will constitute Transportation Income. We do not expect us or our subsidiaries to earn U.S. Source Domestic Transportation Income. However, certain of our and our subsidiaries’ activities could give rise to U.S. Source International Transportation Income, and future expansion of or changes in our and our subsidiaries’ operations could result in an increase in the amount thereof, which generally would be subject to U.S. federal income taxation, unless the Section 883 Exemption applied. Based on our current plans and expectations regarding our and our subsidiaries’ organization and operations, we expect that only a relatively small portion of our and our subsidiaries’ gross Transportation Income will likely constitute U.S. Source International Transportation Income and, if the Section 883 Exemption were not to apply, we expect that the effective rate of U.S. federal income tax on our and our subsidiaries’ gross Transportation Income would be less than 1%.
The Section 883 Exemption
In general, the Section 883 Exemption provides that if a non-U.S. corporation satisfies the requirements of Section 883 of the Code and the Treasury regulations thereunder, or the Section 883 Regulations, it will not be subject to the net basis and branch profit taxes or the 4% gross basis tax described below on its U.S. Source International Transportation Income, including any U.S. Source International Transportation Income it derives from participation in a pool, partnership or other joint venture arrangement that satisfies the requirements of the Section 883 Regulations. The Section 883 Exemption applies only to U.S. Source International Transportation Income and does not apply to U.S. Source Domestic Transportation Income. The Section 883 Exemption applies separately to us and each of our subsidiaries that is treated as a corporation for U.S. federal income tax purposes and earns U.S. Source International Transportation Income (which we refer to below as our “applicable subsidiaries”).
We and our applicable subsidiaries will qualify for the Section 883 Exemption if, among other matters, we and our applicable subsidiaries meet the following three requirements:
| • | We and each of our applicable subsidiaries are organized in a jurisdiction outside the United States that grants an equivalent exemption from tax to corporations organized in the United States with respect to the types of U.S. Source International Transportation Income that we earn, or an Equivalent Exemption; |
| • | We and each of our applicable subsidiaries satisfy the Qualified Shareholder Stock Ownership Test (as described below); and |
| • | We and each of our applicable subsidiaries meet certain substantiation, reporting and other requirements. |
We are organized under the laws of Singapore and our applicable subsidiaries are organized under the laws of Singapore, South Africa, the Isle of Man and the Marshall Islands. The U.S. Treasury Department has recognized each of these jurisdictions as a jurisdiction that grants an Equivalent Exemption with respect to the type of U.S. Source International Transportation Income that we or our applicable subsidiaries generally expect to earn. Consequently, our and our applicable subsidiaries’ U.S. Source International Transportation Income should be exempt from U.S. federal income taxation provided we and our applicable subsidiaries meet the Qualified Shareholder Stock Ownership Test and we and our applicable subsidiaries satisfy certain substantiation, reporting and other requirements.
Qualified Shareholder Stock Ownership Test
A non-U.S. corporation will qualify for the Section 883 Exemption if it is able to satisfy the Qualified Shareholder Stock Ownership Test. The Qualified Shareholder Stock Ownership Test generally is satisfied if more than 50% of the value of the outstanding equity interests in the non-U.S. corporation is owned, or treated as owned after applying certain attribution rules, for at least half of the number of days in the taxable year by:
| • | individual residents of jurisdictions that grant an Equivalent Exemption; |
| • | non-U.S. corporations organized in jurisdictions that grant an Equivalent Exemption provided that the equity interests in such non-U.S. corporations are “primarily traded” and “regularly traded” on an established securities market either in the United States or in a jurisdiction outside the United States that grants an Equivalent Exemption and are not considered to be “closely held” under specific rules in the Section 883 Regulations, which we refer to as the “Publicly Traded Test” or |
| • | certain other qualified persons described in the Section 883 Regulations, or collectively, the Qualified Shareholders. |
It is uncertain whether we will qualify for the Section 883 Exemption for any taxable year. We presently expect to be able to satisfy the Qualified Shareholder Stock Ownership Test for any taxable year in which TMI directly or indirectly owns more than 50% of the value of our outstanding equity interests for at least half of the number of days in such taxable year, meets the Publicly Traded Test and provides us with certification of its Qualified Shareholder status. TMI has indicated to us that it presently meets the Publicly Traded Test and has agreed to provide us with certification of its Qualified Shareholder status.
We will also be required to obtain an ownership statement from each intermediary entity between us and TMI.
We expect that each of our applicable subsidiaries that is wholly-owned by us for at least half of the number of days in a taxable year would satisfy the Qualified Shareholder Stock Ownership Test for any taxable year in which we are able to satisfy the Qualified Shareholder Stock Ownership Test. We do not expect any applicable subsidiary that is not wholly-owned by us to satisfy the Qualified Shareholder Stock Ownership Test for any taxable year, unless a sufficient portion of such subsidiary’s other equity interests were owned by Qualified Shareholders to cause such subsidiary to be more than 50%-owned (by value) by Qualified Shareholders for at least half the number of days in a taxable year and such other Qualified Shareholders were to provide certifications of their Qualified Shareholder status. Given the factual nature of the issues involved and legal and practical uncertainties (including our reliance on TMI’s Qualified Shareholder status, which is outside of our control), we can give no assurances as to our or our applicable subsidiaries’ qualification for the Section 883 Exemption for any taxable year. Furthermore, our board of directors could determine that it is in our best interests to take an action that would result in our and our applicable subsidiaries not being able to qualify for the Section 883 Exemption in the future. Even if we qualify for the Section 883 Exemption for a taxable year, our applicable subsidiaries that are not wholly-owned (by value) by us for at least half of the number of days in such taxable year may not qualify for the Section 883 Exemption. There can be no assurance that we or any of our applicable subsidiaries will qualify for the Section 883 Exemption for any taxable year.
