DryShips Looks Good, Even Without Its Dividends 61 comments
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It is no secret that I view dividend paying stocks as a 'girl's best friend' - at least for the time being. With volatility still at record levels and the continued significant potential for event risk in the credit and equity from mismanagement or fraud, it is wise for investors to move back into long equity positions with some caution.
That said, there is any number of dividend paying companies with temptingly low valuations. For the sake of its dividend, I recently recommended DryShips, Inc. (Nasdaq: DRYS), a transoceanic carrier of drybulk cargo - think steel, coal and grains. Sales topped the $1.0 billion level in the most recently reported twelve months ending September 2008. Profits have soared in the last two years, making an $0.80 annual dividend possible. At the prevailing stock price that provided a yield of 5.25%.
During a period of global economic decline many investors might balk at investing in a company dependent upon trade. However, we point out, it is trade in consumer goods that get hit first and most deeply by macroeconomic declines. According to First Call, the 2009 consensus estimate for DryShips does indicate a drop in sales to $963 million, on which analysts estimate earnings of $5.62 per share. This represents a dramatic decline from the current year wherein EPS is likely to top $10.00 per share. Even at the lower EPS level, the forward P/E is 2.3 times at the current price level. That projected EPS level would also be sufficient to sustain the $0.80 per share dividend…or so I thought.
Within weeks after this commentary was first published, DryShips announced suspension of its dividend, as well as cuts in capital spending plans. Management apparently wants "more flexibility" for its cash reserves. DryShips had $329.1 million in cash on its balance sheet. So my logic was that even if earnings are not as analysts predict, the dividend seemed secure for the time being. Clearly management is looking at a longer "winter" for its business than I measured a month ago.
DRYS shares had soared to $116 per share in May 2008, dropping to an amazing $3.54 by late November 2008. At the current price level, DRYS shares have only just begun to recover and still present an enticing value to investors with a Steady-Eddy investment strategy. A full complement of options provides a means to manage downside risk - or a cheap way to play the long-side for the more wary. This was my original advice and I think I will stick with it. Clearly, however, dividend love should not be allowed to build into blind love. Even the seemingly most well fortified balance sheet and cash flow prospects may not ensure that those dividends will continue.
Disclosure: Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.
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This article has 61 comments:
Check the BDI at:
www.dryships.com/pages...
www.investmenttools.co...
I do think that DRYS will strongly outperform during the recovery and is a very good long-term bet as it is definitely an industry leader!
Within weeks? If I'm not very mistaken that was within hours and the article was then mysteriously removed from seekingalpha within another few hours. Sorry Ma'am, but you just lost your credibility for me.
Anyway - anybody interested in investing (not trading) in DRYS might want to first check how their Chairman, CEO, President and CFO (all in one person!) is running his business. Actually I really urge you to do this! His recent actions seem to suggest he first of all cares for himself rather then for shareholders.
On Jan 27 06:45 AM EconoMarcus wrote:
> "Within weeks after this commentary was first published, DryShips
> announced suspension of its dividend"...?
> Within weeks? If I'm not very mistaken that was within hours and
> the article was then mysteriously removed from seekingalpha within
> another few hours. Sorry Ma'am, but you just lost your credibility
> for me.
>
> Anyway - anybody interested in investing (not trading) in DRYS might
> want to first check how their Chairman, CEO, President and CFO (all
> in one person!) is running his business. Actually I really urge you
> to do this! His recent actions seem to suggest he first of all cares
> for himself rather then for shareholders.
Exactly! After making some horrible decisions with respect to purchasing ships that were owned by his own private company Cardiff (including a string of family members), in september/october 2008, when it was already clear that the BDI was skyrocketing DOWN and the the vessel values were pummeling, he canceled those purchases, and is now paying a hefty toll in cancellation fees: cash money + issuance of millions of new shares.
Who benefits? George Economou and his family members in the shipping business. He canceled three such deals and I believe 2 of them were directly related to Cardiff and his family. They've been paid out MILLIONS (yes, you read well! ) in cancellation fees. In one deal, he provides for a cancellation of about 50 million dollars to THREE family members (yes, 50M each)! Where is the money coming from? From the large cash amount on the balance sheet?
I cannot undo myself of the thought that he did all of this with preconceived ideas. In other words: He had it all set up months ago, when he engaged in the deals. He must have known that under the very particular environment at that time, his purchases would not make sense looking at the short term future of little shipping demand and freight prices that would not even strike a break-even deal. Is there something called as the new 21st century crime?
