Monday, February 18, 2008

Comments on DryShips DRYS

If one looks at the current graph of the DRYS at the time this article is posted, it appears a bubble situation. A lot of bubble has already evaporated. Peter Georgiopoulos of Genmar/ Genco recently challenged George Economou, saying that the market has to separate the 'goats from the sheep'. He was angered by the sudden Economou move to the oil rig business contrary to the purported mission of DRYS and rumors about a finder's fee for the bring the business to the company. Against this backdrop, let me comment on DRYS:
  • George Economou is a veteran very successful, but maverick ship owner. In the bond boom of the late 1990's, Economou did a controversial bond issue with aging bulk carrier assets that then led to a default on the first payment. He renegotiated and the bondholders took losses. Since then he made a tremendous comeback.
  • Economou gives the impression of the traditional private entrepreneur who has unbeatable instinct and does as he pleases, rather than the corporate manager who operates by mutual consent. Right now, he holds most of the officer positions in DRYS – CEO, CFO, etc. The BoD members evidently do not play a strong role. Privately he is seeking to fill these positions and restructure his management team.
  • Economou maintains a private company shipping Cardiff as well as being CEO in DRYS. This is a common situation in Greece. The Greek owners often have both a private shipping company, a management company and a publicly-traded company. There are potential conflict of interest issues with both the private shipping company and the management company, which manages the vessels in the public company. Tsakos (TEN), for example, has had for years a similar structure with a private management company and has succeeded to establish a high level of investor confidence.
  • DRYS has enjoyed a large profit margins in 2007 for two reasons: there are many units spot enjoying good rates and there have been good at resale profits. The company performance in 2007 is to be commended. Economou succeeded to get the timing right for the bulk carrier boom. Shareholders have benefited, but there is no guarantee of future performance.
  • On the other hand, with the company leverage rising, there is increased default risk if the market suddenly turns sour. Finally, it is possible that DRYS is expanding faster than their free cash and this may lead to growing liquidity problems. These last points are from third-party sources and subject to further examination.

As a postscript to this article, DRYS has recently enjoyed a recovery in share price. Latest quarterly results show a doubling of profits, which is excellent for free cash flow and will lower leverage so long as this lasts. One of the benefits of having a large number of units in the spot market is the advantage of higher earnings from the rate volatility.

Economou seems to be making some smart moves, particularly the acquisition of Heidmar for a broader commercial base. With current high oil prices, the oil rig business gambit may eventually pay off .

Challenges ahead for Stock Exchange listed Greek shipping companies

With the Tradewinds recently reporting a count of 24 publicly listed shipping companies in Greece, I firmly believe that we are moving to a period of consolidation, mergers and restructuring over the next few years. Some companies will grow and prosper and evolve into world-class businesses. Others will fail and cease to exist.

Common statistics for US stock exchange IPO's are that up to 75% of these companies cease to exist over the first years from inception. For Greek companies coming from a culture where even 10-15 years ago, many business men had difficulties with balance sheets and relied on their bank account statement for their financial position, this poses some formidable challenges ahead.
Most businesses in Greece are small, closed family owned operations. Greek managers are not used to having to operate under an arms-length board with US-style corporate governance. The traditional management style has been highly centralized even to the point of physical limits. Often all decisions are concentrated to one key person and there is little tradition in delegation of responsibilities. Decision making is often very much like a line manager with quick decisions based on limited information rather than a corporate integrated style based on a team approach.