The Net Basis Tax and Branch Profits Tax
If we or our subsidiaries earn U.S. Source International Transportation Income and the Section 883 Exemption does not apply, the U.S. source portion of such income may be treated as Effectively Connected Income if we or any of our subsidiaries have a fixed place of business in the United States and substantially all of our or any such subsidiary’s U.S. Source International Transportation Income is attributable to regularly scheduled transportation or, in the case of bareboat charter income, is attributable to a fixed place of business in the United States. Based on our and our subsidiaries’ current operations, none of our or our subsidiaries’ potential U.S. Source International Transportation Income is attributable to regularly scheduled transportation or is received pursuant to bareboat charters, nor do we or any of our subsidiaries have a fixed place of business in the United States. As a result, we do not anticipate that any of our or our subsidiaries’ U.S. Source International Transportation Income will be treated as Effectively Connected Income. However, there is no assurance that we or any of our subsidiaries will not have a fixed place of business in the United States or that we or any of our subsidiaries will not earn substantially all of its U.S. Source International Transportation Income pursuant to regularly scheduled transportation or bareboat charters attributable to a fixed place of business in the United States in the future, which would result in such income being treated as Effectively Connected Income. In addition, any U.S. Source Domestic Transportation Income generally will be treated as Effectively Connected Income.
Any income we or our subsidiaries earn that is treated as Effectively Connected Income would be subject to U.S. federal corporate income tax (presently imposed at a 21% rate) as well as branch profits tax (presently
imposed under Section 884 of the Code at
a 30% rate on effectively connected earnings). In addition, a 30% branch interest tax could be imposed on certain interest paid or deemed paid by us or our subsidiaries.
On the sale of a vessel that has produced Effectively Connected Income, we or our subsidiaries could be subject to the net basis corporate income tax as well as branch profits tax with respect to the gain recognized up to the amount of certain prior deductions for depreciation that reduced Effectively Connected Income. Otherwise, we and our subsidiaries would not be subject to U.S. federal income tax with respect to gain realized on the sale of a vessel, provided the sale is considered to occur outside of the United States (as determined under U.S. tax principles) and the gain is not attributable to an office or other fixed place of business maintained by us or our subsidiaries in the United States under U.S. federal income tax principles.
If the Section 883 Exemption does not apply and the net basis tax does not apply, we and our subsidiaries would be subject to a 4% U.S. federal income tax on our U.S. Source International Transportation Income, without benefit of deductions.
U.S. Federal Income Taxation of U.S. Holders
The following is a discussion of the material U.S. federal income tax considerations that may be relevant to beneficial owners of our ordinary shares.
The following discussion applies only to beneficial owners of our ordinary shares that own the ordinary shares as “capital assets” (generally, property held for investment purposes). The following discussion does not address all aspects of U.S. federal income taxation which may be important to particular beneficial owners of our ordinary shares in light of their individual circumstances, such as (i) beneficial owners of our ordinary shares subject to special tax rules (e.g., banks or other financial institutions, real estate investment trusts, regulated investment companies, insurance companies, broker-dealers, traders that elect to mark-to-market for U.S. federal income tax purposes, tax-exempt organizations and retirement plans, individual retirement accounts and tax-deferred accounts, or former citizens or long-term residents of the United States) or to beneficial owners that will hold the ordinary shares as part of a straddle, hedge, conversion, constructive sale, or other integrated transaction for U.S. federal income tax purposes, (ii) partnerships or other entities classified as partnerships for U.S. federal income tax purposes or their partners, (iii) U.S. Holders (as defined below) that have a functional currency other than the U.S. dollar or that transact in ordinary shares in a currency other than U.S. dollars, or (iv) beneficial owners of ordinary shares that own 2% or more (by vote or value) of our ordinary shares, all of whom may be subject to tax rules that differ significantly from those summarized below. This discussion does not contain information regarding any state or local, estate, gift or alternative minimum tax considerations concerning the ownership or disposition of our ordinary shares.
If a partnership or other entity classified as a partnership for U.S. federal income tax purposes holds our ordinary shares, the tax treatment of its partners generally will depend upon the status of the partner, the activities of the partnership and certain determinations made at the partner level. If you are a partner in a partnership holding our ordinary shares, you should consult your own tax advisor regarding the tax consequences to you of the partnership’s ownership of our ordinary shares.
U.S. Holders that use an accrual method of accounting for U.S. federal income tax purposes generally are required to include certain amounts in income no later than the time such amounts are reflected on certain applicable financial statements. The application of this rule may require the accrual of income earlier than would be the case under the general U.S. federal income tax rules described below. U.S. Holders that use an accrual method of accounting for U.S. federal income tax purposes should consult with their tax advisors regarding the potential applicability of this rule to their particular situation.
Each prospective beneficial owner of our ordinary shares should consult its own tax advisor regarding the U.S. federal, state, local, and other tax consequences of the ownership or disposition of our ordinary shares.
As used in this annual report, the term “U.S. Holder” means a beneficial owner of our ordinary shares that:
| • | is an individual U.S. citizen or resident (as determined for U.S. federal income tax purposes); |
| • | a corporation (or other entity that is classified as a corporation for U.S. federal income tax purposes) organized under the laws of the United States, any state thereof or the District of Columbia; |
| • | an estate the income of which is subject to U.S. federal income taxation regardless of its source; or |
| • | a trust if (i) a court within the United States is able to exercise primary supervision over the administration of the trust and one or more “United States persons” (as defined in the Code) have the authority to control all substantial decisions of the trust or (ii) the trust has a valid election in effect under current Treasury regulations to be treated as a “United States person.” |
Subject to the discussion below of the rules applicable to a PFIC, any distributions to a U.S. Holder made by us with respect to our ordinary shares generally will constitute dividends, which will be taxable as ordinary income or “qualified dividend income” as described in more detail below, to the extent of our current and accumulated earnings and profits, as determined under U.S. federal income tax principles. We do not intend to compute (or to provide U.S. Holders with information necessary to compute) earnings and profits under U.S. federal income tax principles. Accordingly, U.S. Holders generally should expect to treat all distributions on the ordinary shares as taxable dividends. U.S. Holders that are corporations generally will not be entitled to claim a dividend received deduction with respect to distributions they receive from us. Dividends received with respect to the ordinary shares will be treated as foreign source income and generally will be treated as “passive category income” for U.S. foreign tax credit purposes.
