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Oraclepkwy (67.16)

Dryships Appears to be Drydocked

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February 02, 2009 – Comments (7)

The surprising news of DRYS and its breach of debt covenants has certainly tanked my CAPS score (over a few days it has wiped out 43 points!!). Am I concerned? Not in the least and in my view if gives a great buying opportunity. I practised international corporate law for over 35 years (in Bermuda; Dubai and Canada) and the one thing that I learned from my practice is that times that on their face appear difficult to the world, represent major opportunities for the dominant shareholders of a company to "play legal games" and get very rich. Think about it. Dryships has been around a very long time. Does anyone seriously think that a major company in the dry bulk shipping world is so stupid as to not see cracks in the superstructure? Give me a break - I may have been born under a mushroom cap but I was NOT created with a finger!! These big guys know exactly what is going on and they are capitalizing with stock options that attract very little attention in these down days plus the very influential and dominant shareholders look like a white knight in shining armour coming to the rescue to offer relief from debt obligations. I am not mentioning any names but take a look at Dryships and figure it out for yourself. A dominant shareholder quickly comes to the party and offers (in exhange for a large number of shares) to release the DRYS from what appears to be an onerous financial obligation. If the shares of DRYS were so worthless (as the market is telling us) then why in hell would a brilliant and dominant shareholder take shares of DRYS in exchange for a release of a very real legal contractual obligation!!! Give me a break and wake up world. This is a major buying opportunity - yes, I have put my money where my mouth is and I will continue to buy DRYS at any level below $15.00. Take a look at the BDI as well over the past 6 weeks. Is it going up or down??!! Hello - is anyone home. You can either be a lemming and jump off the cliff with the rest of the idiots of the investing world or you can use some common sense, study the situation and end up concluding the banks are NOT going to tank one of the largest shipping companies in the world due to a "covenant breach". Not to mention that about 75% of all companies are currently technically in breach of at least one of their loan agreement covenants.

7 Comments – Post Your Own

#1) On February 02, 2009 at 6:07 PM, XMFSinchiruna (27.80) wrote:

Oraclepkwy,

Be careful not to get too emotionally attached to a given play. The share sale hasn't even occured yet, and will be extremely dilutive to shareholders, while even less certain will be the company's ability to attract sufficient buying interest for the shares to raise sufficient capital to apease the lenders whose covenants have been broken... let alone the long list of lenders lined up behind those first two.

I do indeed believe that the degree of demand destruction for commodities caught virtually the entire world completely by surprise. From miners to shippers to heavy industrial manufacturers, every global player remained in full growth mode right up until September / October when the former paradigm led by China's immutable growth was abruptly replaced by concerns for a global recession. Therefore, I do think that companies like DRYS made investments in growth that quickly proved untenable in a contracting global environment.

The fact that BDI will likely have found a bottom if not already then very soon does not make a sufficient investment thesis in this case. We still have a paralyzed global marketplace, and not even the 'big guys' know to what degree or when demand will recover. Growth has all but been abandoned by the industryas shippers can barely gift their vessels into service on the spot market. Recent contracts in the $10-20,000/day range are only attainable for far shorter time periods than the more lucrative contracts of just months ago.

Show me data indicating 75% of all companies are in breach of debt covenants. I don't think that's an accurate statement.

Finally, please know I'm not disagreeing just to disagree, but simply voicing an alternate opinion lest some Fools consider jumping aboard that ship without sufficient due diligence. In any event, the stock has tumbled from $105 to $5, and while I of all people would not seek to deny value based solely on market valuations when I have seen first hand how poorly the market sometimes performs said task... but once you get into markets essentially pricing in the likelihood of outright failure, that is a different story.

You might be right, and you might make a mint on a recovery to $15 of the company can scratch its way out, but the same can be said of many company's facing similar debt-related challenges (TCK, RTP, etc.). In an economy frought with so much risk, the last thing most investors need in their portfolios is more risk.

These are my thoughts on the recent events with DRYS.

Fool on!

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#2) On February 02, 2009 at 6:14 PM, SideShowMel0329 (49.63) wrote:

I also own DRYS (got in at $22) and overall, regret the buy. But I'm definitely not selling. However, I'm definitely not adding to my position.

I rarely ever sell stocks when they're at (or near) 52-week lows AND they're under $5 a share price. Because at this point, I don't  have much more to lose, but if they get their debt straightened out, the upside is huge.

If they go bankrupt, oh well. Poor debt management on their part, because I see good things for dry bulk after the recession ends.