Institutional regulation in the domestic Greek Stock exchange has been notoriously lax. The notion of maintaining share value or management accountability are new concepts in Greece. The notion of hostile take-overs and management changes due bad performance is virtually unheard of.
US-listed Greek shipping companies appear to be exempt of the direct requirement of the Sarbanes-Oxley Act, but there is a system of self-policing where they are required to have an audit committee and report any material non-compliances.
Most Greek IPO’s tell more or less the same story:
  • The BoD’s are very often friends of the management with little industry scope and little weight in corporate oversight on business and financial decisions: lawyers, average adjusters, retired bankers. Rarely do you see Boards with strong independent shipping figures. There are exceptions, of course. Stelmar before being taken over by OSG had a chairman, who was a Major Oil company executive. This added value to the stock and led to a better payout in the eventual sale of the company. More recently, Aegean ANW has a well constructed BoD due in part to the involvement of Hamish Norton in the IPO and Peter Georgiopoulos as major shareholder. Unfortunately many other cases are weak and this is not good for effective oversight that could enhance company performance and share value. There is serious shortage of qualified people for board positions as well as most other senior management positions in shipping these days.
  • Management are often relatives and friends. but outside professional managers are becoming more common. Stelmar above led the way with a professional management team that organized the company. This poses an increasing management talent demand for listed-companies. Some like Diana DXS have turned to managers from multinational companies outside of shipping.
  • Of course, it is not only the titles. The people have to be productive and have something to offer. There has to be some real accountability of management to the BoD and BoD/ management to shareholders. Since Greek management comes mainly from closed, family businesses, this is often a new world for them. They are used to imposing their decisions on their subordinates. They are not accustomed to selling ideas internally, working integratively nor to accounting for past performance. Not unexpectedly, some shelter themselves with elaborate "poison pills." This can have a negative effect on share performance.
  • Greek companies often suffer from lack a productive corporate culture. Little attention is paid how to organize these companies with motivated staff that is efficient and gets results. Most local shipping companies have fairly formalistic ISM systems. Frequently in practice, there are seldom clear job responsibilities. People do not have objectives, etc. Insufficient money is spent for training and continuing education. The worst part of it is that in many larger companies in such environments with weak corporate culture, people can start to work for himself. This can easily degenerate into corruption. A number of large shipping companies in Greece have failed in the past because they lost control for these reasons.
  • The business model is ship provider. The listed company does the technical management and provides the crew and the vessels. Effectively the commercial part is outsourced as the vessels are mainly time-chartered. The companies do not control their market. They often have no direct relations with end-users. Some companies, of course, do have units spot or do profit sharing deals. Even in this case there is no really coherent market strategy. What markets to develop? What kind of customer base to build? There is often a great deal of dependency on a few Charterer customers.
  • The logistical concept of cargo systems or pooling where the Norwegians thrive is still rare among Greeks. The Greeks are mainly looking to play the market speculatively. Greeks have an excellent good track record in this regard, This is very different from building a service transport business with value and recurrent earnings. It is more like a hedge fund of steel commodity assets where profits are mostly from speculative and non-recurrent operations. With the size and affluence of Greek Shipping now in capital markets, this is gradually changing. Greek firms are buying into traditional cargo operators. George Economou of DRYS is buying out Heidmar from Morgan Stanley. Gabriel Panayiotides of EXM is the major shareholder of Torm.
  • The future earning multiples are generated by fleet expansion. The qualitative value element is insufficient. There no concept of brand image or breakthrough performance. Market penetration and customer base is secondary. Internal capacity to take on new business and cash flow generation to support growth is often underestimated. The primary goal is having a huge fleet as soon as possible. The risks in this strategy are liquidity pressures and uncompetitive cost structure that leads to insufficient sustainable competitive advantage in the market place and declining share value.

The concept of listed companies is good for Greek Shipping. The challenges serve as a catalyst for professional management on new level of sophistication and corporate accountablity. There is real evidence of some new world-class companies on the rise. Shipping has lived through an incredible period the last few years, riding a massive boom in commodities world-wide. With the prospects of a US recession looming in 2008 and the dry-bulk market boom fueled by port congestion and infrastructure problems, the coming years are likely to be challenging times. On the other hand, most Greek shipping companies are far more liquid and much better prepared for the years ahead than ever before.

In building value in business, the whole is not the sum of the parts

Private equity firms often seem mesmerised by DCF analysis and financial models. This emphasis is counterproductive to their notional requirements and even proper risk analysis of the project. Theoretically PE groups want a credible business plan in a framework of three to seven years that is going to generate double digit returns. This is inevitably dependent on future earnings multiples. They move into the business to finance strategic acquisitions to generate these earnings multiples and get them to their exit strategy. Some deals work well, some less so as events evolve.

Admittedly the industry needs high returns to build and keep their investor base and to compensate management in their role in the business. Yet nominal returns on projected earnings are little more than a snapshot based on estimations that change rapidly according to market conditions and forward revenue forecasts. Making good projections requires considerable skill and instinct, but this just scratches the surface. Building value in a firm that generates attractive earnings multiples is a complex job.

Harvard Business School recently sent me a prospectus for a new course they are developing on this subject. The headings are useful in illustrating that DCF analysis means little in itself. Management plays the key role. Starting, developing and executing a business plan that generates healthy earning multiples is not a simple accounting exercise. There are a lot of intangible factors. Fundamentally, it all begins with vision and commitment.

