I wrote my first article on Box Ships (TEU), a pure container ship spin-off from Paragon Shipping (PRGN), late last August on Seeking Alpha. I touted the company's 15% potential dividend yield and expected the stock to ascend along with the upcoming dividend hikes. Box Ships only had two charters that expired in 2012, and cash flows seemed to be mostly predictable until 2014. My biggest mistake was that I did not foresee the rampant insider dealings that would occur under CEO Michael Bodouroglou and the resulting dilution.
Since the IPO offering at $12 per share, Box Ships has lost roughly 46% of its market cap while paying out $1.31 in dividends. This represents a net loss of approximately 35%. The chart below highlights the share price since the IPO including dividend payments. The "R" mark represents the SEC shelf registration for up to $500 million of stock, and the "#2" mark represents share pricing at $7.
Click to enlarge image.
Source: Google Finance.
Worse than the poor stock performance and the dilution from the secondary offering, which are to be expected in a poor market, Box Ships has suffered from questionable moves from management. On June 12, Box Ships announced an agreement to acquire two vessels for $31.16 million each. While the vessels were acquired for a reasonable amount, the financing was disastrous. Instead of using a third party, Box Ships turned to Neige International, a private company controlled by Bodourglou.
Box Ships issued $40 million of "9.75% Series B Cumulative Redeemable Perpetual Preferred Shares," which included 1.33 million five-year warrants to purchase a share of common stock at $7.74. Effectively, the CEO gave himself a top-notch interest rate with 1.33 million free warrants. In addition, if Paragon Shipping does not buy back these shares by June 2015, the holder of these shares (presumably Bodourglou) will receive 5% of outstanding common shares of Box Ships as a "bonus." If 9.75% was the market rate, this transaction would be questionable, but it would not be outrageous. However, the company's current credit facility charges LIBOR + 3.75%. With LIBOR under 1%, Bodourglou gave himself 5% in additional "juice," 1.33 million warrants, and a final liquidation bonus for 2015.
It gets worse. On July 13, Box Ships announced the pricing details of its secondary offering: "The company intends to use a portion of the net proceeds of the offering to redeem 692,641 of the 1,333,333 shares." If this was the Goldilocks story, this "portion" refers to Papa Bear's serving. This will equate to roughly 20.8 million of the approximately 30 million expected to be raised in the secondary.
It's not over yet. In the Q2 2012 earnings release on Aug. 1, details exist that Neige was paid $200,000 for its dividend stake from June 12 to June 30. Shareholders were robbed of 1.25 cents per share in only 18 days. Finally, Neige seems to have kept all of its issued warrants. Even though 50% of the transaction was reversed in under a month, the CEO keeps all of the benefits.
Is This Legal?
It appears so. It's shocking isn't it? This is why shareholders should avoid a company with a huge insider interest at all costs, especially foreign companies with small market caps. If anyone knows any relevant laws that may have been broken or legal action that can be taken, please kindly comment below; however, I'm pretty sure everything that occurred was technically legal.
I recommend avoiding Box Ships completely. If you seek container ship exposure with a smaller company and shorter charters, I suggest Diana Containerships (DCIX) (see my previous analysis here). Euroseas (ESEA) was a great company with strong value, but its insider ownership recently hit 45% through disappointing dilution. I recommend avoiding them as well unless you trust the management. If you are looking for more stability and long-term charters, I recommend Costamare (CMRE) (see my previous analysis here).
For the experienced investor who wants an interesting sector play, I suggest going long Diana Containerships and shorting Box Ships. If the sector recovers or stays poor, both companies will benefit proportionately; however, insider transactions will continue to erode shareholder value at Box Ships. This is a direct bet on the superiority of Diana Containerships' management over Box Ships' management. I do not recommend this without additional research and related due diligence.