Disclosure: long ESEA
I agree with other posters that the conflicts of interest at DryShips are a bright red flag.
Biomedlives comment about other shippers suspending dividends is apt. Don't overlook the monkey see-monkey do syndrome. I look for more dividend cuts or suspensions, and in fact look upon these actions as responsible managgement.
The support for your comment is that apparently there are quite a few fund managers too lazy to do adequate research who are unduly influenced by the BDI.
I feel that the majority of the negativity stems from a simple human emotion...jealousy...
Go ahead and throw your battered shares at my head, but I have to say that I have found a lot of forethought in his actions.
Ask yourself this...If Cardiff was not linked to Economou by blood would you still view his actions the same? I doubt from a business standpoint that you can justify the sentiment...
Complexities of the industry notwithstanding, there is no denying the correlation between a 90%+ fall in the BDI and the 77%+ fall in the industry average stock price! One would be foolish to ignore it!
While there may or may not be 'quite a few fund managers too lazy to do adequate research' and are therefore unduly influenced by the BDI, this point of view is impossible to quantify, unless you have data I lack!
In the meantime, the BDI has shown a nice increase in January, and lo and behold, a similar increase in the Transportation (ships) industry's EPS followed right along!
Don't throw the baby out with the bathwater!
On Jan 27 10:54 AM oilsands wrote:
> Jim Hawthorne, your comment ignores the complexity of the shipping
> industry and the fact that many ships are on long term lease.
>
> The support for your comment is that apparently there are quite a
> few fund managers too lazy to do adequate research who are unduly
> influenced by the BDI.
1. how many employees does drys 'employ?'
2. how many times has drys bought or offered to buy from cardiff?
3. who is cardiff?
4. how much did the latest failed purchase form cardiff cost drys?
after finding answers(about 5 minutes of work) and if you still want a crack at this 'company' then then have at it.
It needs to be put into Chapter 11 and all the transfers and payments to its Chairman his family and friends and to Cardiff Maritime brought back into the company for distribution to its creditors and shareholders.
While it remains the favorite of the day traders it will continue to be milked by its Chairman however.
I am glad to see som many folks ringing in with comments on this important subject.
Jim Hawthorne, basically I agree with your point and "don't throw out the baby with the bathwater" is one of my favorite sayings.
My comment was meant to modify your point, not contradict it. However, it is well to note the whole market is down, down, down like Davy Jones, so the influence of the BDI is subject to speculation. Also, remember that technical traders exagerate trends up or down. I wish I did have statistics on the fund managers, but that is not in my purview.
i think you've stung Ms. Fiakas and me to our toes. i catch myself defending everything before i know it.
it could be a feminine trait, as you seem to imply, but pointing it out ought to help a lot of us gals work on that fault. if we can force ourselves to admit to it. hee, hee.
as far as investing goes, we surely need to admit and learn from our mistakes, to become better investors. that is the point of this blog, is it not?
Blonde Molly
You really you have to be kidding here - I can't believe that you were so naive as to believe that the dividend was safe here and I'm not saying this because the dividend is cut - You can't rely on net income, EPS, or P/E for judging whether the dividend was safe. Even the $300m+ cash on hand is dwarfed by $2.9 billion in debt and of course now much has to be spent on cancellation fees. A girls best friend might be dividends or diamonds, but any wise girl looks at just WHO is giving her diamonds or paying the dividend. Down below you'll see what I mean
As one who has been in the ship industry for over 40 years let me tell you that the last 3 years was a "super-blip" in the BDI which boosted ALL drybulk shipping companies. This company went from 4 ships 4 years ago to its present fleet size and has just been an opportunist imo
The shipping cycle is very well known & this time we will be down for a very long time. Guess what all those shipping companies were doing? - ordering new ships hand over fist to take advantage of all the dry bulk goods needed to fire China & India's rapidly growing industries - projections for which only had continuing super growth. Even if growth had continued instead of reversing the BDI would have come down as supply eventually outstripped demand - it ALWAYS does
Instead the dry bulk shipping industry is being hit with a double whammy - increasing supply of tonnage (those new ships are still coming off the stocks) and a retreating demand.
DryShips has been hit far worse than most because it focusses on the spot market - that is mostly single voyage charters and short term time charters. This strategy produces enormous profits when the BDI is high but is crushing when the BDI is low. Companies that charter vessels will naturally use their bareboat chartered (typically 15 year charters) and long term time charter vessels first as they are already committed to pay the charter rates. So vessels on spot charter take the lowest rates IF they can get work.