Dividends received with respect to our ordinary shares by a U.S. Holder who is an individual, trust or estate, or a non-corporate U.S. Holder, generally will be treated as “qualified dividend income” that is taxable to such non-corporate U.S. Holder at preferential long-term capital gain tax rates, provided that: (i) our ordinary shares are traded on an “established securities market” in the United States (such as the NASDAQ, where our ordinary shares are traded) and are “readily tradeable” on such an exchange; (ii) 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 are, have been or will be, as discussed below); (iii) the non-corporate U.S. Holder has owned the ordinary shares for more than 60 days during the 121-day period beginning 60 days before the date on which the ordinary shares become ex-dividend (and has not entered into certain risk limiting transactions with respect to such ordinary shares); and (iv) 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. It is not currently known whether our ordinary shares will be considered “readily tradeable” on the NASDAQ for purposes of these rules. If a dividend is treated as qualified dividend income, the amount of the dividend taken into account for purposes of calculating the foreign tax credit limitation generally will be reduced to appropriately take into account the tax rate differential between the reduced rate of tax applicable to qualified dividend income and the highest rate of tax normally applicable to dividends. Any dividends paid on our ordinary shares that are not treated as qualified dividend income will be taxed as ordinary income to a non-corporate U.S. Holder. In addition, a 3.8% tax may apply to certain investment income. See “—Medicare Tax” below.
Special rules may apply to any amounts received in respect of our ordinary shares that are treated as “extraordinary dividends.” In general, an extraordinary dividend is a dividend with respect to an ordinary share that is equal to or in excess of 10% of a U.S. Holder’s adjusted tax basis (or fair market value upon the U.S. Holder’s election) in such ordinary share. In addition, extraordinary dividends include dividends received within a one-year period that, in the aggregate, equal or exceed 20% of a U.S. Holder’s adjusted tax basis (or fair market value) in an ordinary share. If we pay an “extraordinary dividend” on our ordinary shares that is treated as “qualified dividend income,” then any loss recognized by a non-corporate U.S. Holder from the sale or exchange of such ordinary shares will be treated as long-term capital loss to the extent of the amount of such dividend.
Sale, Exchange or Other Disposition of Ordinary Shares
Subject to the discussion of the PFIC rules below, a U.S. Holder generally will recognize capital gain or loss upon a sale, exchange or other disposition of our ordinary shares in an amount equal to the difference between the amount realized by the U.S. Holder from such sale, exchange or other disposition and the U.S. Holder’s adjusted tax basis in such ordinary shares. The U.S. Holder’s initial tax basis in the ordinary shares generally will be the U.S. Holder’s purchase price for the ordinary shares. Such gain or loss will be treated as long-term capital gain or loss if the U.S. Holder’s holding period is greater than one year at the time of the sale, exchange or other disposition.
A corporate U.S. Holder’s capital gains, long-term and short-term, are taxed at ordinary income tax rates. If a corporate U.S. Holder recognizes a loss upon the disposition of our ordinary shares, such U.S. Holder is limited to using the loss to offset other capital gain. If a corporate U.S. Holder has no other capital gain in the tax year of the loss, it may carry the capital loss back three years and forward five years.
Long-term capital gains of non-corporate U.S. Holders are subject to the favorable tax rate of a maximum of 20%. In addition, a 3.8% tax may apply to certain investment income. See “—Medicare Tax” below. A non-corporate U.S. Holder may deduct a capital loss resulting from a disposition of our ordinary shares to the extent of capital gains plus up to $3,000 ($1,500 for married individuals filing separate tax returns) annually and may carry forward a capital loss indefinitely.
PFIC Status and Significant Tax Consequences
In general, we will be treated as a PFIC with respect to a U.S. Holder if, for any taxable year in which the holder holds our ordinary shares, either:
| | • | at least 75% of our gross income for such taxable year consists of passive income (e.g., dividends, interest, capital gains and rents derived other than in the active conduct of a rental business), or |
| | • | at least 50% of the average value of the assets held by us (based on an average of the quarterly values of the assets during a taxable year) produce, or are held for the production of, passive income. |
Income earned, or deemed earned, by us in connection with the performance of services would not constitute passive income. By contrast, rental income generally would constitute “passive income” unless we were treated as deriving our rental income in the active conduct of a trade or business under the applicable rules. The PFIC provisions contain a look-through rule under which we will be treated as earning directly our proportionate share of any income, and owning directly our proportionate share of any assets, of another corporation if we own at least 25% of the value of the stock of such other corporation.
Based on our current and projected, income, assets and methods of operations, we believe that we should not be treated as a PFIC for our current taxable year and we expect that we should not become a PFIC for the foreseeable future. In this regard, we believe that the income we receive from time and voyage chartering activities should constitute services income, rather than rental income. Consequently, we believe that such income should not constitute passive income and the assets engaged in generating such income should not be treated as passive assets and, so long as our income from time and voyage charters exceeds 25% of our gross income for each taxable year after our initial taxable year and the value of our vessels contracted under time and voyage charters exceeds 50% of the average value of our assets for each taxable year after our initial taxable year, we should not be a PFIC.
We expect that substantially all of the vessels in our Fleet will be engaged in time or voyage chartering activities and intend to treat our income from those activities as non-passive income, and the vessels engaged in those activities as non-passive assets, for PFIC purposes. We believe that there is a significant amount of legal authority consisting of the Code, legislative history, IRS pronouncements and administrative rulings supporting our position that the income from time and voyage chartering activities constitutes services income (rather than rental income). There is, however, no direct legal authority under the PFIC rules addressing whether income from time chartering activities is services income or rental income. Moreover, in a case not interpreting the PFIC rules, Tidewater Inc. v. United States, 565 F.3d 299 (5th Cir. 2009), the Fifth Circuit held that the vessel time charters at issue generated predominantly rental income rather than services income. However, the IRS stated in an Action on Decision (AOD 2010-001) that it disagrees with, and will not acquiesce to, the way that the rental versus services framework was applied to the facts in the Tidewater decision, and in its discussion stated that the time charters at issue in Tidewater would be treated as producing services income for PFIC purposes. The IRS’s AOD, however, is an administrative action that cannot be relied upon or otherwise cited as precedent by taxpayers.
