Pacific Basin upsizes follow-on to $275 million

The dry bulk shipping company is only the fourth Asian company this year to complete a follow-on share sale and manages to price the transaction above the mid-point.
Dry bulk shipping company Pacific Basin Shipping last night became only the fourth Asian company to raise fresh capital through an equity placement this year, suggesting that the recent market gains and the slight improvement in sentiment have made at least some company managements comfortable with the valuations on offer.

The deal was well received by investors, and sole bookrunner Goldman Sachs was able both to upsize the offering by 36% to HK$2.14 billion ($275 million) and to price it in the upper half of the offering range. According to a source, more than 100 accounts submitted orders during the three hours the book was open, leaving the deal multiple times covered. The buyers included a fair number of existing shareholders, who helped ensure the quality of the book. Some of these likely came in to prevent their existing stakes from being diluted, but the fact that Pacific BasinÆs share price is still 21% below its all-time high from October while the stock appears to be on an upward roll, may also have tempted some investors to add to their exposure.

According to a statement issued by the company, JPMorgan Chase & Co and Morgan Stanley bought a combined 15.5 million shares in the placement, or 9.8% of the total deal. However, their respective stakes will still fall slightly after the transaction with JPMorgan left holding 7.98% and Morgan Stanley 5.6%.

Investors initially put in their orders at the bottom of the range, but once the momentum started to build, many of them moved up their limits. The shares were offered at a discount of between 6% and 9%, or at an absolute price of HK$13.23 to HK$13.67. The final price was fixed at HK$13.52 for a 7% discount to yesterdayÆs close of HK$14.54.

The final deal size of 158.6 million primary shares accounted for about 10% of the existing share capital and 10 days worth of trading volume. According to the term sheet, the company initially planned to sell 116.5 million shares.

Pacific BasinÆs share price has been consolidating in a range between HK$14.50 and HK$14.75 over the past two weeks and the placement came after two weak days in the Hong Kong market that saw the Hang Seng Index lose a combined 3%. However, Pacific Basin has been climbing steadily since mid-March when it traded just below HK$10 and analysts are expecting more gains over the next 12 months. Of the 19 analysts that follow the company, according to Bloomberg, 16 have a ôbuyö recommendation on the stock and the consensus target estimate of HK$17.35 implies a further 19% upside from yesterdayÆs close û or 28% based on the placement price.

In a report published yesterday, Morgan Stanley initiated coverage on the dry bulk shipper with an ôoverweightö position and a target price of HK$17.90. Among the reasons to invest, it said, are the fact that the company is a proxy play on strong commodity demand, and has a strong management team, predictable 2008 earnings and a high dividend yield, as well as low gearing. The investment bank also noted that Pacific Basin is one of the least expensive dry bulk shipping stocks in Asia, trading at a 2008 P/E ratio of only six times.

However, it also warned that earnings may start to decline in 2010 as a potential overcapacity of ships may lead to falling charter rates. Asset values could also come down for the same reasons as second-hand ship prices are closely correlated with charter rates.

Pacific Basin said the placement proceeds will be used to finance a variety of expansion initiatives, including its move into roll-on , roll-off vessels, and acquisitions of more dry-bulk ships when appropriate opportunities arise.

This is the second time in five months that Goldman Sachs is helping to raise capital for Pacific Basin, following a $350 million convertible bond issue in early December. The bonds, which can be put back after three years and two months, had an initial conversion price of HK$19.28 and pay a 3.3% coupon. Goldman also took the company public in 2004.
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