The Dry Bulk industry is in the tank right now, thanks to an oversupply of Dry Bulk ships and a lack of demand for Coal, Iron Ore, and other dry bulk goods. For those who are diehard fans of the industry though, an alternative (and potentially safer) investment are Preferred Shares and Debt Offerings.
As a caveat, I want to point out that I am not the foremost expert in this area, and am largely going to point to the work of other authors who have done an excellent job of highlighting the opportunities, along with the potential pitfalls. Those include Richard Legeune from the Panick Report and Lion Square Investments.
For reference, here are the definitions, according to Investopedia:
- Common Stock: A security that represents ownership in a corporation. Holders of common stock exercise control by electing a board of directors and voting on corporate policy. Common stockholders are on the bottom of the priority ladder for ownership structure. In the event of liquidation, common shareholders have rights to a company's assets only after bondholders, preferred shareholders and other debtholders have been paid in full.
- Preferred Stock: A class of ownership in a corporation that has a higher claim on its assets and earnings than common stock. Preferred shares generally have a dividend that must be paid out before dividends to common shareholders, and the shares usually do not carry voting rights. Preferred stock combines features of debt, in that it pays fixed dividends, and equity, in that it has the potential to appreciate in price. The details of each preferred stock depend on the issue.
- Bond Holder: The owner of a government or corporate bond. Being a bondholder is often considered safer than being a shareholder because if a company liquidates, it must pay its bondholders before it pays its shareholders. Being a bondholder entitles one to receive regular interest payments, if the bond pays interest (usually semiannually or annually), as well as a return of principal when the bond matures.
Common stock issues in a company, especially the dry bulk industry of late, tend to be in the magnitude of 100s of millions. For investors, this means they can expect the shares to be highly liquid and available when buying or selling. Preferred stock on the other hand tends to be in the 1-5 million range, and trades in smaller numbers. While a company's common stock trades at a 3-month volume average of 500,000 shares per day, preferred shares might trade in only the 10,000 shares per day area.
Voting vs Non-Voting Shares
Preferred stock typically don't include voting rights like common shares. For individual investors, this might not matter. Since institutional and insider investors normally own significant percentages of a company, individual investors make up a small part of the voting block. While there are those that say that every vote counts, in reality, it's the large shareholders that companies listen to.
Claim on Assets
The order of repayment normally goes Debt Holders, Preferred Stock Holders, and then Common Shareholders. For investors in the Dry Bulk industry, this is particularly important. Many believe this glut will go on for at least another year, and there are several companies that could end up filing bankruptcy due to debt payments, operating costs, and liquidity issues. In the end, everyone might end up empty handed, but Bond Holders (Debt Holders) would have the first claim on any repayments.
The publicly traded companies that offer both Preferred Stock and Exchange Traded Debt are Diana Shipping (NYSE:DSX), Navios Maritime Holdings (NYSE:NM), Safe Bulkers (NYSE:SB), Scorpio Bulkers (NYSE:SALT), and Star Bulk (NASDAQ:SBLK).
Like the rest of the industry, DSX has seen its common shares tank, especially during the 4th quarter. The preferred shares and debt issue have followed suit.
Lion Square Investments recently wrote about the debt issue (DSXN) and the strength of the balance sheet. Both its Debt (DSXN) and its Preferred (DSX-PB) offer attractive returns based on the current trade prices and fixed dividends.
Navios Maritime Holdings
NM has two current preferred offerings with NM-PG and NM-PH. Both are trading at significant premiums with yields of 36% and 40% compared to their current prices. Richard Lejeune has written extensively about these, along with a recent article by Kevin Quon. The company has significant challenges with liquidity, especially as the glut is prolonged.
SB has three preferred offerings with SB-PB, SB-PC, and SB-PD. Each originally had an 8% yield, but the current environment has driven down the price of shares to a current yield of 9% for the series B and 25% for the series C and D. Both Richard Lejeune and Lion Square have recently written about these offerings. The company announced a preferred shares repurchasing program in November of up to $20M.
SALT has one issue of debt with SLTB. While I have previously written about how the reverse stock split is a sell signal, the exchange traded debt issue isn't as dire. Again, in the order of priorities, the debt would be first in line while the common stock would be last in line. At the current price, the debt has a yield of almost 17%.
SBLK also has an exchange traded debt issue with SBLKL. And like SALT, SBLK is working through a reverse stock split, which I am bearish on the common shares, but feel like the debt issue offers more protection from the downside risk. Again, Richard Lejeune covered this after the 3rd Quarter earnings release. At the current price, the debt is earning approximately 20%.
We are talking about the Dry Bulk industry, and there are serious potentials for default with the companies if rates remain week for the next 12-24 months, as analysts predict.
For preferred shareholders and bond holders, if one of the companies goes to zero, the order for restitution would start with bond holders, then preferred shareholders, and finally common shareholders. So at worst, an investor would walk away with nothing, and at best an investor would walk away with a portion of their investment.
A second scenario is the shares fall without going to zero. Preferred shareholders and bond holders would have in effect locked in the return of the price they purchased the shares for, as long as the company continues to pay dividends. For the majority of the companies, the preferred share and bond issues contain clauses for continued accrual of interest even if the company suspends the dividend.
Another scenario is the recovery of the industry, and an eventual retirement of the preferred shares or bonds. While each issuance is different, the prospectus typically contain a statement similar to this one from the SB-PC prospectus:
At any time on or after May 31, 2019 or in connection with a fundamental change, the Series C Preferred Shares may be redeemed, in whole or in part, out of amounts legally available therefor, at a redemption price of $25.00 per share plus an amount equal to all accumulated and unpaid dividends thereon to the date of redemption, whether or not declared.
This article isn't meant to recommend any particular debt or preferred issuance, but to highlight the impressive work I've seen recently by authors to point out the opportunities in each. Right now, for investors of the Dry Bulk industry in the preferred shares and debt issues, the biggest risk is from default and bankruptcy. However for those companies that can survive the downturn, the preferred and debt issues offer additional safety in addition to a relatively safe return.
Disclosure: I/we 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.
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