The determination of whether we are a PFIC in any taxable year is fact specific and will depend upon the portion of our assets (including goodwill) and income that are characterized as passive under the PFIC rules and other factors, some of which may be beyond our control. In particular, because the total value of our assets for purposes of the asset test described above will generally be calculated using the market price of our ordinary shares, our PFIC status may depend in large part on the market price of our ordinary shares. Accordingly, fluctuations in the market price of the ordinary shares may cause us to become a PFIC. In addition, the composition of our income and assets will be affected by how, and how quickly, we use the cash generated by our business operations and any net proceeds that we receive from any future financing or capital transactions. The PFIC determination also depends on the application of complex U.S. federal income tax rules concerning the classification of our assets and income for this purpose, and these rules are uncertain in some respects. Further, the PFIC determination is made annually and our circumstances or the nature of our operations may change. Accordingly, there can be no assurance that we will not be classified as a PFIC for the current taxable year or any future taxable year, and no ruling from the IRS or opinion of counsel has been issued or has been or will be sought with respect to our potential status as a PFIC.
If we were treated as a PFIC for any taxable year in which a U.S. Holder owned our ordinary shares, the U.S. Holder generally would be subject to special tax rules resulting in increased tax liability with respect to any “excess distribution” the U.S. Holder receives on, and any gain the U.S. Holder realizes from a sale or other disposition (including a pledge) of, our ordinary shares, unless a “mark-to-market” election is available and a U.S. Holder makes such election with respect to the ordinary shares, as discussed below. In addition, if we were treated as a PFIC for any taxable year in which a U.S. Holder owned our ordinary shares, the U.S. Holder would be required to file IRS Form 8621 with the U.S. Holder’s U.S. federal income tax return for each year to report the U.S. Holder’s ownership of such ordinary shares. Substantial penalties apply to any failure to timely file IRS Form 8621, unless the failure is shown to be due to reasonable cause and not due to willful neglect. In the event a U.S. Holder does not file IRS Form 8621, the statute of limitations on the assessment and collection of U.S. federal income taxes of such U.S. Holder for the related tax year will not close before the date which is three years after the date on which such report is filed. A U.S. Holder would not be able to make a “qualified electing fund” election as we do not expect to provide the information necessary for U.S. Holders to make “qualified electing fund” elections.
Taxation of U.S. Holders Making a “Mark-to-Market” Election
If we were to be treated as a PFIC for any taxable year and our ordinary shares were treated as “marketable stock” for purposes of these rules, then a U.S. Holder would be allowed to make a “mark-to-market” election with respect to our ordinary shares, provided the U.S. Holder completes and files IRS Form 8621 in accordance with the relevant instructions and related Treasury regulations. If that election is made, the U.S. Holder generally would include as ordinary income in each taxable year the excess, if any, of the fair market value of the U.S. Holder’s ordinary shares at the end of the taxable year over the U.S. Holder’s adjusted tax basis in the ordinary shares. The U.S. Holder also would be permitted an ordinary loss in respect of the excess, if any, of the U.S. Holder’s adjusted tax basis in the ordinary shares over the fair market value thereof at the end of the taxable year, but only to the extent of the net amount previously included in income as a result of the mark-to-market election. A U.S. Holder’s tax basis in the U.S. Holder’s ordinary shares would be adjusted to reflect any such income or loss recognized. Gain recognized on the sale, exchange or other disposition of our ordinary shares would be treated as ordinary income, and any loss recognized on the sale, exchange or other disposition of the ordinary shares would be treated as ordinary loss to the extent that such loss does not exceed the net mark-to-market gains previously included in income by the U.S. Holder. A mark-to-market election would not apply to our ordinary shares owned by a U.S. Holder in any taxable year during which we are not a PFIC, but would remain in effect with respect to any subsequent taxable year for which we are a PFIC, unless our ordinary shares are no longer treated as “marketable stock” or the IRS consents to the revocation of the election.
A “mark-to-market” election may itself have negative tax consequences to a U.S. Holder and would not mitigate any negative tax consequences with respect to PFICs directly or indirectly owned by us. In addition, even if a U.S. Holder makes a “mark-to-market” election for one of our taxable years, if we were a PFIC for a prior taxable during which the U.S. Holder owned our ordinary shares and for which the U.S. Holder did not make a timely mark-to-market election, the U.S. Holder would also be subject to the more adverse rules described below under “Taxation of U.S. Holders Not Making a Timely Mark-to-Market Election.” U.S. holders should consult with their tax advisers regarding the availability and advisability making a mark-to-market election with respect to the ordinary shares.
Taxation of U.S. Holders Not Making a Timely Mark-to-Market Election
If we were to be treated as a PFIC for any taxable year, a U.S. Holder who does not make a timely “mark-to-market” election for that year (i.e., the taxable year in which the U.S. Holder’s holding period commences), whom we refer to as a “Non-Electing Holder,” would be subject to special rules resulting in increased tax liability with respect to (1) any excess distribution (i.e., the portion of any distributions received by the Non-Electing Holder on our ordinary shares in a taxable year in excess of 125% of the average annual distributions received by the Non-Electing Holder in the three preceding taxable years, or, if shorter, the Non-Electing Holder’s holding period for the ordinary shares), and (2) any gain realized on the sale, exchange or other disposition of our ordinary shares. Under these special rules:
| • | the excess distribution and any gain would be allocated ratably over the Non-Electing Holder’s aggregate holding period for the ordinary shares; |
| • | the amount allocated to the current taxable year and any year prior to the year we were first treated as a PFIC with respect to the Non-Electing Holder would be taxed as ordinary income; and |
| • | the amount allocated to each of the other taxable years would be subject to tax at the highest rate of tax in effect for the applicable class of taxpayer for that year, and an interest charge for the deemed deferral benefit would be imposed with respect to the resulting tax attributable to each such other taxable year. |
In addition, if we were to be treated as a PFIC, a U.S. Holder would be treated as owning a proportionate amount of any shares that we own, directly or indirectly by application of certain attribution rules, in other PFICs (including any of our subsidiaries, if they are PFICs) and would be subject to the PFIC rules on a separate basis with respect to its indirect interests in any such PFICs. If we were treated as a PFIC for any taxable year and a Non-Electing Holder who is an individual dies while owning our ordinary shares, such holder’s successor generally would not receive a step-up in tax basis with respect to such ordinary shares.