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#3) On February 02, 2009 at 7:07 PM, abitare (35.54) wrote:

This company has two employees a $3 billion in debt obligation and is going to selll ships and common stock to cover expenses. lol!

You are a spammer, a liar, or a fool. 

Anyone dumb enough to buy DRYS should not be buying individual stocks. 

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#4) On February 02, 2009 at 7:26 PM, mizzoushark (< 20) wrote:

abitare - you need to check YOUR facts.  According to DRYS website, they have over 1,500 employees (not 2 as you stated).  Further, check the latest balance sheet and I believe you will see a company that is feeling the current recession but is far from being one foot on the banana peel and the other in the grave as you were suggesting.

http://www.capitallink.com/ppress/ppressfile/23406845/dryspr110308.pdf

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#5) On February 02, 2009 at 7:49 PM, abitare (35.54) wrote:

mizzoushark

Young padawan...you are right to inspect, but you cannot their trust a company website. Check forbes

So much for consensus. DryShips has been operating with two employees (Economou, 54, and his internal auditor) since his chief financial officer quit in May, the second to split in three years. The company's fleet is managed by Cardiff, 70% owned by Economou, which gets more than $7 million a year for its troubles. Cardiff also manages Economou's private fleet of 13 dry bulkers and 21 oil tankers.

http://www.forbes.com/forbes/2008/0225/095.html

Or 

Not that it isn’t up-front about them. Take the fact that Dryships has only two employees, its CEO and a CFO, and so will conduct virtually all of its operations through Cardiff, which Economou created back in 1991. It’s right there, under risk factors, on page 12. And all that a prospective shareholder had to do was flip to the top of the next page to learn, “you will have no recourse against Cardiff.” A little farther down that same page, furthermore, some fairly standard boilerplate verbiage about Economou’s stakes in both Cardiff and Dryships creating potential conflicts of interest is capped with an unusually blunt warning that blood is thicker than water: “Cardiff may give preferential treatment to vessels that are beneficially owned by related parties because Mr. Economou and members of his family may receive greater economic benefits.” 

http://www.weedenco.com/welling/archive/sb/v07i04sblogo.asp

The company has no CFO just a CEO, who created, drained of money and then bankrupt a similar company, Alpha Shipping.

Now Fool On! But don't be a Fool!

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#6) On February 02, 2009 at 7:51 PM, abitare (35.54) wrote:

mizzoushark,

You have no stock picks? I guess you to are a spammer, a liar or/and a Fool?

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#7) On February 03, 2009 at 10:54 AM, Oraclepkwy (67.16) wrote:

TMF:

Your points are all well taken and quite validly represent a second opinion. My 75% figure is far from a scientific provable statistic - it is simply based on my experience with my corporate clients over the years. In such a dramatic economic downturn, it is quite predictable that several loan agreement covenants cannot be met. The point I was trying to get across is that Banks "usually" are reasonable and will generally waive the breaches and will "usually" renegotiate the covenants to bring them in line with economic reality. Such as was done and announced this morning with Dryships lead banker - this was posted on MSN by Briefing.com earlier this morning:

 

"February 3, 2009 8:30 AM ET

DryShips reaches preliminary agreement for covenant waiver and deferral of loan installments with Piraeus Bank The co announces that it has reached an in principle agreement with Piraeus Bank, one of its largest lenders, to restructure its two loan facilities in the original aggregate principal amount of $220.0 million with current outstanding $164.9 million. As part of the restructuring, caused in large part by the failure of certain buyers to conclude the agreed purchase of three vessels, the basic terms will provide for: (1) a waiver regarding financial and asset coverage covenants through January 1, 2011; (2) an increased applicable margin; (3) an amendment fee; (4) rescheduling the loan principal amortization by reducing the principal repayments by about 47% and 21% in 2009 and 2010, respectively, and reducing the tenor of the loan. The agreement is preliminary and is subject to execution of definitive documents, providing, inter alia, for substantial reduction of the loan should the three vessels be disposed, and formal approval by Piraeus Bank's Credit Committee."

 

This announcement this morning came as no surprise to me nor did this morning's 22% jump in the trading price of DRYS. I have no scientific evidence but I am reasonably comfortable concluding that all of DRYS other lenders will quickly follow suit and although economic life for DRYS will not be normal for a long time, corporate life will go on and the stock will eventually recover to reasonable levels (not likely to ever see its former lofty heights in my view).

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