Last week 2 ocean shippers sold new income issues with high yield coupons. The coupons are high for a reason and that is simply because of the risk involved in the ocean shipping business. This risk is most apparent in the dry bulk carriers, but even the tanker business is susceptible to eroding margins. The 2 issues below are both ocean tanker businesses.
Scorpio Tankers Inc. (NYSE:STNG) has sold new senior notes with a coupon of 8.25%. These notes have a short maturity date of 6/1/2019 with an early call provision starting 12/1/2018. These are unsecured notes (no particular assets are backing the debt). The company will use the proceeds for a tender offer they are making for their notes that are due on October 15th of this year. Understand that the notes being “tendered” for have no early call provision so it is optional to the holder whether they want to sell the notes back to the company at this point in time or whether they want to hold them to maturity in about 6 months.
While we do not purchase securities issued by ocean shippers very often we do make a quick review of company fundamentals when they issue income securities. STNG has had some of the better fundamentals of the ocean shippers and have had fairly strong positive cash flows while showing net income on the bottom line for the years 2013, 2014 and 2015 before falling to a loss in 2016. Unfortunately 2016 showed a reduction in revenue of about 30% which is a bit bothersome. Scorpio Tankers has had large non cash depreciation charges so even though they lost money in 2016 they had positive cash flow of over $75 million.
For investors with a bit of higher risk tolerance this issue may fit your needs. STNG has 3 baby bonds outstanding with coupons of 6.75% and 7.5% (this is the issue the company is tendering for) so this new issue is superior to the old outstanding issues. Of course the income stream will consist of interest payments so income will be taxed at your ordinary tax rate.
Tsakos Energy Navigation (NYSE:TNP) has sold a fixed-to-floating rate preferred with a very high initial coupon of 9.25%. They are in the same business as Scorpio Tankers and like STNG their revenue fell by around 30% last year. Fortunately TEN was able to continue to show reasonable net income and decent positive cash flows even though revenue fell.
This fixed-to-floating rate issue has a fixed rate until 2027 when the coupon moves to a floating rate that is based upon 3 month Libor plus 6.881% which is adjusted every 3 months.
This issue will be qualified for preferential tax treatment and dividends are cumulative.
Shares of this new issue are now trading on the OTC Grey market under the temporary ticker TNPEP at around $25.05/share.
As we noted above ocean shippers of all sorts are relatively risky but these 2 companies represent some of the better operators. We would prefer TNP over STNG because they have a smaller number of “newbuilds” under contract (just 4) and historically ocean shippers get themselves into trouble when they contract for too many newbuilds and then have to continue to borrow to fund these ships even when the day rates the ships are leased at move sharply lower.