Pacific Basin Shipping (2343.HK) has boatloads of cash. So, raising another $123.8 million from convertible bonds should also raise some questions.
With a cash coupon of 1.875% per year, the debt is inexpensive–similar shipping bonds have recently carried a coupon north of 3.375%. But investors don’t like it–the stock has sunk more than 7% since the deal was announced last Thursday.
There are two likely reasons for the sell-off. Either investors think the company will squander the cash. Or they think Pacific Basin is battening down the hatches to prepare for stormy seas ahead.
The Hong Kong-listed shipper had US$650 million of cash at the end of June. Add in the CBs, and Pacific Basin has equivalent to about 16 times operating cash flow for the first six months of 2012. Capital commitments and loan repayments between now and 2014 are about US$430 million. But that is partially offset by US$200 million the company will receive over the next three years from selling half-a-dozen roll-on roll-off vessels earlier this month.
Certainly, a mountain of funds would come in handy should weak trade and too much freight capacity bring discounted assets to the market. The price of secondhand Handysize and Handymax vessels–both of which Pacific Basin specializes in–has sunk to levels last seen in 2004, notes J.P. Morgan.
Spending the bulk of the accumulated cash, though, would take some doing. The company says it’s looking at buying vessels, not another shipper. But with five-year old Handysize vessels costing about $16 million, Pacific Basin can theoretically afford another 48–more than a quarter of its existing operating dry bulk fleet.
Meanwhile, shareholders have to worry about potential dilution. The conversion price of 4.96 Hong Kong dollars (US$0.64) is a healthy 27.5% premium over Thursday’s closing share price. Fully converted, though, the CBs would increase the number of shares by about 10%, eating into per share earnings at a difficult time. Gross profit fell to US$11 million in the six months to June 30, an about 80% year-on-year decline, and the company halted its dividend.
With consistently low freight rates, the rest of 2012 looks troubled. At about US$7,000 per day, Handysize rates are hovering around the company’s breakeven level, notes Jefferies.
Strong funding positions Pacific Basin well as the sector hits stormy waters. But just because debt’s cheap, doesn’t mean it’s a good deal. Investors need convincing all that money can be put to good use.
By Duncan Mavin, (c) 2012 Dow Jones & Company