A U.S. Holder that is an individual or estate, or a trust that does not fall into a special class of trusts that is exempt from such tax, will generally be subject to a 3.8% tax on the lesser of (i) the U.S. Holder’s “net investment income” for a taxable year and (ii) the excess of the U.S. Holder’s modified adjusted gross income for such taxable year over $200,000 ($250,000 in the case of joint filers). For these purposes, “net investment income” will generally include dividends paid with respect to our ordinary shares and net gain attributable to the disposition of our ordinary shares not held in connection with certain trades or businesses, but will be reduced by any deductions properly allocable to such income or net gain.
U.S. Federal Income Taxation of Non-U.S. Holders
A beneficial owner of our ordinary shares (other than a partnership or an entity or arrangement treated as a partnership for U.S. federal income tax purposes) that is not a U.S. Holder is a “Non-U.S. Holder.”
Distributions we pay to a Non-U.S. Holder will not be subject to U.S. federal income tax or withholding tax if the Non-U.S. Holder is not engaged in a U.S. trade or business. If the Non-U.S. Holder is engaged in a U.S. trade or business, our distributions will be subject to U.S. federal income tax to the extent they constitute income effectively connected with the Non-U.S. Holder’s U.S. trade or business (and a corporate Non-U.S. Holder may also be subject to U.S. federal branch profits tax). However, distributions paid to a Non-U.S. Holder who is engaged in a trade or business may be exempt from taxation under an income tax treaty if the income arising from the distribution is not attributable to a U.S. permanent establishment maintained by the Non-U.S. Holder.
Disposition of Ordinary Shares
In general, a Non-U.S. Holder will not be subject to U.S. federal income tax or withholding tax on any gain resulting from the disposition of our ordinary shares provided the Non-U.S. Holder is not engaged in a U.S. trade or business. A Non-U.S. Holder that is engaged in a U.S. trade or business will be subject to U.S. federal income tax in the event the gain from the disposition of ordinary shares is Effectively Connected Income (provided, in the case of a Non-U.S. Holder entitled to the benefits of an income tax treaty with the United States, such gain also is attributable to a U.S. permanent establishment). However, even if not engaged in a U.S. trade or business, individual Non-U.S. Holders may be subject to tax on gain resulting from the disposition of our ordinary shares if they are present in the United States for 183 days or more during the taxable year in which those ordinary shares are disposed and meet certain other requirements.
Backup Withholding and Information Reporting
In general, payments to a non-corporate U.S. Holder of distributions or the proceeds of a disposition of ordinary shares may be subject to information reporting. These payments to a non-corporate U.S. Holder also may be subject to backup withholding, if the non-corporate U.S. Holder:
| | • | fails to provide an accurate taxpayer identification number; |
| | • | is notified by the IRS that it has failed to report all interest or corporate distributions required to be reported on his U.S. federal income tax returns; or |
| | • | in certain circumstances, fails to comply with applicable certification requirements. |
A U.S. Holder generally is required to certify its compliance with the backup withholding rules on IRS Form W-9.
Non-U.S. Holders may be required to establish their exemption from information reporting and backup withholding by certifying their status on IRS Form W-8BEN, W-8BEN-E, W-8ECI or W-8IMY, as applicable.
Backup withholding is not an additional tax. Rather, a shareholder generally may obtain a credit for any amount withheld against its liability for U.S. federal income tax (and obtain a refund of any amounts withheld in excess of such liability) by filing a U.S. federal income tax return with the IRS.
Individual U.S. Holders (and to the extent specified in applicable Treasury regulations, certain individual Non-U.S. Holders and certain U.S. Holders that are entities) that hold “specified foreign financial assets,” including our ordinary shares, whose aggregate value exceeds $75,000 at any time during the taxable year or $50,000 on the last day of the taxable year (or such higher amounts as prescribed by applicable Treasury regulations) are required to file a report on IRS Form 8938 with information relating to the assets for each such taxable year. Specified foreign financial assets would include, among other things, our ordinary shares, unless such ordinary shares are held in an account maintained by a U.S. “financial institution” (as defined). Substantial penalties apply to any failure to timely file IRS Form 8938, unless the failure is shown to be due to reasonable cause and not due to willful neglect. Additionally, in the event an individual U.S. Holder (and to the extent specified in applicable Treasury regulations, an individual Non-U.S. Holder or a U.S. entity) that is required to file IRS Form 8938 does not file such form, the statute of limitations on the assessment and collection of U.S. federal income taxes of such holder for the related tax year may not close until three years after the date that the required information is filed. U.S. Holders (including U.S. entities) and Non-U.S. Holders should consult their own tax advisors regarding their reporting obligations.
South African Tax Considerations
The following is a summary of the material South African income tax consequences for South African tax resident shareholders who are resident for tax purposes in South Africa in relation to the acquisition, ownership and disposal of our ordinary shares, based on current South African law and South African Revenue Service, or SARS, practice as at the date of this document.
This summary is of a general nature only and is not intended to be legal or tax advice to any particular shareholder. This summary is not exhaustive of all South African income tax considerations. Accordingly, shareholders should consult their own tax advisors as to the tax consequences under the tax laws of the country of which they are resident or otherwise subject to tax.
As used in this annual report, the term “SA Tax Resident Shareholder” means a beneficial owner of Grindrod Shipping ordinary shares that is a “resident” as defined in the South African Income Tax Act, No. 58 of 1962, or the Income Tax Act.
Consequently, the term “Non SA Tax Resident Shareholder” means a beneficial owner of Grindrod Shipping ordinary shares that does not meet the requirements to be a “resident” as defined in terms of the Income Tax Act.
This summary only addresses the South African tax consequences for SA Tax Resident Shareholders who hold their ordinary shares as capital assets and does not address the tax consequences which may be relevant to other categories of shareholders such as share dealers. Moreover, certain categories of shareholders, including those carrying on certain financial activities, those subject to specific tax regimes or benefiting from certain reliefs or exemptions, those connected with the Company and those for whom the shares are employment related securities, may be subject to special rules and this summary does not apply to such shareholders.