As a case study, Quintana - a successful start up in the dry cargo market - would not even have got off the ground without the vision and leadership of Corbin Robertson, the founder. Clearly his client relationship with First Reserve and position as a US-based commodity trader played a big role in the evolution of this vision, but he did not start investing in vessels because of DCF figures. He had a vision and he committed himself to go into the dry cargo sector. The market prospects were not all that clear when he funded the first vessel acquisitions back in 2005 in a volatile, choppy freight rates environment.. In effect, he led the investors into the business with an initial personal commitment and the returns evolved as the business took form. First Reserve, the PE firm concerned, would never have done this on their own. This is fundamental aspect of any business
Lets consider below a few of headings in HBS course summary, which clearly demonstrate that good earnings multiples and successful business performance is anything but a simple mathematical number crunching game:


  • Providing energy and vision for the corporation

  • Overseeing the selection and recruitment of the company's corporate-level and potential leaders

  • Managing the ongoing professional development and career advancement of all corporate executives

  • Understanding the role that succession plays in an organization's corporate strategy


  • Designing and managing the business- and country-unit portfolio to add value, while developing and managing business growth based on cross-unit or entirely new activity
  • Creating effective corporate-division relationships
  • Overseeing the organic development of new businesses
  • Managing mergers and acquisitions to ensure that they contribute strategically to the company's overall mission


  • Funding strategic initiatives and managing both access to capital and cost of capital
    Understanding balance-sheet structure, the pattern of earnings, dividend policy, resource allocation, and relations with financial markets
  • Meeting the special financial challenges associated with multinational activity


  • Maintaining productive relationships among owners, managers, and other stakeholders
    Leveraging the role of the corporate board to ensure accountability, responsibility, and ethical business practices
  • Evaluating the impact of governance structures on compensation and incentive systems

Note how little emphasis HBS gives on those dogged DCF calculations over which PE partners so often dwell over in cold call road show presentations. Too often they flood you with questions on minute details that overshadow the basic critical issues in the business guidelines that you are eager to discuss with them and exchange views! Most of the emphasis in the HBS course is on the human element and relationships, which is central in business where quality of relationships is critical to financial results.

In reality, businesses grow and prosper as they evolve. Asset investments to get into the market place for initial positioning may actually have nominally mediocre returns. These first asset investments are simply stepping stones in an overall strategy. A lot of initial effort in business development goes into positioning and building of relationships with customers, banks and investors. Also very important is building viable infrastructure for good execution that ensures customer satisfaction. This requires organizational development skills to find the right people, keep them motivated and provide them the means to perform well in their jobs. Commercial power in the market place is a factor of market position and scale. It grows over time as the business develops and reputation spreads, opening new opportunities that are not necessarily visible or accessible at outset.
In short, what actions you take today bring results tomorrow. You have to be willing to learn to walk before you can run. Those attractive earning multiples that PE firms adore cannot necessarily happen instantaneously nor do DCF calculations really tell much of the story. This is why vision and commitment in business are such important elements of success. You may well have to sacrifice today in taking risks and committing yourself to a lot of hard work to get those impressive results down the line that seem in retrospect so obvious. There is no free ride here.

The challenge for PE firms is to provide the support and effective financial engineering for the business to grow. They need to make more effort to know their clients and understand their business guidelines in deal formation. Conversely since they hold majority share generally, it very important that there is good match for the prospective client and a mutual understanding of the business risks involved in the transaction so as to facilitate the underlying commercial relationships in the project.

Lausanne Shipping Forum

Let me recommend the Lausanne Shipping Forum, which takes place this year 12-13 September, 2008 at IMD in Lausanne: . IMD is a very fine business school, whose President Peter Lorange is a world-wide authority on the shipping industry. The seminar is co-sponsored by Marsoft, which is an excellent marine consulting firm in Boston:

This forum attracts senior industry executives from leading firms in all sectors of the shipping industry world-wide. I can confirm that this a very high quality seminar, where there is unusual opportunity to discuss shipping matters with some major players in the industry.

IMD is located in Ouchy section of Lausanne on the shores of Lake Geneva. Apart from the excellent program, it is also a very enjoyable experience.

Crewing Crisis

Having had my maritime career mainly in Greece, I can say that this problem is a major issue for the future that is likely to have far reaching consequences.

The Past and Present:

The Greek shipping business model is primarily a vessel provider, rather than cargo operator. Greek shipping always had a competitive edge in service because of the close relation between the office and the ship, which gave superior operational strength and capacity. Traditionally, the older major shipping companies used extensively crew from their islands who were friends and even relatives. They cared for their families in a paternalistic spirit. Their offices were staffed by ex-seamen, which gave them great strength in managing both the deck cargo operations and the technical condition of the vessel.

