Star Bulk Carriers Corp. (NASDAQ:SBLK) recently released its 2nd-quarter earnings, and along with it, announced it had purchased the fleet from Excel Maritime, which filed for bankruptcy in 2013. The company has been trending upwards and has had some setbacks, as have almost all of the Dry Bulk Carriers that are subject to the global economy. Leading up to the earnings report, the company began trending higher due to the rise in the Baltic Dry Index (BDI), and then jumped another 10% after announcing the acquisition and beating earnings.
Star Bulk announced on August 19th that it would be acquiring 34 additional ships from Excel Maritime Carriers Ltd., which currently sits in bankruptcy. This purchase will make Star Bulk the largest US-listed Dry Bulk company, and will almost double the size of the fleet on the water from 3.5 million dwt to 6.6 million dwt by December 2014.
This acquisition is a huge bet on the improvement in the BDI, which comes with small downside considering the price paid per ship. The total cost for the transaction was $634.91 million, paid in the following manner:
- $231m bridge loan provided by Oaktree and Angelo Gordon
- $24.9m of senior secured debt financing
- $32.49m of cash
- 29.9 million of Star Bulk shares worth $346.52m, based on July 21st Star Bulk NAV
(Source: Company presentation)
The downside from this deal is the BDI does not improve as fast as expected, and the company made a huge purchase for a fleet that isn't exactly young. The company would then have to work to get the 34 ships on contract to avoid paying the difference between the day rate and the actual cost of operating. However, this downside is mitigated by the low price paid per ship:
- Capesize: $33.86 million each
- Kamsarmax: $20.86 million each
- Panamax/Handymax: $9.97 million each
During the earnings release and conference call that followed, this downside was discussed, especially as it applies to the older ships:
Jon Chappell - Evercore Okay. And then you've acquired 11 1990s built ships in addition to the 2 that Star Bulk already had in mid-90s builds and Capes... how are thinking about the timing of maybe of disposing those, the way I understand that they are relatively debt free so those could also help funding the equity gap that you have for the new building commitments?
Hamish Norton - President... Indeed, look we're thinking about those vessels as you say possibly as a way to help pay for our new buildings if we see an opportunistic time to dispose them. And the vessels obviously give us a lot of operating leverage on the upside and of course the best time to dispose such vessels is when they have their highest cash flow. So it's a tricky decision, but we're certainly thinking about it along the line as you have suggested.
Now that the downside has been addressed, the upside is huge for the company. Including newbuilds, the acquisition of the Excel Fleet, and the acquisition of Oceanbulk Shipping, the company will have over 100 vessels on the water in 2016, with a capacity of 11.9 million dwt.
(Source: Company presentation)
The acquisition also gives the company more leverage for the potentially improving BDI day rates. Most of the shipping companies have a strategy of slowly moving ships off contract, and moving them to the potentially more lucrative day rate in the 2nd half of 2014 and into 2015 and beyond. By doubling the size of the fleet, the company is also doubling the exposure.
(Source: Company presentation)
During the conference call, this strategy was addressed:
This transaction doubles our fleet on the water, offers great participation in the expected trades markets tightening and cements Start Bulk's position as the largest U.S. listed dry bulk company as measured by the cargo carrying capacity of our vessels.
This enlarged fleet in the water will enable us to take advantage of the expected freight tightening in the last quarter of 2014 and 2015.
A word of caution…
With all the good news, there is one potential caution for investors: a funding gap and potential equity financing. The company has a funding gap of $142.2 million that needs to be addressed from CapEx. While this may seem like a lot, the company just doubled in size and shrunk the percentage of that compared to assets on hand.
Analysts probed this funding gap on the conference call:
Ben Nolan - Stifel... And then stepping away from that for a moment to the CapEx program. Obviously and you laid out there pretty nicely... $142 million of remaining CapEx. How do you think about... funding that, is that something you feel like you can handle organically through the cash flows of the company or would you possibly be looking to the equity markets or some other form of capital markets to bridge that gap?
Christos Begleris - Co-Chief Financial Officer Sure, this is Christos. First of all, we should mention that effectively the excel transaction helps us in this funding gap in that we have taken very low leverage which we will refinance the portion of the bridge facility we're taking from Angelo Gordon with conservative leverage, but which will give us extra cash which will go towards this funding gap. These gives us time the luxury of time in order for us to figure out what is the best strategy to top either debt or equity capital market in order to fund the remaining gap together with operational cash flow.
And then from Morgan Stanley:
Fotis Giannakoulis - Morgan Stanley Okay. And in terms of how much equity you're planning to raise; is this going to be just funding gap or you think of more might be also an alternative?
Petros Pappas - Chief Executive Officer Well, as we have said during the presentation for this, the funding gap that we have relative to the size of the company and our shareholders backing the company is relatively small and we feel comfortable.
Now, on (inaudible) of equity that we might be raising in the future, we cannot comment on that. It really depends on the cash flow generation of the fleet and on the market. So basically, if we see the significant market upturn in the fourth quarter of the year and the cash flow generation permits -- is healthy, this will reduce further upon gap and our equity needs. We will value add that on that time. But you have to take into account that the Excel fleet acquisition actually gives us the luxury of time before tapping the debt or equity capital markets.
So while it may not come quick, depending on the recovery of the BDI, the company may look to issue more equity to help meet the CapEx projections.
Star Bulk has a good following amongst analysts, with multiple analysts upgrading the company to a buy or initiating with a hold. Even with the potential for dilution, which investors always hate, the increased size of the company will help it improve market share and take advantage of the expected recovery in the industry.
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