This summary only addresses the South African tax consequences for SA Tax Resident Shareholders who are shareholders of our ordinary shares registered on the South African administrative depository register.
For purposes of this summary it is understood that Grindrod Shipping is incorporated and tax resident (i.e. has its place of effective management), in Singapore.
SA Tax Resident Shareholders who choose to reposition their interest into an account with a U.S. broker dealer will need to apply for approval from the Financial Surveillance Department of the South African Reserve Bank, or Fin Surv, through their authorised dealer.
SA Tax Resident Shareholders who are individuals can apply to the extent of their single discretionary allowance and foreign capital allowance. If their investment in our ordinary shares registered on the U.S. branch register will exceed these allowances they will need to apply for a special tax clearance certificate before applying to Fin Surv for approval.
SA Tax Resident Shareholders that are corporates will also need to apply for approval to hold our ordinary shares as part of their foreign portfolio investment allowance, provided they do not hold more than 10% of our ordinary shares.
Repositioning of ordinary shares on register located in South Africa to an account with a U.S. broker-dealer
A deemed disposal and reacquisition for an amount equal to the market value of that security will be triggered where a SA Tax Resident Shareholder (applying only to a natural person or a trust) chooses to reposition their ordinary shares reflected in the administrative depository register located in South Africa to an account with a U.S. broker-
dealer
. The deemed disposal and reacquisition will be deemed to take place on the day that the security is registered on the U.S. branch register. Please note that this is a recent amendment in the Income Tax Act which came into operation on March 1, 2021 and applies in respect of any security listed on an exchange outside of South Africa on or after that date.
Please refer to “
Taxation of Capital Gains
” below in respect of the South African tax consequences of the deemed disposal for SA Tax Resident Shareholders which are natural persons or trusts.
Controlled Foreign Company, or CFC
Notably, a controlled foreign company is a non-South African company in which more than 50% of the participation rights / voting rights are directly or indirectly held / exercisable by SA Tax Resident Shareholders who are not headquarter companies.
Prior to January 28, 2022, the Grindrod Shipping ordinary shares were held more than 50% by SA Tax Resident Shareholders, who each held at least 5% of the listed Grindrod Shipping ordinary shares and thus Grindrod Shipping appeared to be a CFC. Any non-South African subsidiaries of Grindrod Shipping in which it could exercise more than 50% of the voting rights would also be CFCs. Certain profits of CFCs would be included in the taxable income of SA Tax Resident Shareholders subject to certain exclusions and exemptions.
Because the Company was a CFC, SA Tax Resident Shareholders who, together with connected persons, held more than 10% of the Grindrod Shipping ordinary shares are advised to obtain tax advice regarding the South African tax implications, including the tax treatment of foreign dividends, arising from holding shares in a CFC. The tax implications set out below may potentially not apply to such shareholders.
The Company is a foreign company as defined in section 1 of the Income Tax Act. A foreign dividend means an amount that is paid or payable by a foreign company in respect of a share in that company, where that amount is treated as a dividend or similar payment by that foreign company for purposes of the laws relating to tax on income on companies of the country in which that foreign company has its place of effective management, which for purposes of this summary is deemed to be Singapore.
The Company is a dual listed foreign company, that is, a company listed on the JSE as well as a recognized foreign exchange, for the purposes of the Income Tax Act.
Corporate Income Tax in relation to dividends
In terms of Section 10B(2)(d) of the Income Tax Act, foreign dividends, excluding such dividends that consist of a distribution of an asset in specie, from the Company will typically be exempt from income tax in the hands of tax residents of South Africa.
In terms of section 10B(2)(e), foreign dividends in respect of a listed share that constitute a distribution of and asset in specie will be exempt in the hands of South African tax resident companies. Where the shareholder is any person other than a South African tax resident company (for example, an individual or trust), a portion, determined in terms of a formula, of the market value of the distribution in specie would be included in the income of the shareholder.
Non-resident shareholders should not be subject to South African income tax in respect of such foreign dividends on the basis that these dividends arise from a source outside South Africa.
For purposes of determining a shareholder’s liability for dividends tax, the definition of a dividend in section 64D of the Income Tax Act includes a foreign dividend paid by a foreign company listed on the JSE, provided that the foreign dividend does not constitute the distribution of an asset in specie. Thus a foreign dividend declared by a company listed on the JSE, will not attract dividends tax if it constitutes the distribution of an asset in specie. Moreover, a foreign dividend received by a SA Tax Resident Shareholder which holds shares in the Company which are registered on the NASDAQ (and does not hold shares registered on the South African administrative depository register) would not be subject to dividends tax in South Africa.
In terms of Section 64D of the Income Tax Act, a cash foreign dividend declared by the Company will fall within the definition of a dividend for dividends tax purposes. Such foreign dividends will attract dividends tax calculated at the rate of 20% of the amount of any foreign dividends paid or becoming due and payable.
In terms of section 64F of the Income Tax Act certain foreign dividends are exempt from dividends tax. These include, inter alia, foreign dividends declared to South African resident companies, provided that the shareholder in question has made the necessary declaration and undertaking prior to the dividend having been paid or becoming due and payable.
Taxation of Capital Gains
On a disposal of Shares by a shareholder, a capital gain or loss will arise, equal to the difference between the disposal proceeds and the base cost of the shares. Such capital gain or loss will be aggregated with all other capital gains or losses derived by the shareholder in the same tax year.
Any aggregate capital gain will, if applicable, be reduced by the natural person’s annual exclusion of R40,000 (R300,000 in the year of death) and the relevant percentage of the capital gain (40% for individuals, special trusts and individual policyholder funds, resulting in a maximum effective tax rate of 18%, and 80% for companies, ordinary trusts and other taxable insurance portfolios, resulting in an effective tax rate of 36% for ordinary trusts and 21.6% for companies), will be included in the shareholder’s taxable income. Any aggregate capital loss will, if applicable, be reduced by the natural person’s annual exclusion as above, and the net amount will be carried forward for set off against future capital gains.
