Eagle to combine with Star Bulk Carriers Corp.

September Quarter Results Near Expectations, Management Locks in More Pricing

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Eagle reports results slightly below expectations, goes all in on shipping improvement

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Eagle Bulk Shipping Inc.

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No surprise that second largest shareholder sold. Bad news, good news, who knows?&nbsp;Strong stock price performance likely triggered added selling by the second largest shareholder. After selling 1.95 million shares at $46.50/share,the remaining 1.1 million shares owned by GoldenTree Asset Management were sold in a block trade at $48.50/share. Even though the stock has been under pressure since the sale, adding 1.1 million shares to the public market float is a positive event due to reduced overhang and higher trading liquidity.
After selling a total of 3.1 million shares over the past six months, GoldenTree, formerly the second largest remaining shareholder, reduced the ownership position from 3.1 million shares (~23%) to effectively zero.&nbsp;According to the exit 13D filing, GoldenTree continues to own convert debt of ~$17.5 million, which is convertible into 445k shares at the current conversion ratio of 25.543 shares per $1,000 bond. As a result, Oaktree Capital Management remains the largest shareholder with an ownership position of 3.8 million shares, or 28.1%, per the April proxy.
At the same time, the ATM program has been active and about 581k shares were issued at $37.97/share in 2Q2021. In total of $27.9 million of equity was issued, mainly to fund the latest acquisitions, and there is about $23 million left on the ATM program. We believe that the ATM program will be utilized opportunistically in advance of announced acquisitions. 
 
The sales by GoldenTree and ATM issuance expands the public market float and appears to have enhanced trading liquidity. Currently, there are 13.5 million shares outstanding and the public market float approximates 9.7 million shares, or ~72%, up from 7.1 million shares, or ~44% in 2Q2021. Average daily trading volume also picked up to an average 227k shares in 3Q2021, up from 206k shares in 2Q2021, 113k shares in 1Q2021 and 51k shares in 4Q2021.
Management call was&nbsp;positive. Global refinancing, variable dividend and buy back program were highlighted.&nbsp;
Catalyst for new capital allocation strategy was the global refinancing. Refinancing of high cost 8.25% bonds and all other debt with a new five-year term $300 million loan and a $100 million revolver saves $8 million/year and sets the stage for the new variable dividend policy to start this quarter.
Due to higher cash flow and declining financial leverage, a dividend policy will be instituted based on a simple and straightforward percent of net income. Quarterly dividend will equal a minimum of 30% of the previous quarter&#8217;s net income with a floor of $0.10/share. First dividend will be based on 3Q2021 results and paid in November. We estimate variable dividends of $22.6 million, or $1.73/share, will be paid in 4Q2021 and $75.7 million, or $5.75/share, will be paid in full year 2022.
The variable dividend will also require an adjustment of the conversion price of the convert debt of $114.1 million. The current conversion price is $39.29/share and it will be reduced by each dividend payment based on a set formula at the time of the dividend declaration. The conversion ratio will be adjusted to incorporate the implied dividend yield, or the stock price divided by the stock price minus the dividend. In other words, the conversion price will drop by the dividend yield.
Capital structure improving and stock buyback adds to capital allocation tool kit.
After issuing equity to partially finance several acquisitions over the past year, the focus is shifting to stock buy backs and a $50 million buy back program has been established. We believe that the buy back program will be opportunity driven and don&#8217;t expect buy backs to be a priority at the current stock price. There is the option to establish a 10b5-1 trading plan for buy backs to allow buy backs during quiet periods.
While the global refinancing lowered credit availability slightly to $50 million and pro forma cash approximated $100.0 million, the capital structure has improved and allows the variable dividend policy to be established. Looking at the rest of 2021, stronger operating results should more than offset acquisitions and financial leverage should moderate. 2H2021 operating cash flow of $188.7 million is expected to easily cover capex of $19.0 million so free operating cash flow should be $169.7 million, or $12.96/share. Net free cash flow will also be positive at $118.6 million, or $9.06/share, even though working capital is expected to be negative $10.0 million and acquisitions, net of asset sales, will be $60.4 million. Debt will drop by $41.6 million, equity issuance will total $2.9 million and dividends of $22.6 million will be paid so cash should increase by $51.3 million to $125.6 million.
For the full year 2021, operating cash flow of $268.6 million is expected to easily cover capex of $21.4 million so free operating cash flow should be $247.2 million, or $19.65/share. Net free cash flow will also be positive at $62.7 million, or $4.98/share, even though working capital is expected to be negative $59.3 million and acquisitions, net of asset sales, will be $125.7 million. Debt will drop by $16.5 million, equity issuance will total $30.3 million and dividends of $22.6 million will be paid so cash should increase by $46.3 million to $135.1 million. Including unamortized financing costs of $19.2 million, total debt should approximate $464.1 million. Given our revised estimates, net debt+leases is now forecast to drop into the $341.4 million range, and the net debt+leases/LTM EBITDA ratio should drop to 1.1x from 7.1x in 2020.
Based on our 2022 EBITDA estimate, positive operating results should further lower financial leverage. Operating cash flow of $297.3 million should more than cover capex of $25.0 million and free operating cash flow should approximate $273.7 million, or $20.78/share. While difficult to predict, we estimate negative working capital of $20.0 million so net free cash flow should approximate $253.7 million, or $19.26/share. Net free cash flow and existing cash should more than cover estimated debt amortization of $49.8 million and dividends of $76.2 million so cash is projected to increase by $126.7 million to $261.8 million. Including unamortized financing costs of $13.5 million, total debt should approximate $408.3 million and net debt+leases is expected to drop into the $146.0 million range, or a net debt+leases/LTM EBITDA ratio of 0.5x from 1.1x in 2021.
The strong stock price performance also has the potential to lower financial leverage further since the convertible debt is in the money. Even though the current conversion price is $39.29/share, there is little likelihood to convert until the August 2024 maturity date is closer since there is little incentive to convert prior to maturity. Not only do three years of interest payments remain, convert debt holders will benefit from variable dividends through adjustments to the conversion price.
Please see our research notes from earlier this week for more details (dated October 4th, 5th and 6th) and our valuation summary below for a discussion our price target methodology.
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Eagle Bulk Shipping Inc. (EGLE)

Exit of Second Largest Shareholder Creates Opportunity

Fundamental Analysis:

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Eagle to combine with Star Bulk Carriers Corp. (EGLE)

September Quarter Results Near Expectations, Management Locks in More Pricing (EGLE)

September Quarter Preview (EGLE)

Eagle reports results slightly below expectations, goes all in on shipping improvement (EGLE)

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