Free Lunch on Star Bulk Carriers Corp (SBLK)

Star Bulk Arbitrage on May Rights Offering
aka Free money from a poorly masked corporate takeover

Background
A few weeks back a client of mine brought me a problem involving an equity rights offering by a Greek shipping company called Starbulk.

Below is a writeup I put together for Starbulk shareholders explaining the recent rights offering and how to capitalize upon it.

If any of my readers come across a situation that sounds even remotely close, please email or call me at 206-390-0375 and I would be happy to dissect the problem.

~Max

Star Bulk Carriers Corp (SBLK), a Greek shipping company, recently announced an equity rights offering backstopped by Oak Tree allowing for the purchase of an additional 2.59 shares at $5.35 for every existing share. Although the offering appears egregious dilutive, it has provided a unique arbitrage opportunity for anyone who owned shares as of last Friday, May 10th.

With the shares outstanding set to nearly triple at price below the market, what caused last week’s runup from $6 to $7 ¾?  

A few facts:

• The offering is set to raise $75mm and is backstopped by Oak Tree in California
• All shareholder as of May 15th (Friday the 10th and T+3 to settle) will have the rights to purchase 2.59 shares at $5.35/share
• SBLKs IR firm has confirmed the following
• The rights offering is not effective
• Investors will have 20 trading days post-effective to exercise the rights

This is a democratized offering allowing all current shareholders to maintain ownership %.... but I call total BS on that as the one thing not democratized is the dissemination of useful information – all investors, other than Oak Tree and a few others “in the know” are completely flying blind and unlikely to exercise upon those rights…. Allowing those “in the know” to essentially buy the company below the market

With the offering price set at $5.35/share it seems a poor time to own shares at $6.50 ….

The following steps will yield a free lunch:

1. Blow out any holdings in SBLK above $5.35 – you own the rights to over 2.5 shares, which will function like a call option for 20 trading days after the rights offering becomes effective
1. Maybe you are holding on for that nice 15% dividend…. But note per the terms of their ABM Amro bank loan will issue no dividends until 12/31/2014 (see page f-16 on the 6k filed Jan 3rd 2013)
2. Short 2.5 shares for every 1 share held
3. When the offering is effective, subscribe to the offering and jump back in with your guaranteed $5.35 delivery and keep the difference

Shorting today at $6.5 will realize a risk-less profit of $1.15/share 

About the Author

Max Taylor is a 24 year old market analyst from Seattle, Washington. Max has been trading since he was 12 years old and moved to NYC/Wall St last year to chase his dreams. In his short tenure on Wall St, Max has acquired the Series 7/24/63/65/86/87 licenses. He is hungry and ready to work.