Tuesday, April 21, 2009

DRYS after completion of its US$ 500 mio capital raise

DRYS has been in cross currents for some time. It has been suffering from over leverage, losses from newbuilding cancelations, charterer defaults and asset impairment from its acquisition of OceanRig. Now that it has completed increase of capital, its default risk is diminishing and this is likely to have a positive effect on its near term share value.

Increase of capital is dilutive to existing shareholders, especially if done at discount to prevailing share price. DRYS chose to raise additional capital slowly over several months by selling new shares at prevailing market prices. Whether this will add value to the company depends on the use of the funds. Under pressure of senior lenders for default on loan/ asset coverage warranties, these funds are likely to be used to pay down debt. This reduces leverage and default risk.

For this reason, Scott Burke of Oppenheimer recently upgraded the stock to 'outperform'. He also felt that DRYS might have some upside due to firmer freight levels in spring dry bulk markets. I think that he may be overshooting on the freight markets as there has been lately signs of weakness. China seems to be experiencing a hard landing. This does not bode well for an immanent dry bulk market revival.

I continue to feel that a major issue in DRYS that could affect the stock positively would be a successful spin off of its OceanRig offshore drilling business.

Otherwise, it continues to be a battle of attrition and endurance for all shipping companies until there is real improvement in freight market fundamentals.

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