Gulf Navigation shares plummeted yesterday after it reported a doubling of annual losses and the company's auditors warned that its future depends upon the willingness of its lenders to keep it afloat.
Shares in the Dubai-based shipping company, which deals in cargoes of oil and chemicals, fell as much as 9.8 per cent to 22 fils each, their lowest level in more than a year.
The company's stocks rallied later in the trading day, but nevertheless closed down 8.2 per cent at 22.4 fils per share.
Gulf Navigation posted a net loss for last year of Dh147.8 million (US$40.2m), compared with losses of Dh72.7m a year earlier, following write-downs of Dh89.7m in goodwill incurred as part of its initial public offering.
The auditors' report also warned that accumulated losses of Dh477.6m mean that Gulf Navigation's future as a going concern "is reliant upon the continued availability of external debt financing" and reiterated that a breach of its terms of agreement gives lenders the right to declare a default and call in all outstanding debts.
In a statement, Gulf Navigation's chairman Abdullah Al Shuraim said "the company continues to work very closely with our lenders to ensure that a new agreement can be reached to remedy the breach of its covenants within its current lending agreements", adding that he expected progress in talks during the current quarter.
Gulf Navigation said it had made all of its payments to date.
It was "confident that a decision will be reached with the lenders which will avoid a demand for immediate repayment of the loans and ensure compliance with the loan agreement", the company said.
It also said it was preparing for a potential arbitration hearing in London against a Chinese shipyard over disputed payments of Dh106.5m, which Gulf Navigation hopes to claw back.
The stock was traded heavily and led declines on the Dubai Financial Market General Index, which fell 0.8 per cent to 1,829.24.
Gulf Navigation, which has gone through six chief executives in as many years, has not turned an annual profit since 2009 and began debt restructuring talks in 2011.
The company was heavily affected by the financial crisis and its ability to restructure its debts had been curtailed, said Marwan Shurrab, the assistant fund manager and chief trader at Gulfmena Alternative Investments.
The company "depleted a huge proportion of its cash reserves" during the process, he said. "The restructuring phase affected the company's results and its ability to tap into debt markets has harmed its ability to restructure."
Gulf Navigation's revenues fell by 21.5 per cent to Dh201m for the year, while the goodwill write-offs caused operating losses to triple.
Goodwill is booked during acquisitions and reflects a premium that a company pays to take over another.
The Dh428m goodwill booked by Gulf Navigation at the end of the year was a consequence of its initial public offering in 2006, the company said.
Goodwill is usually written down on an annual basis unless it has not been consolidated within a parent company, Mr Shurrab said.
The Dh89.7m charge was the first time Gulf Navigation had written down its goodwill. The company could not be reached for further comment.
The financial crisis forced companies around the world to make heavy write-downs against goodwill booked during transactions struck before the crisis hit.
But the European Securities and Markets Authority has cast doubts about the rigour of international accounting practices related to goodwill.
It estimated that premiums paid for acquisitions on the books of European companies totalled €800bn in a study of 235 companies during 2011, with around 43 per cent of those examined potentially overstating the value of past purchases.