Will Safe Bulkers Do The Same As DryShips?

Oct.21.13 | About: Safe Bulkers (SB)

Introduction

I wrote about Safe Bulkers (NYSE:SB) earlier this year in this article, and also talked about its preferred shares here, so I continued to follow the company. When I published my first article on Safe Bulkers, the share price was trading around $5.25/share, and has since then enjoyed a huge run to Friday's closing price of $7.60 which is a return of approximately 45%. The current share price of $7.60 is approximately the highest level in 18 months, and I think the company will use the recent strength in its share price to raise more capital.

Let's start with the good news

Safe Bulkers has not less than five Panamax-class vessels with charters which expired in September/October of this year. This means the company will very likely have been able to re-deploy the ships in a higher price environment, as the current daily charter rate is on average 20% higher than per the previous contracts. If SB would have been able to re-deploy these five vessels at attractive charter rates, the company will enjoy a higher cash inflow (which I estimate to be $4M per year for the five vessels combined). On top of that, I also expect Safe Bulkers to have re-deployed three Kamsarmax-vessels at a higher charter rate.

(click to enlarge)Click to enlarge

Why would Safe Bulkers raise money?

Other dry bulk shippers such as DryShips (NASDAQ:DRYS) have taken advantage of the recent shipping rates to raise additional capital to strengthen its balance sheet by raising $200M. Whilst I admit DryShips' balance sheet looks worse than Safe Bulkers' balance sheet (but manageable thanks to its exposure to Ocean Rig UDW (NASDAQ:ORIG) ), it might be a good idea for Safe Bulkers to top up its cash balance as well.

First of all, It has been 18 months since the company raised cash, as it issued 5.75M shares to raise approximately $37M. As the company raised money at $6.50/share, I don't think anyone would be upset if Safe Bulkers would raise additional cash at a higher price.

Secondly, earlier this year, the company filed a shelf registration statement, which allows it to easily issue new common stock and preferred shares up to $300M. Safe Bulkers already issued $44M worth of preferred shares (see my previous article about the preferreds), so it can raise an additional $255M without too much problems. As such, I wouldn't be surprised to see an announcement from Safe Bulkers stating it will take advantage of the better markets to raise some money.

Would a capital raise be bad news?

No, even though I'm not a shareholder (anymore, I sold my SB preferred shares in July after it shot up) I would actually be happy if the company raised additional funds. If Safe Bulkers would issue 7.7M new shares (a 10% dilution) at a 6% discount to the market price, it would raise $55M which would really strengthen its balance sheet. On top of that, as the book value at the end of June this year was approximately $6.50/share, it would actually be a smart move for Safe Bulkers to raise cash at a premium to its book value.

Conclusion

I'm not sure Safe Bulkers will issue new shares, but I would -from a neutral point of view- not oppose an issue, as it would happen at a premium to the company's book value and would provide the company with additional room to breathe.

For investors who would like to (partially) hedge exposure to the volatility in the sector, it might be interesting to write covered calls 7.5 and 10 for April 2014 and receive a premium of respectively $0.90 and $0.20.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.