Scorpio Bulkers: An Upcoming Shipping IPO Worthy Of Attention

Nov.21.13 | About: Scorpio Bulkers (SALT)

Maritime commerce, in all of its forms, is an indisputable instrument of global trade. At sea is where fortunes have long been made, and where empires have traditionally been built. In the vast majority of instances, the sea faring capitalists of the world tend to have shipping in their blood. Nautical transport, perhaps more than any other tent pole of international business, seems prone to a hereditary system of corporate evolution. The most common form of "climbing the corporate ladder", tends to be a passing of the torch from one generation to the next. The shipping industry has forever been, for better or worse, one largely of insulated design.

Among these shipping families, renowned in history for their longevity, resourcefulness, tradition, and ruthlessness, is the Lolli-Ghetti family. Descendent of the Bibolini family, one of Italy's oldest and most historically relevant shipping families, the Lolli-Ghetti family remains a significant force among today's leading deep-sea industrialists. Among the family's current holdings, is The Scorpio Group, which owns and operates Scorpio Tankers (NYSE:STNG). However, earlier this month, a recently formed subsidiary of The Scorpio Group registered for an IPO in New York. This new subsidiary is named Scorpio Bulkers (NYSE:SALT), and hopes to be listed on the NYSE. This development should prove to be both advantageous, and profitable, for the Scorpio Group.

Shipping Royalty

As the saying goes, "one needn't be of royal blood to be of royal worth". In every industry, profession, and sector of society, there are those who are referred to as royalty, without having actually been descendent of kings and queens. For example, the Kennedy family of Massachusetts is often referred to as "American Royalty" for their political prowess through the years. Likewise, the prominent American family known by the surname Folger is often referred to as "Coffee Royalty". These are popular colloquialisms. By this same measure, the Lolli-Ghetti family can be considered Shipping Royalty.

Glauco Lolli-Ghetti , the founder of The Scorpio Group, and Scorpio Ship Management, was a significant figure in global shipping dating back to the 1950's. It was during that decade when he married into the Bibolini family, the leading Italian shipping family of the era. In 1955, upon the death of his father in law, Mr. Lolli-Ghetti created a company of his own named Carbonavi, and he began to develop its fleet. Over the next 20 years, the Carbonavi fleet grew to include handysize and handymax bulk carriers, as well as suezmax tankers, capsize bulkers, and oil bulk ore carriers. He developed a special opinion of oil bulk ore carriers specifically, citing their commercial value, and safety, explicitly. He grew to become a proponent of safety, responsibility, and environmental awareness at a time when these attributes were largely afterthoughts. His opinion, that "the best quality ensures greater safety", is a company motto still valued today.

In the late 1970's, Mr. Lolli-Ghetti moved from Italy to New York. This was an inevitable progression. He had been awarded the internationally recognized "Maritime Man of the Year Award" in 1970, and had been appointed as president of the Italian Ship Owners Association in 1972. Like many Italians before him, he desired to take his perspectives, expertise, and business acumen to America to explore additional opportunities. In New York, he expanded his fleet, established yet another corporate subsidiary, and added to his reputation as a trustworthy, capable, and ambitious shipping executive. He continued to expand, diversify, and grow over the next 25 years. The company, eventually, settled its corporate headquarters in Monaco, where it remains today. Glauco remained the company's most active, and influential, executive until his death in 2006.

The Modern Era

Today, the Scorpio Group, and all of its affiliates and subsidiaries, is under the guidance of Emanuele Lauro, a member of the Lolli-Ghetti family. Mr. Lauro became the managing director of Scorpio Ship Management in 2004, and successfully managed to expand the global brand of Scorpio. As a result of his efforts, the company reconfigured and realigned itself to form a new Scorpio Group. The new focus was expanded and redefined to include pooling, fleet management, commercial management, dry bulk logistics, private equity, and extended commodity interest. The addressable markets of the new Scorpio Group were extensive and ever growing.

In April of 2010, the IPO was launched for Scorpio Tankers. In the not too distant future, the IPO will launch for Scorpio Bulkers as well.

Scorpio Bulkers IPO Preparation

Depending on one's perspective, the timing of this upcoming IPO is either misguided or serendipitous. It is of the opinion of this contributor that the timing could not be better. The dry bulk shipping sector has just recently begun its inevitable process of recovery and re-emergence. The dust has begun to settle following a nearly six year period of overwhelming dormancy. An unbalanced supply and demand ratio, low freight rates, high fuel costs, deteriorating asset values, and global recession, depressed the industry to unprecedented levels. Furthermore, because this collapse immediately followed an all-time high, the number of new ship builds, and the overextension of shippers financially, crippled investor interest and faith.

