Jim Cramer devoted his sell block a few weeks ago to several IPO offerings in the dry bulk and oil tanker markets. This article focuses on Baltic Shipping (NYSE:BALT), a company started by Genco Shipping (GNK) to convey iron, coal, fertilizer, and other dry bulk. Mr. Cramer criticized the IPO because it did not own any ships and concerns about Genco management taking advantage of shareholders.
As to no ships, BALT has actually purchased 6 vessels, 2 Cape and 4 Supramax sized vessels, and plans to acquire more. The 6 ships cost $288 million and are expected to come on line between April and October. The Capes have already been contracted out to Cargill for 11 to 13.5 months on the spot market.
The IPO raised $228 million through stock offerings on the NYSE. An additional $75 million was put up by GNK in exchange for 5.7 million shares, or about 25% of the company. The $300 million in the kitty will be used to fund their vessel acquisitions. Right now the company consists of cash/vessel purchases. No debt. At its current price, $13.55, its market cap is book value.
The idea behind the IPO is to run a company with no debt, full pay outs, future vessel expansion through stock offerings, and leasing ships in the spot market.
Per their S1 SEC documents:
We plan to operate all of our vessels in the spot market, on spot market-related time charters, or in vessel pools trading in the spot market. We expect to finance our fleet primarily with equity capital and to utilize little to no leverage, and we intend to enter into a revolving credit facility for bridge financing for acquisitions. We aim to grow our fleet through timely and selective acquisitions of vessels in a manner that is accretive to our earnings and cash flow. At or prior to the closing of this offering, Genco, through its wholly-owned subsidiary Genco Investments LLC, will make a capital contribution to us of $75 million in exchange for shares of our Class B Stock. We intend to distribute to our shareholders on a quarterly basis all of our net income less cash expenditures for capital items related to our fleet, other than vessel acquisitions and related expenses.
What other shipping company plies its trade in the spot market? Finances its ships with equity offerings? Pays out all excess profits in the form of dividends? Has no debt? Why, no other than Jim Cramer favorite North American Tanker (NYSE:NAT).
As to conflict of interest: GNK will own 25% of the company. This ensures the parent company's interests will be aligned with BALT investors. Expect decent dividend returns in BALT with lower balance sheet risk seen in other drybulkers.
Finally, is it really such a bad thing to have a parent company play a big role in its offspring, and have a large stake? Witness Grupo de Mexico's majority ownership of Southern Copper (NYSE:SCCO), a company that has a history of excellent dividend payments and being very shareholder friendly.
Disclosure: Long BALT