The effective capital gains tax rate is determined by multiplying the inclusion rate by the corporate income tax rate (i.e. 27% x 80% =21.6%). It was announced in the 2022 Budget, and confirmed in the Rates and Monetary Amounts and Amendment of Revenue Laws Act No. 19 of 2022 (dated 5 January 2023), that companies with a year end after 31 March 2023 will be subject to a 27% corporate income tax rate. Those with year ends before 31 March 2023, however, will still be subject to a 28% corporate income tax rate until the following year, and their effective capital gains tax rate will be equal to 22.4% (28% x 80% =22.4%).
Securities Transfer Tax, or STT
STT arises on the transfer of a share in a non-resident company which is listed on the JSE (i.e. registered on the South African administrative depository register), including any reallocation of securities from a shareholder’s bank restricted stock account or a shareholder’s unrestricted and security stock account to a shareholder’s general restricted stock account.
Thus the disposal of ordinary shares in the Company which are listed on the JSE will typically give rise to STT at the rate of 0.25% of the ‘taxable amount’, generally being the consideration payable for the shares. STT only arises to the extent that a transfer results in a change in beneficial ownership.
In terms of the STT Act No 25 of 2007, or the STT Act, the liability to pay STT in relation to the transfer of a share listed on the JSE, rests with-
| (a) | a member (defined as an “authorised user” in section 1 of the Financial Markets Act No 19 of 2012), if the listed security is purchased through the agency of, or from such member; |
| (b) | the participant (defined as a person authorised by the central securities depository to hold in custody and administer the listed security), where the listed security is purchased from the participant and the STT has not been settled by a member referred to under (a) above; |
| (c) | by the purchaser, if no STT was payable under (a) or (b) above. |
The STT Act contains a number of specific exemptions from STT, which may apply to exempt the transfer in question from STT.
Donations tax is payable on the value of any property disposed of under any donation made by any SA Tax Resident Shareholder. A donation means any gratuitous disposal of property, including any gratuitous waiver or renunciation of a right, and is deemed to include the disposal of an asset to the extent that the consideration is inadequate. Exemptions from donations tax include donations between spouses, donations made in contemplation of death and an annual exemption of R100,000 for individuals.
Donations tax is payable at a rate of 20% on the value of aggregate donations not exceeding R30 million and 25% of the aggregate donations exceeding R30 million.
Inheritance tax in South Africa is referred to as estate duty. Estate duty will be levied on the worldwide assets of any person who is
ordinarily resident
in South Africa at the date of his or her death. Estate duty will also be levied on any person who is not ordinarily resident in South Africa at the date of his or her death in respect of any assets situated in South Africa or rights which are enforceable in South Africa.
Various allowable deductions are permitted to determine the net value of the estate, including the value of all property that accrues to a surviving spouse of the deceased. After deducting a primary abatement of R3.5 million, estate duty is levied at a rate of 20% on the first R30 million of the dutiable amount of an estate and 25% on the amount exceeding R30 million. Any foreign death duties proved to have been paid in respect of property situated outside South Africa and included in the estate of any person who at the date of death was ordinarily resident in South Africa, may be deducted from the estate duty payable.
Shares which are registered on the South African administrative depository register of the Company in South Africa will be included in the estate of any person who is ordinarily resident in South Africa at the date of death, and in the South African estate of any person who is not ordinarily resident in South Africa at the date of death, on the basis that any transfer of ownership in such Ordinary Shares is required to be registered in South Africa.
Estate duty is subject to the provisions of any applicable double taxation agreement in relation to estate duty.
Singapore Tax Considerations
Dividends or Other Distributions with Respect to Ordinary Shares
Under the one-tier corporate tax system which currently applies to all Singapore tax resident companies, tax on corporate profits is final, and dividends paid by a Singapore tax resident company will be income tax exempt in the hands of a shareholder, whether or not the shareholder is a company or an individual and whether or not the shareholder is a Singapore tax resident.
Capital Gains upon Disposition of Ordinary Shares
Under current Singapore tax laws, there is no tax on capital gains. There are no specific laws or regulations which deal with the characterization of whether a gain from the disposal of ordinary shares is income or capital in nature, as it is determined based on the consideration of the facts and circumstances on a case-by-case basis. Gains arising from the disposal of Grindrod Shipping’s ordinary shares may be construed to be of an income nature and subject to Singapore income tax, if these are regarded as shares held on revenue account for trading purposes. However, under Singapore tax laws, any gains derived by a divesting company from its disposal of ordinary shares in an investee company between June 1, 2012 and December 31, 2027 are generally not taxable if immediately prior to the date of the relevant disposal, the divesting company legally and beneficially has held at least 20% of the ordinary shares in the investee company for a continuous period of at least 24 months.
The gross proceeds received from the issue or transfer of ownership of Grindrod Shipping’s ordinary shares to a Singapore incorporated entity should be exempt from Singapore Goods and Services Tax. On the other hand, the gross proceeds received from the issue or transfer of shares of Grindrod Shipping’s ordinary shares to an overseas incorporated entity should qualify for zero-rating GST treatment. Hence, the holders would not incur any Goods and Services Tax on the subscription or subsequent transfer of the shares.
If Grindrod Shipping’s ordinary shares evidenced in certificated forms are acquired in Singapore, stamp duty is payable on the instrument of their transfer at the rate of 0.2% of the consideration for the transfer or the market value of Grindrod Shipping’s ordinary shares, whichever is higher.
Where an instrument of transfer is executed outside Singapore or no instrument of transfer is executed, no stamp duty is payable on the acquisition of Grindrod Shipping’s ordinary shares. However, stamp duty is payable if the instrument of transfer is executed outside Singapore and is received in Singapore. The stamp duty is borne by the purchaser unless there is an agreement to the contrary. Transfer of scripless shares is generally not subject to Singapore stamp duty.
On the basis that any transfer instrument in respect of Grindrod Shipping’s shares traded on the NASDAQ or the JSE are executed outside Singapore through Grindrod Shipping’s transfer agent and share registrar in the United States for registration in Grindrod Shipping’s branch register of members maintained in the United States (without any transfer instrument being received in Singapore), no stamp duty should be payable in Singapore on such transfers.
Tax Treaties Regarding Withholding Taxes
There is no comprehensive avoidance of double taxation agreement between the United States and Singapore which applies to withholding taxes on dividends or capital gains.