However, in recent months, charter rates for dry bulk shippers have been increasing. As a result, the financial likelihood of revenues finally beginning to translate back into profits is improved. This prospect of profitability is enhanced more so when considering that dry bulk commodities, such as iron ore and wheat, are increasing in price; a reflection of growing global demand. All of these factors bode well for dry bulk shippers in general.

As it pertains to Scorpio Bulkers explicitly however, there are far more reasons for optimism. The Scorpio Group, as a conglomerate, has committed a significant amount of money to building and expansion during the dry bulk down turn. While most other shipping corporations were waiting for the storm to pass, Scorpio was embracing the rain in preparation of the future. According to Clarkson PLC, the world's largest ship broker, Scorpio has committed more money to building new ships and supporting infrastructure than any other comparable entity in the world since 2008. Almost all of these new ships for Scorpio, estimated to number upwards of 54, are expected to be launched in 2014. 36 of those new ships are designated for Scoprio Bulkers specifically. Those 36 ships, comprised of 26 ultramaxes and 10 kamsarmaxes, carry a total purchase price of 1.03 billion dollars. To date, the company has already paid 157 million dollars in installments for these ships. This a good sign moving forward. The company has already paid nearly seven percent of its outstanding balance for new builds, before any of the ships have touched the water, or begun to generate revenue. This is a proactive and fiscally responsible decision. This decision is also well timed. In terms of acquisition costs, they are at the lowest average levels the shipping industry has seen in a decade.

Furthermore, Scorpio Bulkers has expressed their intention to minimize their long term debt, and maximize their financial leverage and flexibility. According to a statement from the company;

"We plan to finance the remaining contractual commitments of $872.8m for our initial Fleet with the net proceeds received from the IPO, the remaining net proceeds we have received from the equity private placements, other available cash on hand, cash flows from operations after the delivery of one or more vessels in our initial fleet, borrowings under new secured credit facilities, and from securities offered in the public and private debt, and equity capital markets."

For prospective investors, this should be a statement of endearment. Assuming that Scorpio Bulkers can, in fact, significantly, if not entirely, pay down their remaining debt for their newly built fleet with upcoming proceeds and other available liquidity, it would put them in a rare position. The preponderance of dry bulk shippers operate from a position of significant encumbered debt. Nearly all of their competitors would maintain older ships, with higher collateralization ratios, and thus possess less flexibility in terms of pricing and contract litheness. If in fact Scorpio Bulkers can function from a position that allows them to offer better ships, at lower margins, proposing less safety and maintenance concerns than their competitors, then one could reasonably expect them to make an immediate impact on the market.

In terms of the Scorpio Bulkers relationship with the Scorpio Group and Scorpio Tankers, the company released the following statement;

"We believe that one of our principal strengths is our relationship with Scorpio Tankers and the Scorpio Group of companies. Our vessel operations are managed under the supervision of our board of directors, by our management team and by members of the Scorpio Group of companies. We expect our relationship with Scorpio Tankers and the Scorpio Group of companies will give us access to their relationships with major international charterers, lenders and shipbuilders. We will have access to Scorpio Group's customer and supplier relationships and their technical, commercial and managerial expertise, which we believe will allow us to compete more effectively and operate our vessels on a cost efficient basis."

Once again, this stands to be a considerable advantage for Scorpio Bulkers. The company will essentially be launching themselves into an industry without the shortcomings and challenges that most companies would face. Scorpio Bulkers will already possess right of entry into relationships with vendors, charterers, banks, ship builders, infrastructure support, suppliers, logisticians, and technical experts. These advantages set the company up to be perceived as a veteran entity transitioning into a public forum. As history has shown, transitional IPO's tend to perform much better than "new company" IPO's. Thus, Scorpio Bulkers gets the publicity, excitement, and anticipation of a "new company" making an IPO, but with the organization and proven stability of a private company initiating a "transitional IPO".

What We Know Thus Far

Robert Bugbee, a veteran executive of Scorpio Tankers, and the President of Scorpio Bulkers, has stated that "We see the opportunity as here and now. Speed and momentum is extremely important in shipping as markets start to recover." In addition, he went on to say "One of the reasons for the success of Scorpio is the lack of shipping companies with a clean balance sheet today." These statements validate the purview detailed herein thus far; that this is the time, and this is the company capable of seizing this time, in the dry bulk sector.

In terms of anticipated opening price for the IPO, this is highly speculative at best, and yet to be determined. The offering is being made by Deutsche Bank Securities; that is known. Furthermore, the company issued an aggregate of 97,240,411 common shares in three separate Norwegian private placements, exempt from registration under the Securities Act, resulting in reported net proceeds to Scorpio Bulkers of 824 million dollars.

