CTRM - Toro Corp: CEO And Chairman Petros Panagiotidis Grabs Large Stake In Recent Capital Raise

2023-04-26 09:18:08 ET

Summary

• After last month's spin-off from Castor Maritime, junior tanker operator Toro Corp. wasted no time pursuing its first capital raise.
• Surprisingly, the company has not followed the playbook of other recent shipping spin-offs like Imperial Petroleum or OceanPal.
• Rather than selling a combination of new common shares and warrant sweeteners to outside investors at a steep discount, Toro instead turned to its Chairman and CEO.
• While 40% dilution at an 80%+ discount to net asset value is no reason to celebrate, the capital raise has resulted in CEO Petros Panagiotidis becoming more aligned with outside equity holders.
• With the risk of further near-term dilution virtually gone, speculative investors and traders have started chasing the shares ahead of anticipated strong first-quarter results. Given the company's corporate governance issues, long-term investors should continue to avoid the stock.

Note:

I have covered Castor Maritime ( CTRM ) and Toro Corp. ( TORO ) previously, so investors should view this as an update to my earlier coverage of these companies.

After last month's spin-off from Castor Maritime, junior tanker operator Toro Corp. or "Toro" wasted no time pursuing its first capital raise, very much as suspected by me in my initial take on the spin-off announcement six months ago.

On March 14, the company filed a registration statement on Form F-1 with the SEC for the proposed issuance of up to 10,121,457 units consisting of common shares and an equal number of warrant sweeteners with Maxim Group LLC ( FRHC ) acting as Toro's the placement agent.

But even after almost six weeks, the registration statement has not yet been declared effective by the SEC.

Ten days ago, Toro surprised market participants by selling new common shares to an entity affiliated with its controlling shareholder, Chairman and Chief Executive Officer, Petros Panagiotidis (emphasis added by author):

Toro Corp (...) announced today that on April 17, 2023, the Company entered into a subscription agreement with Pani Corp., a company controlled by Toro's Chairman and Chief Executive Officer, pursuant to which Toro has agreed to issue and sell, and Pani Corp. has agreed to purchase, 8,500,000 common shares , par value $0.001 per share (the "Purchased Shares"), at a purchase price of USD$2.29 per share, for gross proceeds of USD$19,465,000 . The purchase price per Purchase Share equals the market price per Toro's common share at the close of trading on April 13, 2023. (...)

The terms of the Subscription Agreement and the transaction were approved by the Board of Toro consisting of its independent and disinterested directors, following the negotiation and recommendation by a special committee of the independent and disinterested directors of the Board of Toro. The special committee was advised by independent legal and financial advisors in its negotiation and recommendation of the proposed transaction.

Toro intends to use the net proceeds from the sale of the Purchased Shares for vessel acquisitions, including to renew its fleet, and for other capital expenditures, working capital, and general corporate purposes, or a combination thereof.

Following the completion of the transaction, the Company will have 17,961,009 common shares outstanding . As a result of the transaction, Toro's controlling shareholder, Chairman and Chief Executive Officer, Mr. Petros Panagiotidis, will, directly or indirectly, hold 47.4% of the Company's common shares in addition to his existing holdings of 100% of the Company's Series B Preferred Shares and, accordingly, will control 99.8% of the outstanding voting rights of Toro.

(...) Pursuant to the Subscription Agreement, Pani Corp. may not dispose of any of the Purchased Shares for a period of 180 days after the closing date of the Subscription Agreement. (...)

Quite frankly, it is hard to believe a special committee of independent and disinterested directors advising to dilute common shareholders by 40% at a more than 80% discount to net asset value ("NAV"), particularly when considering Toro's substantial liquidity position as well as the company's strong cash flow generation:

That said, unlike potential third party investors in a public offering, the CEO did neither demand a massive discount to prevailing share prices nor the issuance of warrant sweeteners.

Moreover, with the newly issued shares being subject to a 180-day lock-up, additional near-term dilution appears highly unlikely at this point.

Furthermore, with second hand crude oil tanker prices hovering near record highs, Toro simply lacks opportunities to expand its tanker fleet.

In fact, this might be an opportune time to dispose of the company's two oldest vessels ahead of their 20-year special periodic surveys next year.

Given the average age of its fleet, Toro could decide to order some new tankers from Asian shipyards, but these vessels would only require moderate initial down payments and take at least two years to be delivered.

With the dilutive capital raise out of the way, speculative investors and traders have started chasing the shares ahead of anticipated, strong first quarter results. Considering Toro's low free float, shares might very well see additional buying interest over the next couple of weeks.

That said, given the company's ongoing corporate governance issues, long-term investors should continue to avoid the shares.

Bottom Line

While Toro indeed diluted common shareholders right out of the gate, the company has not followed the playbook of former parent Castor Maritime and other recent spin-offs like Imperial Petroleum ( IMPP , IMPPP ) and OceanPal ( OP ).

Rather than selling a combination of new common stock and warrant sweeteners at a substantial discount to prevailing share prices, Toro issued 8.5 million new common shares to an entity affiliated with its controlling shareholder, Chairman and CEO Petros Panagiotidis.

As long as these shares remain in lock-up, I do not expect Toro to further dilute common equity holders as the CEO will likely be looking to protect or even increase the value of its newly acquired stake in the company.

While substantial dilution at an 80%+ discount to net asset value is certainly painful for existing equity holders, things could have been much worse.

Moreover, the capital raise has resulted in CEO Petros Panagiotidis becoming more aligned with common shareholders, at least for the next six months.

While the stock might see further upside going into anticipated, strong first quarter results, long-term investors should continue to avoid the shares due the company's ongoing corporate governance issues.

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