Sino-Global Shipping, a Flushing, New York-based provider of shipping agency services in and out of China, priced 1,229,032 shares at $7.75 each on Tuesday, May 20. It opened on Wednesday at $15 per share, sold as high as $16.40. SINO closed its opening day at $13.98 on Nasdaq. On Friday, May 23, the stock closed at $18.26. The Richmond, Virginia-based full service investment firm of Anderson & Strudwick acted as the offering’s lead placement agent -– not its underwriter.
In a “best efforts” offering, the “placement agent” (not to be confused with the underwriter) agrees to use its best efforts to sell at least a minimum number of shares up to a maximum number of shares. (Both the minimum and the maximum numbers are specified in the prospectus.) If the placement agent fails to sell the minimum number of shares, it has no obligation to buy the unsold shares. The placement agent was using its best efforts to sell the deal.
In the case of Sino-Global Shipping, the company filed to offer a minimum of 870,968 shares up to a maximum of 1,229,032 shares.
Risk and Reward
In an underwriting, or “firm commitment” offering as it’s known, the underwriters agree to purchase the entire offering from the issuer -– they own it — and then to re-offer it to investors. If the underwriter or underwriters fail to sell the entire issue, they still own the unsold shares.
In a shaky stock market, one could argue that it’s better or certainly less risky to be a placement agent instead of an underwriter. In fact, up to the early part of the 20th century, most deals were done on a “best efforts” basis because Wall Street was much more averse to taking risk then.
In the Sino-Global deal, the placement agent’s commission, as opposed to an underwriting discount, was 7 percent of the $7.75-per-share offering price — or 54.3 cents. Seven percent is about the same as underwriters charge, but they have the liability of owning unsold shares.
But with the sloppy stock market, which lost over 3 percent last week, it was surprising to see an IPO come out of nowhere and score a gain of over 100 percent by week’s end. There was a reason.
The DJ US Marine Transportation Index had been on a roll since its close on March 14 at 284.89 to May 20 when it finished at 370.42 — UP 30 percent on the day Sino-Global was offered. And the deal’s price had been set at $7.75 per share.
But this week’s offering might not be so lucky.
Remember the Sino-Shipping deal was priced at $7.75 per share and it was a “best efforts” offering to sell up to about 1.2 million shares. In contrast, a firm commitment is a negotiated offering and the number of shares and the price range is subject to change.
There are two deals on this week’s IPO calendar, a maritime shipping company and a SPAC, which is a carryover from last week.
Safe Bulkers (NYSE: SB proposed), an Athens-based provider of marine dry bulk transportation service, is looking to price 10 million shares at $20 to $22 each during the week.
The company has had a good 12 months. Consider the following:
For the year ending Dec. 31, 2007, Safe Bulkers reported operating income of $233.4 million, UP 115.9 percent from $108.1 million for the same period a year ago.
For the year ending Dec. 31, 2007, Safe Bulkers reported net income of $211.6 million (earnings per share of $3.88), UP 117.7 percent from $97.2 million (earnings per share of $1.78) for the same period a year ago.
The magic words behind Safe Bulkers’ success are “drybulk rates.”
Let’s take a look at the Baltic Dry Index (BDI), a shipping and trade index created by the London-based Baltic Exchange that measures changes in the cost to transport raw materials such as metals, grains and fossil fuels by sea. The Baltic Exchange directly contacts shipping brokers to assess price levels for a given route, product to transport and time to delivery (speed). The Baltic Dry Index is a composite of three sub-indexes that measure different sizes of dry bulk carriers (merchant ships) — Capesize, Supramax and Panamax. Multiple geographic routes are evaluated for each index to give depth to the index’s composite measurement.
The BDI closed on Friday, May 23, 2008, at 11,465, UP over 100 percent from about 5,600, which was its early February 2008 low. But the drybulk rates can be quite volatile. A lot can happen between now and when the deal gets priced.
No pricing date had been set at press time.