Tuesday, February 24, 2009

DRYS: three scenarios in the perils of Pauline

Dryships (DRYS) is struggling to raise US$ 500 mio additional capital at market prices. About half the money has been placed. This is a tactical victory that led one analyst recently to upgrade his recommendation. Some estimate that this new money could keep the company afloat for 2009/2010, but the jury is still out and there is a lot in play. DRYS is undoubtedly one of the most exciting listed shipping companies.

As DRYS writes in its prospectus, further market downside could result in its shares losing 'most or all of [their] value'." What are the major risks in DRYS at present:

1.) How soon and at what prices the remaining half of $500m equity issuance is wrapped up? Right now DRYS is trading below US$ 4 per share. If this trend continues, this equity infusion will have diminishing returns. In any case, the offering is looking very dilutive for existing shareholders.

2.) Whether DRYS's charterers pay on time and in full and the dry bulk market stages an impressive turnaround? Whatever period charters DRYS may have, if the market stays sour, its free cash flow will be impacted negatively by additional charterer defaults, renegotiations, redeliveries and lower rates on renewal.

3.) How much further DRYS's lenders are willing to bend on principal repayment terms? DRYS certainly has plenty of proverbial debtor's leverage but the banks are being pressed for solvency and to clean up their loan portfolios. So far so good, but patience may come to an end.

Ole Slorrer of Morgan Stanley sees three scenarios: Bullish case: US$ 30 based on earnings multiples of 15 and a V-shaped market recovery, base case: US$ 6 based on earnings multiples of 10 and muddling through supported by expectations of an eventual silver lining in the dry bulk market and the oil rig business and worst case: US$ 0 based on further charterer defaults, prolonged weak market, and lenders' decision to foreclose.

One of the most interesting assets in DRYS is the Ocean Rig acquisition. DRYS is planning to spin it off later this year. If successful, it could boost share price. Another possibility is that DRYS sells off the company as a sacrifice sale to raise cash and deleverage for survival. A more pessimistic version is that Economou sells DRYS to a financially stronger competitor.

Nordea who is the principal lender in the Ocean Rig acquisition is a veteran shipping bank. If they determine that DRYS will not be a survivor, they will be very adept in liquidating the company. George Economou is also a veteran in default negotiations with creditors from his bond issue debacle in the late 1990's.

Whatever the outcome of DRYS, it is fairly certain than its CEO will retain his private shipping interests in Cardiff and be a shipping market survivor.

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