Time To Man The Lifeboats On Dryships (DRYS, GNK, EGLE)
Indications that things weren't quite shipshape at bulk commodity carrier Dryships (Nasdaq:DRYS) surfaced last week when the company stunned the market with news that it was suspending its dividend and canceling several new ship orders. It also warned that its fourth-quarter earnings would fall well short of expectations.
Now another shoe appears to have dropped.
Dryships Faces Debt Crisis
The company's shares shed as much as 30% of their value after management disclosed that it was now in breach of certain financial covenants, and it planned to raise $500 million from an unexpected new stock issue. Apparently two of the company's bankers, which are collectively owed about $752 million, recently gave notice that the loans were in breach. Nervousness on the part of lenders is understandable. During the last shipping boom in the mid-1990s, many Greek-owned shipping companies issued junk bonds to finance fleet expansion. The whole thing turned out very badly for investors as 17 out of the 18 Greek issuers defaulted.
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One analyst covering the stock quickly moved to downgrade his recommendation on the company to "underperform" - that's analyst-speak for "sell". (For more on analyst expectations, be sure to read Analyst Recommendations: Do Sell Ratings Exist?)
Rapid Industry Growth Fueled Debt
Dryships' problems come at what appears to be the end of a dramatic global shipping boom over the last five years. During this time, more than 20 Greek-controlled ocean-going shipping companies came to market raising billions to finance fleet expansion, with most of that in the form of debt. Looking at Dryships' latest balance sheet, its debt ratio stood at 56%. A comparable degree of leverage is evident on the balance sheets of other dry carriers like Eagle Bulk Shipping (Nasdaq:EGLE) and Genco Shipping (NYSE:GNK).
Signs that the industry had hit rough water were also apparent from the recent cancellation of a major ship purchase order by Genco and the suspension of dividend payments by Eagle and Diana Shipping (NYSE:DSX). (Read Is Your Dividend At Risk? to learn about some telling factors that can help you answer this question and avoid losses.)
Corporate Governance Issues Also A Concern
The move to go public was unprecedented in that it also marked a major management paradym shift for those companies, which until that point had been closed family businesses. This apparently has not been without its problems.
In a somewhat prophetic piece published last June, the Financial Times of London gave a public airing to the fact that serious corporate governance issues still remained in the industry. Quoting various sources, the article noted that management in the industry remained highly centralized and somewhat unaccountable, that many boards consisted of relatives and other people closely associated with the owner's family, and that the potential still existed for owner-managers to place their private interests ahead of those of company shareholders. This can lead to potential conflicts of interest in cases where owner-managers use their private companies to provide management services or even sell ships to the listed entity.
The Final Word
The loss of dividend income, imminent risk of total default, the prospect of serious equity dilution, falling shipping rates and lingering corporate governance concerns all spell out perfect storm conditions for any remaining shareholders still willing to ride out the rough weather in hopes of an industry turnaround. Frankly, it looks like it's time to abandon ship.
By Eugene Bukoveczky
Eugene Bukoveczky is a freelance writer and investment researcher. He holds a CFA designation and has spent several decades working in the investment business in places like Toronto, New York, London and Dubai. He currently resides in Nova Scotia, where, when not writing, he devotes his time to chopping wood, growing his own vegetables, riding his bike to the store, and thinking about other ways to reduce his carbon footprint. At the time of writing Eugene Bukoveczky did not own shares in any of the companies mentioned in this article.
Disclaimer: Do not buy or sell based on my recommendation. I am not your financial advisor .My recommendations are based on my intuition, research or both and may be right or wrong.
