DryShips (DRYS) has had problems with its credit lately. It has refused to take delivery of Capesize vessels (and has cancelled many future deliveries). DRYS has had to pay a stiff price for all of this. It has cancelled its dividend. It has, however, been able to renegotiate its credit with Bank of Piraeus to restructure two loan facilities totaling $220 million, with $164.9 million currently outstanding. Under the terms of the deal, outstanding repayments will be reduced by roughly 47% in 2009 and by 21% in 2010. The deal also includes a covenant waiver through Jan. 1, 2011.
DRYS has made a shelf registration to sell $500M worth of its shares purportedly to help shore up its credit situation. This will no doubt cause share value dilution. I have talked to investor relations at DRYS. They say there is no set timeline on the sale of these shares. They will inform shareholders when the shares are sold. The shares have fallen as a result from the recent $13-$15 range to their current price of approximately $6. They were as low as the high $4 range at one point. This begs the question, why buy now?
The answer is twofold. First, nothing has dramatically changed in the DRYS shipping business. It is still a great value. The ship deliveries that were cancelled were cancelled to cut back on CAPEX for the near future. This is something nearly every company is doing in these hard times. The money raised from the share sale will likely be used to retire debt (or make further acquisitions). The money from these shares is going to be used to make the company more financially stable. The BDI has been going up steadily on increased demand from China, due to its infrastructure heavy stimulus package (and a possible second infrastructure package). The imminent approval of the US stimulus package is likely exerting an indirect effect also. The BDI stands at 1642 with the capesize spot price at $30,001. It has risen consistently for the past two months.
Second, DRYS has announced that it is planning to spin off its Ocean Rig holdings as a new company by issuing shares as a dividend to its shareholders. The regular dividend has been cancelled. However, I have not heard that this dividend has been cancelled. The proposed spin off was supposed to occur in Q1 of 2009. However, I have confirmed with DRYS’ Investor Relations that the spin off has now been delayed until 2H 2009.
Investors should take into account that the consistent rise in the BDI lately will likely mean that the market prices of old ships will be going up also. DRYS has one of the best price to book ratios in the industry. If the used ship prices go up, DRYS should soon have no problems with covenant violation, as these problems have largely arisen due to mark-to-market accounting rules.
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