Castor Maritime – Discussing Proposed Tanker Fleet Spin-Off

I have covered Castor Maritime (NASDAQ:NASDAQ:CTRM) previously, so investors should view this as an update to my earlier articles on the company.

After the close of Wednesday’s session, junior Cyprus-based shipping company Castor Maritime announced the proposed spin-off of its tanker fleet into a new-Nasdaq listed company called “Toro Corp.” or “Toro”.

Castor Maritime Inc. (…) has decided (…) to effect a spin-off of its tanker fleet comprising one Aframax, five Aframax/LR2 and two Handysize tankers (the “Spin-Off”). In the Spin-Off, Castor shareholders will receive two common shares of Toro Corp. (“Toro”), a newly formed subsidiary that will act as the holding company for the eight tanker vessels, for every five Castor common shares held at the close of business on December 6, 2022 (the “Record Date”). Toro has applied to have its common shares listed on the Nasdaq Capital Market. Castor’s Chairman, Chief Executive Officer and Chief Financial Officer, Petros Panagiotidis, has been appointed as Chairman and Chief Executive Officer of Toro with effect as of the completion of the Spin-Off.

The Board believes that the creation of a business in a distinct sector of the shipping industry – tankers – will provide significant benefits to both companies and their shareholders. The transaction is expected to enable each of Castor and Toro to increase its focus on its respective line of businesses, enhance operational efficiencies, facilitate efficient strategic expansion, attract new investors, and, with this dividend distribution of Toro common shares, give Castor shareholders the flexibility to monetize or adjust their equity holdings according to the shipping sectors in which they want to invest.

Please note that Toro, like its parent company, will be controlled by Castor Maritimes’s Chairman, CEO and CFO, Petros Panagiotidis via newly issued supervoting Class B Preferred Shares.

Timing looks great as charter rates have been decent for both crude oil and product tankers in recent months which in combination with newbuild cost inflation and particularly Russia’s ongoing efforts to accumulate sufficient capacity ahead of a proposed crude oil price cap has contributed to second hand vessel prices rising to new all-time highs.

According to MarineTraffic, the company’s small and fairly old tanker fleet with an average age of 17.5 years is currently valued at well above $200 million, more than double its aggregate purchase price of approximately $100 million last year.

Adding Toro’s cash balance and deducting an aggregate $76.3 million in long-term debt and Series A Preferred Stock being issued as partial compensation to Castor Maritime calculates to a net asset value (“NAV”) per share of $3.70:

With Castor Maritime common equity holders receiving two Toro shares for every five Castor Maritime shares owned, the proposed spin-off appears to be a great, value-enhancing transaction, at least when relying on simple math:

At prevailing share prices, an investment in Castor Maritime of $6.50 (5x $1.30) would qualify for receiving Toro shares with an aggregate net asset value of $7.40 (2x $3.70).

Unfortunately, disclosures made in Toro’s regulatory filings clearly show the company’s intent to dilute common shareholders shortly following the proposed spin-off, very similar to peers Imperial Petroleum (IMPP, IMPPP), OceanPal (OP) and United Maritime (USEA):

Toro has an authorized share capital of 3,900,000,000 common shares that it may issue without further shareholder approval. Our growth strategy may require the issuance of a substantial amount of additional shares. Based on market conditions, we may also opportunistically seek to issue equity securities, including additional common shares, shortly following the Spin Off.

(…)

On November 14, 2022, Castor, in its capacity as our sole shareholder, authorized our Board to effect one or more reverse stock splits of our common shares issued and outstanding at the time of the reverse stock split at a cumulative exchange ratio of between one-for-two and one-for-five hundred shares. Our Board may determine, in its sole discretion, whether to implement any reverse stock split by filing an amendment to our Articles of Incorporation, as well as the specific timing and ratio, within such approved range of ratios; provided that any such reverse stock split or splits are implemented prior to the Company’s annual meeting of shareholders in 2026.

Given the apparent risk of substantial, near-term dilution, I would strongly advise Castor Maritime equity holders, to sell their Toro shares immediately following the spin-off.

Also keep in mind that shipping companies employing dilutive capital raising schemes are usually valued at a steep discount to NAV which is very much visible in the shares of parent Castor Maritime which currently trade at an approximately 85% discount to estimated net asset value.

Moreover, with almost 38 million in outstanding common shares right out of the gate, Toro is unlikely to be chased by momentum traders following the spin-off like has been the case with Imperial Petroleum, OceanPal and United Maritime.

Quite frankly, investors would have likely been much better off if Castor Maritime would sell the entire tanker fleet into the red hot second hand market and distribute the net cash proceeds to common shareholders.

Going forward, Castor Maritime will be a dry bulk pure play again commanding a fleet of 20 vessels:

Based on the company’s balance sheet at the end of Q2, estimated NAV post spin-off would be approximately $4.50:

Assuming the current discount to NAV to persist, Castor Maritime shares would trade below $0.70 post spin-off which might result in the requirement to conduct another reverse stock split in the second half of next year.

So for investors to make money out of this special situation, it will be crucial that either Toro or Castor Maritime (or even both) trade at a reduced discount to NAV following the spin-off.

For my part, I am willing to take the bet given Toro’s appeal as a profitable company focused on the red hot tanker markets.

That said, as discussed above, it will be imperative for investors to dispose of their Toro shares shortly after the spin-off to avoid potential near-term dilution.

Bottom Line

With tanker charter rates and second hand vessel values at multi-year highs, Castor Maritime’s founder Petros Panagiotidis once again demonstrates his exceptional timing capabilities by spinning-off the company’s tanker fleet into a new Nasdaq-listed entity.

Unfortunately, according to statements made in the company’s regulatory filings, Toro is likely to pursue growth at the expense of common shareholders, very similar to its parent and peers Imperial Petroleum, United Maritime and OceanPal.

While highly speculative investors might indeed make some money buying Castor Maritime’s shares ahead of the proposed spin-off date and subsequently selling both the original and spin-off shares, success is not a given by any means.

Given the massive discount to NAV and potential for some gains from the upcoming Toro spin-off, I reiterate my “Speculative Buy” rating on Castor Maritime’s shares despite rather weak dry bulk market conditions.

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