When it comes to Scorpio Group companies, a follow-on shares deal can never really be said to be a surprise, especially ahead of a tough rates market.
But even so, this comes as a bit of a surprise.
Scorpio Bulkers trotted out a $60m equity issuance after the close of trading on Tuesday, with no fewer than five banks underwriting the deal.
Scorpio Services Holding, a private company owned by Scorpio insiders, is taking $15m of the issuance, which is led by Bank of America Securities, BTIG and Clarksons Platou Securities as joint bookrunners.
Scorpio Bulkers shares closed at $20.51 on Tuesday — a 17% loss. In after-market trading, they fell a further 8% to $18.90.
The dry bulk market appears to face lean times for at least the rest of 2020. But it had been widely perceived in the market that Scorpio already had taken a series of defensive measures, including ship sales, that left it with an adequate cushion.
Shake it off
That was why one equity analyst consulted by TradeWinds on Tuesday was, well, surprised.
"I'm very surprised," he said. "But of course you can never put it past them. Looking to come at a 50% discount to [net asset value]? Why? Are they a going concern risk?
"Oh, dry bulk is terrible and we have to make sure we can get liquidity when we can. But that's why they sold all those ships in the first quarter and early in the second quarter. Also, the stock was down 17% today while all the other dry names were down 2% to 5%. So execution was completely botched as well."
The criticism is probably not the last Scorpio will receive on the issuance. And if past is prologue, management will shake it off.
Forceful action
For one thing, Scorpio Bulkers and sister Scorpio Tankers have a credo of always acting forcefully, including through dilutive shares sales, early enough to avoid even the question of a bankruptcy scenario.
Further, a source familiar with the deal suggested the proceeds may give Scorpio enough liquidity and runway to ultimately put the funds to use in an offensive manner — and not in the way that offends equity analysts.
Fearnley Securities said: "The company has proactively improved its liquidity over the last year by selling assets ... taking on additional S&L and reducing its Scorpio Tankers (STNG) with nearly $50m. Albeit more of a signal effect than actual cash preservation, the dividend was also reduced with 75% in the first quarter."
The company holds $110m of cash. Adjusting for negative operating cash flow for the rest of the quarter and scrubber investments, Fearnley expects this number to be reduced to about $70m.
Deja vu deal?
"In addition, SALT [Scorpio Bulkers] owns $40m worth of STNG shares, implying total liquidity per end of Q2 of $110m," it added.
Fearnley believes the owner could have managed into 2021 without offering equity.
"However, it's typically better to be safe than sorry," analysts Espen Landmark Fjermestad, Peder Nicolai Jarlsby and Ulrik Mannhart said.
"Now, SALT will have nearly $200m of liquidity at hand, tackling pretty much any rate environment for the next two years. That certainly has a value.
"Overall this transaction has a certain deja vu to it — and yes, we are thinking of STNG back in October 2018. Time it right and buying SALT at these prices is probably not your worst bet."