What is also known, according to Bugbee, is that one of the catalysts, which led to the Scorpio Group's expansion into the dry bulk sector, was the demand and insistence of such from shareholders. This would lead one to believe that the IPO should garner considerable interest and support from existing Scorpio investors. Further validation of this premise was secured in the words of Erik Helberg, an executive at RS Platou Markets, who said;

"Given Scorpio's track record in the capital market and their management, and the strong interest in dry bulk at the moment, there are reasons to believe this will be a tight offering that will get strong support from the investors in Scorpio Tankers."

Expected Fleet Utilization and Business Model

Scorpio Bulkers has stated their intention to employ their fleet in a diverse and cost efficient way in order to ensure immediate revenue. They have stated that "we intend to operate our vessels in spot market-oriented commercial pools, in the spot market, or, under certain circumstances, on time charters."

In order to increase vessel utilization, and thereby revenues, they intend to participate in commercial pools operated by the Scorpio Group, in which other ship owners with similar, high-quality, modern and well-maintained vessels participate. 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 maximizing scheduling efficiencies. Also, pools employ experienced commercial managers, and operators, who have close working relationships with customers and brokers. Technical management is, however, performed by each ship owner.

In terms of the spot market, Scorpio Bulkers plans to utilize market voyage charter contracts to carry a specific cargo from a departure port, to an arrival port, for an agreed freight fee per ton of cargo, or a specified total amount. Under spot market voyage charters, Scorpio would pay specific voyage expenses such as port, canal and bunker costs, but would retain the right to amend rates on renewable contracts as market fluctuations allow.

With time charters, Scorpio will earn a fixed and stable cash flow for a known period of time. Time charters also mitigate, in part, the seasonality of the spot market business, which is generally weaker in the second and third quarters of the year. They have also stated that, "in the future, we may opportunistically look to enter our vessels more into time charter contracts, should long term rates continue to become more attractive. We may also enter into time charter contracts with profit sharing agreements, which enable us to benefit if the spot market increases."

Risks

As is already well known, risks associated with IPO's are prevalent and substantial. In this case, where initial price details have yet to even be speculated, gauging risk is almost an impossibility. Granted, if prices opened at one dollar, risk would be all but non-existent. If prices open between nine and eleven dollars (given the private equity placement of 97 million shares and Scorpio's filing for a 100 million dollar IPO) this would be equitable. In the event prices opened at between 14-16 dollars, it would be a different story entirely. However, as was previously stated, to speculate here, in any capacity, would be a fool's errand.

Moreover, while the dry bulk industry is recovering, the rate of the recovery is yet to be seen. Initiating an IPO, freshly out of a down cycle in the industry, carries much uncertainty. The historical volatility of the industry, as well as the highly speculative rate of recovery, makes this a very subjective matter for each potential investor as an individual. Furthermore, while all shippers operate in the spot market, spot charter rates are volatile, and fluctuate on a seasonal and year-to-year basis. The 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. Therefore, vessels operating in the spot market generate revenues that are less predictable than others. This volatility can make investments into shipping an undertaking made only for those with a high risk tolerance.

Conclusion

The Scorpio Group is a strong, respected, and admired company. Their subsidiaries, most notably Scorpio Tankers, are significant players in their respective sectors. Scorpio Bulkers appears poised and prepared to continue that tradition of achievement.

Scorpio Bulkers also has the advantage of learning from the IPO made by Scorpio Tankers in 2010. That IPO was relatively well anticipated, but failed to show much momentum out of the gate. That experience could lead to less aggressive initial pricing, and thus more highly contested interest from prospective investors. In addition, given the current winds of change in the shipping industry, an IPO at this time could prove more fervently received, by the general investing public, than the 2010 Scorpio Tankers IPO.

At the end of the day however, the decision to "keep an eye" on this upcoming IPO should be a no-brainer. The company has deep bloodlines in the shipping industry. The diversification, success, and reputation of the company's affiliates, provide a strong foundation for the launch of Scorpio Bulkers. The recovery of the dry bulk sector, in consideration of the company's strong financial position, responsible financial plan, and all-encompassing business model, stand to support and give credence to this upcoming IPO. Once opening price is further narrowed and anticipated, then the process of considering investment can truly begin.

The Scorpio Group, since 2008, has led the way for investment back into maritime commerce. They have been aggressive, effective, and trendsetting during this down time. One would only expect their devotion, commitment, and assertiveness to continue well into the industry's recovery. Comparatively, this year's domestic market performance has been extraordinary because it has flourished not because of a strong economy, but in spite of one. This same concept could be applied to Scorpio Bulkers upcoming IPO. The Scorpio Group has been thriving in a down market, leading one to wonder what they could be capable of in a strong market. That fact, standing on its own, makes this IPO, one bursting at the seams with potential and possibility. For the speculative investor, with an interest in maritime commerce, the Scorpio Bulkers IPO is an event worthy of further consideration.

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.