CTRM - Castor Maritime Joins Danaos Corporation In Hunt For Eagle Bulk Shipping

2023-07-06 14:40:24 ET

Summary

• While current dry bulk shipping charter rates are nothing to write home about, leading containership lessors Costamare and Danaos Corporation recently made moves to enter the space.
• Castor Maritime recently joined Danaos Corporation by taking a significant stake in competitor Eagle Bulk Shipping.
• I believe shareholders would have been way better off if Castor Maritime had repurchased its own common shares at the current 90%+ discount to net asset value.
• Discussing risk of further shareholder dilution arising from a recently disclosed $30 million equity distribution agreement with Maxim.
• Considering the above-discussed issues, I am reiterating my "Sell" rating on Castor Maritime's common shares.

Note:

I have covered Castor Maritime Inc. ( CTRM ) previously, so investors should view this as an update to my earlier articles on the company.

While the current dry bulk shipping charter rate environment remains nothing to write home about, leading containership lessors like Costamare Inc. ( CMRE ) or "Costamare" and Danaos Corporation ( DAC ) or "Danaos" recently made moves to enter the sector.

While Costamare's strategic decision to diversify into dry bulk shipping dates back to 2021, the company recently intensified its efforts with a $200 million capital commitment to a new dry bulk operating platform named Costamare Bulkers Inc. ("CBI").

In contrast to Costamare's approach, Danaos apparently decided to take advantage of discounted valuations among exchange-listed dry bulk shippers and quietly accumulated a significant stake in Eagle Bulk Shipping Inc. ( EGLE ) or "Eagle" in the open market.

In fact, according to recent statements made by Eagle's Chairman Paul Leand, Jr., Danaos actually tried to effectively take control of the company by acquiring Oaktree Capital Management's ("Oaktree") 28% stake in Eagle Bulk Shipping:

Dear Dr. Coustas:

(...)

As you well know and acknowledged, Oaktree's stake represented effective control of the company and, as such, its exit created a unique circumstance. I know you appreciate this because at our lunch you confirmed that Danaos made an offer for those shares at or around NAV. Furthermore, we understand you were not the only entity to do so. (...)

In light of these disclosures, Eagle's subsequent decision to buy back the Oaktree stake and adapt a poison pill can be hardly considered a surprise anymore.

Late last week, things started taking a new turn with Cyprus-based shipping company Castor Maritime Inc. ("Castor Maritime") surprisingly disclosing a 14.99% stake in Eagle Bulk Shipping.

Apparently, the company has started to build its stake in Eagle Bulk Shipping several months ago as Castor Maritime recorded a surprise $7.7 million unrealized loss on equity securities in its Q1/2023 report .

The Q1 cash flow statement shows $31.5 million in net purchases of equity securities, which apparently have been recorded under "Other current assets" on the balance sheet.

Assuming an average purchase price of $48 per share, Castor Maritime invested approximately $67 million in shares of Eagle Bulk Shipping, despite its own market capitalization only being slightly above $40 million.

A portion of the funds appears to be derived from recent dry bulk vessel sales:

In addition, Castor Maritime had unrestricted cash and cash equivalents of $63.1 million as of the end of Q1/2023 which already reflects the funds used for buying into Eagle Bulk Shipping's shares during the quarter.

While there's nothing wrong with selling vessels at market value and investing the proceeds into assets trading at a substantial discount, I believe Castor Maritime and particularly its common shareholders would have been much better off by the company simply repurchasing its own shares at a 90%+ discount to estimated net asset value ("NAV"):

Unfortunately, the company appears to be going into the opposite direction as evidenced by the recently entered $30 million equity distribution agreement with Maxim Group LLC ( FRHC ).

Apparently, there's no sense in selling shares into the open market at a 90%+ discount to net asset value to refinance an investment in Eagle Bulk Shipping, which has been made at an estimated discount of 30% to NAV.

Should Castor Maritime indeed sell new shares under the latest Maxim equity distribution agreement, net asset value per common share would be further diluted.

Please note that Maxim-lead capital raising efforts employed by a number of Greece- or Cyprus-based micro-cap shippers like Top Ships ( TOPS ), Imperial Petroleum ( IMPP ), Performance Shipping ( PSHG ), OceanPal ( OP ) or Castor Maritime have been met with increased scrutiny as of late.

Bottom Line

After all, there is a reason why Castor Maritime's shares are trading at a massive discount to net asset value as evidenced once again by the company surprisingly acquiring a stake in competitor Eagle Bulk Shipping rather than repurchasing its own shares at below 10% of estimated NAV.

Moreover, with the tanker bonanza having been spun off into Toro Corp. ( TORO ), Castor Maritime's near-term earnings and cash flows will be impacted quite meaningfully, particularly as dry bulk charter rates have been nothing to write home about as of late.

In addition, investors will likely have to prepare for another reverse stock split later this year.

Given these issues, I am reiterating my " Sell " rating on Castor Maritime's common shares.

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