Because of the early retirement of seamen, Greek offices locally are staffed by older deck officers and engineers, who assume middle management port captain and port engineer functions. The early retirement works as an indirect subsidy on office costs and overheads for small and medium size operators. Today this office staff is gradually becoming more and more elderly due insufficient replacement. For those who go to sea, they serve much less than in the past and leave. The younger staff has limited or no sea service whatsoever. This process risks a decline in the experience factor and quality of the shore-ship link that is a great traditional strength in Greek shipping.

Originally foreign seamen were used only for rating positions and all officers were Greek. In the shipping crisis of the 1980's, companies started to use full foreign crews and lay off the Greeks. At the same time, the Greek government offered subsidies to build rooms, hotels etc to promote tourism, which led many families to move to this sector and abandon the sea. The private schools for seamen all closed. Gradually the enrollment in the state schools diminished. Generally the Greek government has always under invested in education. They have not given technical education sufficient emphasis. Only recently has there any discussion about revamping the Greek educational system nationally and improving standards to which there has been recently considerable local resistance to change and modernization.

Another adverse factor has been the mismanagement of the Greek Seamen's Pension Fund. The Greek seamen unions were ideologically opposed the use of professional fund managers to improve the endowment. The Greek Governments in the 1980's extended the Seamen's pension funds to cover pensions to refugee families from Eastern Europe from the Greek Civil War era. This undermined the economics of the fund and increased dramatically the contribution liabilities on Greek flag vessels. Many smaller and middle size shipping companies were simply not in an economic position to take on these open-ended pension liabilities and were forced to flag out. Ultimately Greek seamen suffered the consequences in diminishing benefits and the need to work on foreign flag vessels. The European Union has encouraged the Greek Government to reform and unify its pension system and progress is slowly being made.

Today with the anti-terror measures shore time is more and more restricted. Immigration formalities are burdensome and onerous for seafarers. Government Authorities have too often shown callous disregard in offering refuge to distressed tonnage. There is a nasty tend in the penalization of accidents, where Masters and senior officers are increasingly exposed to jail and penal trials. One of the ugliest examples was the Spanish Government in the case of the Prestige, where the Spanish Authorities exposed the crew to danger of their lives in refusing refuge and put the Master on an extended jail sentence after surviving the ordeal and seeing his crew to safety, refusing for months to release him on bail.

Governmental considerations for the future:

Governments need to find ways to ease traveling and immigration formalities for seamen and allow them their due on shore leave, so they have more time to let off steam from long voyages and enjoy the ports that they visit when they are off duty. Travel and seeing the world has always been an incentive for young people to go to sea.

Governments need a more rational unified response plan in case of accidents. It would be good to have the jurisdiction in case of accidents and emergencies given exclusively to shipping professionals similar to the US Coastguard and preclude any involvement of political figures whatsoever. The matter of shore refuge for vessels in distress needs to be reviewed and made more professional, so seamen have the security that the shore authorities are there in case of trouble. Some countries are a lot more advanced and professional than others on these matters. The EU should consider these issues carefully.

The matter of penal liabilities in case of accidents has to be reviewed and modernized. The Master and senior officers should not be held in jail or charged for criminal liabilities without cause, which has to be established by proper inquiry in specialized maritime legal units - perhaps similar to US Coastguard accident inquiries, etc.

Management Considerations:

Crew group pension and medical benefits that reward those who make the choice of a seagoing career with a company.

Shore job opportunities that reward sea-going experience and integrate sea-going staff with office staff.

Continuing education benefits for high training standards, reduction of accidents and better shipboard management.

Highly trained shore staff who ensure good communication, support and co-operation to the crew.

Unfortunately this process tends to favor larger companies, who have the critical mass and resources to support these overhead expenses that improve quality and productivity. On the other hand, those companies who show personal interest in their units and crews tend to get better results. Ships do not run well by remote control.

Over the past few years, salaries levels have risen enormously. For senior officers, there is gradually an international convergence of remuneration irrespective of crew nationality. Also the fleet today is much newer, communications have improved with Internet. Life on board is less isolated and more comfortable that it has ever been before. Oil company vetting and safety standards are much higher so ships and sailing are safer than ever in the past.

Hopefully attitudes will change and more people will be drawn to a sea-going career.