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Orphan Adopted With Added Benefit of a Back-Door Listing of Ocean Rig Shares
Pair the brilliance of Mr. Economou with the ingenuity of Evercore Partners and problems become opportunities. On Tuesday, DryShips Inc. announced that it had agreed to acquire the outstanding shares of OceanFreight Inc. for a total consideration per share of $19.85 consisting of $11.25 in cash and 0.52326 shares of common stock of Ocean Rig UDW Inc., valued at the July 25th closing price of NOK 89 ($16.44) on the Norwegiaqn OTC. OceanFreight’s shares closed Monday at $9.47, implying a premium of 110%. The offer is not subject to any financing contingency as the cash portion will be paid from DryShip’s existing cash and the shares will come from outstanding shares currently owned by the DryShips, reducing its ownership from 78.3% to 75.9%.
George Jumps into a Convertible
DryShips announced on Tuesday that it intends to offer $300 million aggregate principal amount of convertible senior notes under its previously filed shelf registration. In addition, the underwriter will be granted an option to purchase up to an additional amount of $45 million of the notes to cover over-allotments. Proceeds of the notes will be used for vessel acquisitions, working capital and general corporate purposes.
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Waived
After a rather quiescent period, last week marked the return of waivers and restructurings. Seanergy Maritime Holdings announced that it 50% owned affiliate, Bulk Energy Transport (Holdings) Limited had signed a supplemental agreement with its lenders receiving a reduction of the security requirement and minimum equity ratio for the period up to July 1, 2010.
DryShips also announced that it had finalized its previously agreed waivers with the German banks, Nord LB and West LB covering their respective loans of $116 million and $67 million. According to Mr. Economou, “We are now left with $187.5 million of outstanding debt, where constructive discussions with the banks continue for waivers and we expect to have those concluded shortly.” What a long hard road it’s been.
Earnings Season Continues
We continue to admire our analyst friends, who four times a year have to pore through the company financial reports, analyze them and update their models to fine tune their calls. With the greater disclosure there is much work to be done during these periods and we are happy to leave it to them. We, on the other hand, prefer to give the earnings releases a quick review in search of items of interest to us, which we think provide broader general insights both to the companies themselves as well as the industry. What follows is a selection of these items.
Eagle Amends
Within its 2nd quarter earnings release, Eagle Bulk Shipping (“Eagle”) disclosed that it had amended its revolving credit facility and entered into a management agreement with its former main shareholder.
In its third Amendatory Agreement to its credit facility, Eagle and Royal Bank of Scotland (“RBS”) have agreed to reduce for the second time the amount of availability under the facility. Originally the facility was for $1.6 billion which amount was reduced in December 2008 to $1.35 billion. With the current amendment, it has been further reduced to $1.2 billion. The facility, which matures in July 2014 continues to be interest only until July 2012, when availability begins to decline with the commencement of four semi-annual reductions of $56.25 million with the balance due at maturity. The facility currently accrues interest at LIBOR + 2.50%, with undrawn portions bearing a commitment fee of 0.7%. The cost of interest has become expensive, having nearly doubled from prior periods. It now represents ~22% of EBITDA up from 13%.
Misperception
We have recently been criticized for our recent coverage of DryShips and it may be deserved. Rightly or wrongly, we have viewed the purchase of shares as an investment and expect a duty of care by management. But what if we have it wrong. We recently heard a story about a tradesman who by his own admission knows little about shipping but has done extremely well in the market by alternately buying and shorting DryShips. If it is just a trade, Mr. Economou has provided the market with an ideal vehicle.
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The World’s Greatest Salesman
We will let the analysts’ dissect Dryships first quarter report and give you their insights and recommendations. We were however intrigued by a number of points that Mr. Economou makes in his presentation. Proclaiming Dryships as poised “…to go after distressed assets and drive the long awaited consolidation of the industry,” Mr. Economou describes Dryships as having a healthy liquidity position of approximately $1.7 billion consisting of $722 million in cash and $948 million in undrawn debt capacity.
Poor Uncle Needs Cash. What’s a Good Nephew to Do?
Our thanks to Oppenheimer’s Scott Burk for highlighting OceanFreight’s plan to issue up to $147.9 million of common shares as part of an Standby Equity Purchase Agreement with YA Global Master SPV (“YA Global”) arranged by DVB Capital Markets.
The transaction would be extremely dilutive to shareholders. If all $147.9 million of shares were sold at $3.83, the last reported price prior to the announcement, the company would have approximately 57.2 million shares outstanding which represents an increase of 208% in issued and outstanding shares.
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Mr. Economou Continues Discussions with a Cautionary Note
As discussions continue with an affiliate of Mr. Economou, Top Ships announced last week that it had extended its exclusivity agreement for two weeks through October 22. However, the earlier price indication of $6 has gone by the wayside. The potential acquirer has informed the company that the purchase price will be subject to further negotiations and will reflect prevailing market conditions. At today’s levels, we expect shareholders and management may be less inclined to move forward.
Dry“Rigs” Credit
Despite lingering clouds in the credit markets, Mr. Economou’s DryShips announced on Monday the closing of a $1.125 Billion senior secured credit facility jointly arranged by Deutsche Bank AG – Global Principal Finance, London and Dexia Credit Local, New York Branch for the financing of the two ultra-deep water drillships to be constructed at Samsung Heavy Industries. Based upon an estimated construction cost of $800 million each, the loan to value is approximately 70%. The drillships are scheduled to be delivered in the 3rd quarter of 2011 and will be operated by the newly acquired Ocean Rig.
That Was The Week That Was
Marine Money’s flagship conference came to New York this week and if you were a kid you might refer to it as a three- ring circus. With the conference as the centerpiece, the week has become filled not only with the usual owner/banker meetings but formal presentations and the usual bevy of social events. The numbers are astounding with over 1,000 delegates registered this year, exceeding by far all previous years. In fact, as quickly as we printed a copy of the delegate list, we found it to be obsolete.
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