New shipper company Baltic Trading (BALT) completed its initial public offering on March 15th. The new company immediately took its 228 million and began buying ships - a selection of cheap ships of varying sizes. Was this really a good time to do a shipper IPO, with shipper stocks suffering the disdain of the market? Maybe so. BALT had an idea for a different kind of shipping company, with a different kind of business plan.
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The company operates as a wholly-owned subsidiary company of Genco (GNK), a major US shipping company. Not only that, but the company is largely a virtual creation, having only a single employee, its president. All the shipping operations are run by GNK.
According to this article in Barrons, the company has adopted a pricing policy of offering ship charters whose rates adjust -- up or down -- based on the current spot rates. For instance, if Big China Steel Co. leases a Handysize vessel from Baltic for 3 months, the weekly rates that BCS will pay to BALT each week will be determined by the value of the current spot market.
This brings up a rather interesting situation. The spot rates of the drybulk shippers are widely available to investors in the form of the daily published index BDI, the Baltic Dry Index. We know what the spot rates are, we know how many ships are chartered from the company's press releases, therefore we know (or can figure) the exact revenue being paid to BALT at all times. It doesn't take an analyst.
This means that investors now have what amounts to a Baltic Dry Index ETF. Buying BALT stock is the same, or should be the same, as buying a position in the BDI. But, to what extent is this true?
Stock price in the shipping sector is dominated by risk factors, instead of income factors, such that a price based solely on the BDI might be asking too much. Stock in a shipping company is stock in a very much out-of-favor industrial sector, and prices reflect fears based on the availability of credit, the existence of debt covenants which can put a company at the mercy of its creditors, the nightmare of frequent shareholder dilution by issuance of new shares, and the fragility of dividend returns. Looking at the chart above, you can see that the fit between BDI and BALT is quite vague.
However, management publicly declares the dividend policy. In their second earnings statement, they stated:
Our dividend policy is to pay a variable quarterly dividend equal to our Cash Available for Distribution, during the previous quarter, subject to any reserves our board of directors may from time to time determine are required. Dividends will be paid equally on a per-share basis between our Common Stock and our Class B Stock. Cash Available for Distribution represents our net income less cash expenditures for capital items related to our fleet, such as drydocking or special surveys, other than vessel acquisitions and related expenses, plus non-cash compensation. For purposes of calculating Cash Available for Distribution, we may disregard non-cash adjustments to our net income, such as those that would result from acquiring a vessel subject to a charter that was above or below market rates.
Investor confidence will determine how closely BALT follows BDI. So far, we have had two earnings reports and one dividend declaration -- 16 cents, giving a return of about 5.6%. It will probably take at least one year before the relationship, if one develops, is set. The parent company, GNK, is solid and has dedicated its cash flow to acquiring new ships since the abandonment of its dividend in the washout of 2008/9.
Smart money, though, continues to view shipping stocks as a short term investment only because of the oversupply of ships which could develop if all the ships currently ordered for future delivery are put to service, driving down rates. I suggest that the stock trader not rely on BALT as a BDI surrogate yet - that day may come, but risk avoidance trumps income in the pricing of stocks everytime.
Disclosure: Author is currently long GNK