Dividends and Paying Agents
Grindrod Shipping files its annual and current reports and other information with the SEC. The SEC filings are available to the public from commercial document retrieval services. Grindrod Shipping’s SEC filings may also be obtained electronically via the Electronic Data Gathering, Analysis and Retrieval, or EDGAR, system on the website maintained by the SEC at http://www.sec.gov.
The above information and certain other documents may be obtained at the registered office of Grindrod Shipping and are accessible at www.grinshipping.com. The information contained on our website is not incorporated by reference in this annual report.
| | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We currently employ our vessels primarily in the spot market or spot market-oriented pools and do not have a significant amount of fixed revenue cover and we are therefore exposed to the cyclicality and volatility of the spot market. Spot rates may fluctuate significantly based upon the supply of and demand for seaborne shipping capacity.
Borrowings under our credit facilities generally bear interest at rates based on a premium over LIBOR. Therefore, we are exposed to the risk that our interest expense may increase if interest rates rise. We currently do not have any interest rate swaps in place. We may, in the future use interest rate swaps to reduce our exposure to market risk from changes in interest rates. The principal objective of these contracts is to minimize the risks and costs associated with our variable-rate debt and are not for speculative or trading purposes.
Our bank loans and other borrowings were originally issued at US$ LIBOR floating rates plus a margin. They have not been transitioned to an alternative rate as the US$ LIBOR referred to in the agreements will continue to be quoted until 30 June 2023. Two of the bank loans will mature before this date and do not require amendment. Management are discussing the transition for the longer term bank loans and other borrowings with the lenders and do not anticipate material adjustments to effective interest rates. We do not currently have any interest rate hedging instruments.
For the years ended December 31, 2022, 2021 and 2020, we paid interest on our outstanding debt at a weighted average interest rate of 8.16%, 3.82% and 3.71%, respectively. A 0.5% increase or decrease in LIBOR would have increased or decreased our interest expense for the years ended December 31, 2022, 2021 and 2020, by $0.3 million, $0.5 million and $1.1 million, respectively.
Foreign Exchange Rate Risk
Our primary economic environment is the international shipping market. This market utilizes the U.S. dollar as its functional currency. Consequently, virtually all of our revenue and expenses are in U.S. dollars. Transactions in currencies other than the functional currency are translated at the exchange rate on the transaction date and the relevant payment is translated on the payment date, with the difference being reported in the income statement as an exchange gain or loss. In addition, a part of our debt obligations were, but no longer are, denominated in currencies other than the U.S. dollar, being the Japanese Yen. Assets and liabilities denominated in currencies different from the functional currency are translated into the functional currency for the preparation of the statement of financial position at the exchange rate prevailing on the statement of financial position date. Differences in exchange rates between statement of financial position dates may lead to gains or losses being reported in the income statement.
Extraordinary transactions and the translation of the financial statements of the subsidiaries whose functional currencies are not the U.S. dollar for purposes of preparing our consolidated financial statements, may follow different translation procedures. Depreciation in the value of the U.S. dollar relative to other currencies will increase the U.S. dollar cost of us paying such expenses. The portion of our business conducted in other currencies could increase in the future, which could expand our exposure to losses arising from currency fluctuations.
There is a risk that currency fluctuations will have a negative effect on our cash flows. We have not entered into any hedging contracts to protect against currency fluctuations. We may seek to hedge this currency fluctuation risk in the future.
The following sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the respective period end for a 10% change in foreign currency rates. If the relevant foreign currency strengthens by 10% against our functional currency, relative to the exchange rate that we used to prepare the respective financial statements, profit or loss will increase/(decrease) by:
| | | Impact on profit or loss | |
(In millions of U.S. dollars) | | 2022 | | | 2021 | |
| U.S. dollars | | $ | - | | | $ | 0.1 | |
| South African Rand | | | (0.2 | ) | | | (0.5 | ) |
From time to time, we may take positions in freight derivatives, mainly FFAs. Generally freight derivatives may be used to hedge exposure to charter rate market risk through the purchase or sale of specified time charter rates for forward positions. Settlement of FFA is in cash, against a daily market index published by the Baltic Exchange. By taking positions in FFAs or other derivative instruments we could suffer losses in the settling or termination of these agreements.
As of December 31, 2022, there were no outstanding FFA’s. There were 23 outstanding contracts as of December 31, 2021 and no outstanding FFA’s as of December 31, 2020. For the years ended December 31, 2022, 2021 and 2020, we recorded a net gain on outstanding FFAs of $6.8 million, $5.1, and $nil, respectively, in our consolidated financial statements, which resulted from fair value gains.
Our operating results are affected by movement in the price of fuel oil consumed by the vessels-known in the industry as bunkers. The price and supply of fuel is unpredictable and fluctuates based on events outside our control, including changes in legislation such as the IMO 2020 regulations, geopolitical developments, supply of and demand for oil and gas, actions by OPEC and other oil and gas producers, war and unrest in oil producing countries and regions, regional production patterns and environmental concerns. Further, fuel may become much more expensive in the future, which may reduce our profitability. We do hedge some of our exposure to bunker price risk.
For the years ended December 31, 2022, 2021 and 2020, we recorded a net loss of $0.1 million, a net gain of $0.2 million and a net gain of $0.5 million on bunker swaps, respectively, which resulted from fair value loss or gain, in our consolidated financial statements.
A 10% increase or decrease in the bunker price, would result in a decrease or increase of the hedging reserve for the years ended December 31, 2022, 2021 and 2020, by $0.5 million, $0.8 million and $0.2 million, respectively.
Concentration of Credit Risk
Financial instruments, which potentially subject us to significant concentrations of credit risk, consist principally of trade accounts receivable and bank balances. We closely monitor our exposure to customers for credit risk. We have policies in place to ensure that we trade with customers with an appropriate credit history. We do not take out credit default insurance.
Our maximum exposure to credit risk in the event that counterparties fail to perform their obligations as at the end of each financial year in relation to each class of recognized financial assets is the carrying amount of those assets as indicated in our statement of financial position.
We do not expect inflation to be a significant risk to direct expenses in the current and foreseeable economic environment.