Going Concern?

On Monday, DryShips filed its annual report for last year, which included unqualified audit opinions from Deloitte, Hadjipavlou, Sofianos and Cambanis on the company and Ernst & Young (Norway) on its subsidiary, Ocean Rig. However both opinions assume a “going concern,” despite breaches in financial covenants, questions about its ability to meet its financial needs and negative working capital.

Unlike TBS, mentioned earlier, the company did not obtain its waivers prior to the issuance of the financial statements. The inability to obtain resolution is likely attributable to the multiplicity of lenders as well as the different prospects for the shipping and offshore businesses. Footnote 11 to the financial statements lists 13 current credit facilities. Dryships is the obligor on 12 of which 2 relate to Ocean Rig (share purchase and construction loan). The last is an Ocean Rig credit facility. While the spin-off of Ocean Rig sounds logical and appealing, the equity value in its assets and excess cash flows are too valuable to be let go by the DryShips lenders particularly in light of the DryShips’ guarantee of the Ocean Rig debt. In light of these complicated interrelationships an unwinding seems unlikely.

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What Do DryShips And The U.S. Government Have In Common?

The answer is they both seem to be issuing lots of paper. Last week, DryShips announced two transactions designed to reduce their future financial commitments. In the first instance, it transferred its interest in three Capesize newbuildings to an unaffiliated entity generating savings of $364 million in exchange for total consideration of $116.4 million. The latter consists of $36.4 million in previously paid deposits, $30 million paid to the purchaser and two additional tranches of $25 million payable to the purchaser within 30 and 60 days respectively. The last two tranches are payable either in cash or, at the option of the company, by issuing 2.6 million shares of common stock for each tranche.

Not surprisingly, the company also unwound the previously announced acquisition of 9 Capesize bulkcarriers from affiliates of Cardiff Marine, George Economou and third parties for $1.17 billion, which was to be paid for with 19.4 million shares of the company’s common shares and the assumption of $478.3 million in debt and future commitments. The consideration to cancel this transaction will consist of the issuance of 6.5 million shares to the unaffiliated entities, subject to a six-month lock-up. The affiliated entities will receive 3.5 million warrants that give the holders the right to purchase one share of DryShips stock.  The warrants will be priced at $0.01 and will have strike prices, depending on the relevant tranches of between $20 and $30 per share. Vesting will be over 18 months with an expiry of 5 years.
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The Week in Review

While there are rumors of a number of IPOs in the works, volatility and uncertainty has all but brought the US equity markets to a stop, and we don’t expect to see much more done over the summer. Bank debt has not proved as much of a problem for shipping. Most recently this week Deutsche Bank and HSH Nordbank acted as MLAs on a $753.1 million loan for E. R. Schiffhart GmbH & Cie KG to finance ten capesize bulkers currently under construction in Korea by the Hyundai Group with delivery expected throughout 2010. BNP Paribas, Commerzbank and Dresdner Kleinwort joined DB and HSH as arrangers while Deutsche Schiffsbank came in as a co-arranger for the deal, which finances 71% of the $1,056 million project cost and covers both pre and post-delivery financing. Notably Ralph Bedranowsky of Deutsche Bank and Harald Kuznik of HSH both hailed the deal as an example of “the global shipping market…returning to reasonable, market-consistent valuations…”
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DryShips Update

DryShips on Wednesday commenced the mandatory offer period for the acquisition of all outstanding shares of Ocean Rig. The peri­od will run through June 11th. In the meantime, wholly-owned DryShips subsidiary Primelead Limited has upped its stake in Ocean Rig to 75.1%. This includes the 4.4% stake Cardiff had retained, which was sold to DryShips at NOK 45 per share last week. Meanwhile the bulk market has been booming and at press time DryShips’ stock price has rebounded to $105.68.

The Week in Review

The money, apparently, is in oil as two of the industry’s biggest gurus, John Fredriksen and George Economou, both make aggressive plays into the rig space. Mr. Fredriksen, of course, has long been making investments into various facets of the offshore industry and has either spawned or acquired a bevy of offshore companies to that end. It was hardly earth shattering this week when Seadrill announced that it had acquired 200,000 shares and entered into forwards to acquire 16,300,000 shares in US-listed Pride International, an offshore company with a market capitalization of $7.2 billion. The shares amount to a 9.9% stake, worth around $708 million. The move prompted Pride International to take action to lower the threshold level of ownership to trigger its stockholder rights plan from 15% to 10%. Seadrill has also asked Pride for a meeting to discuss “potential strategic benefits for both parties of a transaction between the two companies.” A merger could be on the cards – or it could not be. Mr. Fredriksen has shown himself as skillful an investor as an acquirer, using each strategy as it suits him.

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DryShips Launches Bid for Ocean Rig, Plans Ultra Deepwater Spin-off

When DryShips first purchased a 40.4% stake in Ocean Rig from Cardiff Marine in December 2007 for $405 million, shareholders were perturbed and correspondingly punished the share price. Why had a dry bulk play entered the rig market, they wondered? And why did DryShips purchase interests from George Economou’s pri­vate company Cardiff Marine just weeks after Cardiff had purchased the interests itself – for a higher price? To Mr. Economou it was a shrewd business move and a good opportunity to diversify, but to shareholders it was perplexing and made the future more uncertain – and therefore more risky.

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2007 Draws to a Close

And what a year it’s been. Marked by skyrocketing dry bulk markets, somewhat less stellar but improved wet markets, and a vicious credit crunch, whose reach has gradually gone beyond transaction volume into cut into staff – and some holiday parties. Still, the bankers we’ve talked to have remained extremely busy and transaction volume continues to flow, if a little more cautiously. Chembulk and TECO have closed their respective acquisitions, and Teekay, Navios and OSG have successfully spun out new parts of their businesses to the public markets. Mr. Economou has flipped his Ocean Rig stake from private interests to public within days of purchasing it.

As we remember the year gone by please take a moment, if you haven’t already, to nominate your favorite transaction(s) from 2007 either through our anonymous submission form at:
http://www.surveymonkey.com/s.aspx?sm=VHHjXJnAw3UzphYnjLhgBg_3d_3d or by sending an email to nhuvane@marinemoney.com.

Please note that our US offices will be closed the week of December 24th and there will be no new edition of Freshly Minted published. We wish you all a very merry Christmas, a happy and prosperous New Year, and look forward to welcoming you back in 2008.

Blending Bonds & Bank Debt: Ocean Rig Completes $600 Million in Financing