Market Scan
Dry Bulk Shippers May Tack Away From Market
Ruthie Ackerman, 12.02.08, 08:50 PM EST
DryShips and Genco are rumored to be considering going private.
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DryShips, Inc.
Tue Dec 02 2008 22:22 EST
$3.99
$-0.16
-3.86%
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Genco Shipping & Trading Ltd
Tue Dec 02 2008 22:22 EST
$7.42
$+0.24
+3.34%
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Dry bulk shippers have been hit by a perfect storm of plunging asset values, tumbling freight rates and sliding stock prices. What's a ship owner to do? Some publicly traded dry bulk companies are mulling taking themselves private, and word on the Street is that DryShips and Genco Trading & Shipping are sailing in that direction.
"With stocks trading at these levels, all the dry bulk shippers should probably look at going private," said Jefferies analyst Douglas J. Mavrinac.
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Dry bulk shipping rates have plunged over 90.0% since the summer highs and the net asset values of ships have tumbled 70.0%, causing a significant number of dry bulk companies to breach their loan covenants. (See "Shippers Breaking Their Covenants.")
As the dry bulk market has gone under it has taken the equities market down with it, sending ripples of fear through dry bulk owners, who are already struggling to stay afloat. The result: The most heavily debt-laden dry bulk companies may decide to go private, wrote Wachovia (nyse: WB - news - people ) Capital Markets analyst Justin Yagerman in a note to investors.
Which company will it be? The edge goes to George Economou's DryShips (nasdaq: DRYS - news - people )--the billionaire shipping tycoon can certainly afford it. As for risks, DryShips has earned itself a top spot on the list of publicly traded dry bulk companies with the most outstanding debt, and its total has shot up 131.3% over the prior year. (See "CEO: Don't Dump DryShips.")
There are other bad signs for investors, too. Last month, DryShips said in a filing with the U.S. Securities and Exchange Commission that it planned to sell as many as 25.0 million new shares, a move that could significantly dilute existing shareholders. It also warned it may breach its loan covenants if the current low charter rates in the dry bulk market continue. In October, the company took over nine Capesize ships that had been owned by Economou's privately held Cardiff Marine, a move many saw as a way to offload debt onto DryShips shareholders. (See "High And Dry In Dry Bulk.")
Even more troubling is if Economou, who is No. 707 on Forbes' list of billionaires, decides not to take DryShips private but instead lets it fall into bankruptcy. Economou's first Wall Street venture ended badly when Alpha Shipping defaulted on $175.0 million in junk bonds in 1999, allowing Economou to strike a deal that let him pay creditors 37 cents on the dollar and left him in possession of most of the fleet. (See "Curious George.") In 2005, Economou was back, taking DryShips public.
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But Mavrinac said that all hope is not lost for DryShips. "DryShips has almost $700.0 million in cash in the bank," he said. "It's not in dire straits. The company has enough cash to meet all its debt obligations through 2010."
Related Quotes Tue Dec 02 2008 22:22 EST
DryShips, Inc.
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* $3.99
* -0.16
* -3.86%
Tearsheet | Chart | News | Executives
Genco Shipping & Trading Ltd
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* $7.42
* +0.24
* +3.34%
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Wachovia Corp.
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* $4.99
* +0.69
* +16.05%
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Eagle Bulk Shipping, Inc.
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* $3.54
* -0.07
* -1.94%
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Mavrinac said that many of the dry bulk companies are cash-rich with strong balance sheets and a lot of options at their disposal. Now each company has to figure out what to do with its cash: buy back shares, suspend its dividend, buy assets, go private. By going private, a company can be bought for less than its net asset value. But, Mavrinac said, there are advantages to being public such as access to capital.
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Another company that's exploring going private is Genco Shipping & Trading (nyse: GNK - news - people ). The dry bulk shipper entertained the possibility on its recent third-quarter conference call.
A dry bulk company that seems ready to weather the storm is Diana Shipping (nyse: DSX - news - people ). J.P. Morgan Securities analyst Jonathan Chappell has upgraded Diana to "overweight" from "neutral" because he believes the company can survive the weak market. Diana has relatively little debt.
Last month, Cantor Fitzgerald analyst Natasha Boyden said she was encouraged after Diana suspended its dividend because she said it would allow the company to retain free cash flow in order to take advantage of acquisition opportunities. “Due to the company's low leverage, we believe the dividend suspension is not a reflection of any liquidity issues, but rather an indication of the company's financial strength and desire to grow the fleet,” she said. (See "Diana Makes Investors Take The Long View.")
On Tuesday, rates on Capesize ships, which are the largest vessels, fell to $2,316, down from $2,364 on Monday. Ironically, rates on the smaller Panamax ships, which can fit through the Panama Canal, sank to $4,499, down from $4,759 on Monday. The rates on the even-smaller Supramax ships slid to $6,244, down from $6,381 on Monday. (See "Dry Bulk Shippers Foundering.") "With freight rates this low, it's really zero," said Mavrinac. "There is no market. That's what happens when you don't have financing."
Yagerman believes there will "likely be a light at the end of the tunnel for dry bulk day rates." "The question now is: How long is the tunnel?" He said that given the sagging demand and oversupply of ships, it is too early to consider acquisitions of ailing companies since the market may fall further.
Meanwhile, the Baltic Dry Index, which is managed by the Baltic Exchange in London and measures dry bulk shipping rates on 40 routes across the world, fell for the 10th straight session on Tuesday to below 700, a level not seen since 1986. The index slipped 16 points on Tuesday to 684.
On Monday, Golden Ocean announced it would suspend its dividend as it works to shore up capital by restructuring its $1.6 billion ship-building program.
Dry bulk shipping stocks were a mixed bag on Tuesday. DryShips shares sank 3.9%, or 16 cents, to $3.99 at the close, while Eagle Bulk Shipping (nasdaq: EGLE - news - people ) fell 1.9%, or 7 cents, to $3.54. Paragon Shipping (nasdaq: PRGN - news - people ) rose 3.3%, or 13 cents, to $4.09 and Diana Shipping (nyse: DSX - news - people ) slid 5.2%, or 40 cents, to $7.24. Genco rose 3.3%, or 24 cents, to $7.42. |
