Safe Bulkers Overview
Safe Bulkers (NYSE:SB) is a dry bulk shipping firm which has heavy spot market exposure and has recently been the subject of serious solvency concerns. SB has 37 vessels on the water, 4 of which are time-chartered under long-term contracts. SB also has 7 newbuilds with scheduled deliveries between 2016 and 2019.
SB has 83.5 million shares outstanding for common equity market capitalization of approximately $65 million based on the most recent close of $0.78. SB also has $160 million in face value of preferred equity ($91.4 million market value): the B-Series trades at 94% par ($37.6 million cap), the C-Series trades at 46% par ($23 million) and the D-Series trades at 44% par ($30.8 million cap).
Original (Nov15) Bear Thesis and Update
In November 2015, I published a comprehensive bear thesis on SB common stock while the pricing was just over $3/sh. The original report covered the plunging market conditions, decaying vessel values, a balance sheet that was nearing insolvency and raised concerns about cash burn for 2016 and beyond.
Since this report, SB's plummet exceeded my expectations as the dry bulk market continued to crumble. I was eyeing a collapse to around $1/sh, but SB collapsed as low as $0.30. The pricing is now at $0.78, reflecting a global surge in speculative commodity stocks over the past month, but also due to a series of impressive bank loan modifications.
I remain extremely cautious and/or bearish on SB common, as I don't believe it represents an investable security. However, I believe Hajioannou will do everything in his power to avoid an embarrassing (and financially painful) bankruptcy.
The preferred equity makes more sense for speculators though, as saving SB might eventually involve a painful common equity dilution. If SB raised $200 million in common equity at $0.50/sh, this would dilute current ownership by over 80%. At $0.25/sh, the dilution would be over 90%. Those who argue that Hajionannou won't dilute himself are ignoring that he could simply participate in the public offering and agree to purchase 54% of the new shares to keep his ownership constant.
Recent Transition Steps
On 21 January, SB refinanced an old $82.4 million facility with a new $75.3 million term loan, which offered better repayment terms and more flexible covenants. SB was able to push a 2019 balloon to 2021, but had to reduce the size of the facility and also pull payments forward from 2022-2024 up to 2021.
On 26 January, SB refinanced an existing $44.9 million credit facility with a $40 million term loan, which improved by pushing the 2018-2020 payments out to 2022.
On 3 February, SB amended a $145.5 million credit facility to push the balloon payment from 2020 to 2022.
Most recently, on 3 March, SB amended a $51.8 million loan facility to push the balloon payment from 2019 to 2022. Notably, the past two swaps were achieved without prepaying any amounts, which differed from the two first agreements.
All four of these changes together have reduced the 2016 repayment schedule from $12.1 million to $5.2 million, 2017 repayments from $14.4 million to $7 million, and 2018 repayments from $39.8 million to $14.5 million. Altogether, SB has reduced the next three years of debt amortization liabilities by $39.6 million while also logging a tremendous 2019 improvement of $62.2 million.
All of these improvements suggest SB management is in for the long haul and banks believe their collateral is relatively stable.
Preferred Equity Discussion/Calculus
Due to my belief that SB is unlikely to go bankrupt, I have liked both the SB-C and SB-D preferred equity at certain pricing levels. Last fall, I purchased a significant stake in SB-D at $7.70, but I quickly sold at $8.60 as the markets appeared very shaky heading into 2016.
The current pricing of the 8% C or D series, at $11.60 and $11.01 respectively, is too rich for me to be piling into these shares, especially due to the legitimate risk of a dividend cut. However, if an investor really desires exposure to this name, I believe this is the place to be. On that note, the common gap between the C-Series and D-Series is just a phenomenon of a very thin market. The dividends on all three of these issuances are pari passu, which means that SB must either suspend or continue payouts to all three sets. Both have 8% payouts (on $25-par), so the fact that C-Series often trade higher than the D-Series is nothing short of market stupidity. I know of some traders who make a steady arbitrage profit by swapping back and forth when the spreads wider and narrow.
Additionally, there's a bit of a 'broken market' effect going on with the SB-B series, which also carries an 8% payout, yet commands a shocking $23.50 price, recently hitting $24.49! The reason the B-Series trades higher is because unlike the C/D which never have to be redeemed at $25, the B-Series has a "Failure to Redeem" clause, which kicks in on July 30, 2018. If these shares are not redeemed by then, the quarterly payout will increase by 1.25x until reaching a maximum of 30% (e.g. normal $0.50/qtr goes to $0.625, then $0.78125, eventually capping at $1.875/qtr after 6 quarters - end of 2020).
This provision ensures that unless SB is facing imminent bankruptcy, the preferred equity will almost certainly be redeemed by end-2018 at the latest, likely by mid-2018. Hajionannou owns 17.5% of this series, which also lends credibility to this thesis. However, the C/D series are also more secure due to this provision. Why? They are pari passu. SB can only redeem the B-Series if they payout 100% of dividends which are due. This action would require the C and D-Series to also be "made whole."
Since the market is saying that SB-B will be redeemed with near 100% certainty, this also means that the next 10 payments ($5 in total), are likely to be made to both the SB-C and SB-D classes. This same huge penalty (1.25x up to 30%) also kicks in if SB misses four consecutive SB-D dividends. This means that SB is extremely unlikely to cut dividends while any SB-B remains outstanding. The downside is that SB-B is callable at $25/sh starting on July 30, 2016. If SB wants to cut SB-C and SB-D dividends and save roughly $9.6 million/yr in payouts, they must first redeem all of the remaining SB-B series at $25.
SB announced a $20 million preferred repurchase program last fall, but so far they have only reported a meager 57.8 thousand shares repurchased at a price range of $16.04 to $19.90. (As of the 20-F filing, current to only 5 Feb 2016, see page 93).
The calculus is immense, but cash is crucial for SB right now, so I doubt they spend nearly $40 million buying back the SB-B considering they have over two years before penalties kick in.
SB has made very impressive transitions recently, which will tremendously improve their cash flow picture during 2016 and 2017. I do not believe that bankruptcy is a likely outcome for SB, primarily due to strong insider support; however, this does not make the common equity an attractive investment. I remain bearish overall, but wanted to update readers on these key events. I may dabble in the preferred equity if prices get more attractive.
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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