Yes I know that in the last couple of years DryShips has put a significant portion of its ships into long term charters but even those are not safe. I've seen this movie before - as the spot rates go so far down below the long term rates it is advantageous for the charterer to incur the penalties for early cancellation. Even worse they may not have any work for the vessels and in that case cancellation is certain. The worst case scenario is that the charterer goes bankrupt and hands the ships back with no cancellation fees paid - Anyone remember when esteemed (certainly more so than DryShips) Japanese company Sanko Steamships went bankrupt? They had a fleet of 200 ships mostly on bareboat charters - the company I worked for - Orient Overseas Lines had 4 brand spanking new ships on bareboat charter to Sanko - guaranteed money right? The cancellation nearly drove OOL to the brink because of the liquidity problem this caused
DryShips has walked away from 12 new Capesize (large dry bulk ships) and incurred a $36m loss on pre-payments, $30m in additional payments and must either pay a further $50m or issue 2.6 million shares. Great management? - I don't think so
I wouldn't get into bed with this management - take a look at this deal. To cancel an order for a further 9 Capesize vessels the company has agreed to issue a further 6.5 million shares and 3.5 million out-of-the-money warrants. Because Drybulk's CEO Economou is the seller of these ships guess who gets to benefit???? If you look at Excel Marine Carriers cancellation agreements you will see that they got away with little more than the pre-payment fees.
WHY DOES DRYSHIPS PAY SO MUCH FOR CANCELLATIONS?
It's certainly prudent to cancel huge capex committments when you know that you won't have the money but whose plan was it to build so many ships?
How long before Dryships reports a loss? Also while we are at it why would a company that is expected to make $5+ in net income this year suspend its dividend - I'll tell you why - because it doesn't have the cash to pay it & won't have the cash any time soon. Instead of looking at EPS take a look at the company's free cash flow which is almost always negative because of the high capex requirements of shipping - that tends to be okay when the market is on the upswing but not too hot now.
Why doesn't the article mention the debt load? Especially since we are in a credit crunch - what is the re-financing risk here? $2.9 billion in debt is not a fun place to be for a company with a marketcap around $500 million. How does this company raise capital in this environment?
I think that there is a real chance of insolvency here and certainly that risk can not be ignored. But my real reason for running as far away as possible has to do with the related party business connections.
The fleet is managed by an Economou company Cardiff Marine & I very much doubt that DryShips is enjoying competitive rates. Secondly Cardiff also manages Economou's privately owned fleet so which one is likely to get preference - I'm not talking about explicit instructions to favor one over the other but a natural human tendency to justify actions which may be to the detriment of the publicly quoted company
I still can't get over how naive this article is. If I owned shares I'd sell now
DRYS just filed to issue 500 million new shares!
On Jan 28 05:44 PM ramisle wrote:
> Wow, Every time Deb comes out with a DRYS article, George comes out
> with a new bombshell
> DRYS just filed to issue 500 million new shares!
This article is a load of crap. There is absolutely nothing in it that one does not know. Waste of time. And yes, everyone should look out for themselves and sell every rally. Was hoping to get out this week, with all the bum rally and all. But no - this George the Jerk had to line his pockets more.
I wonder there is anything, we Americans, can do about getting him and his cronies kicked out.
On Jan 28 06:26 PM ramisle wrote:
> That should read $500 million in new shares.
On Jan 27 10:18 AM biomedlives wrote:
> Even before DryShips suspended its dividend, it was reasonably clear
> that, these days, a company's ability to cover a dividend is no guarantee
> that the company will continue to pay it. Note the example of Diana
> Shipping.
>
> I agree with other posters that the conflicts of interest at DryShips
> are a bright red flag.
Wow what a great investment --- where do I sign up?
Thank you Debra, for your sage wisdom..
I don't have to worry about a PoP now.
My daughter doesn't have to do her homework< she's VeRy happy with you.
No college.
On the upside, you DiD give me a day of hope, too bad it willnow be followed by so many nights of sorrow..
It's ok Debra, keep writing! IF I ever have any money again at this late stage of my life< at least I'll know to do the exact opposite of whatever you say.
Thank you Debra for ruin.
I knew it might be a good short term gamble but I didn't want ot touch it until: a) they reported the current quarter earnings and the PE reflected todays reality. I think it might still be a good short.
If people think that the contango in oil is going to remain high, FRO and OSG might be a better bet. I think given 5 years - almost everything that survives will be higher than it is today. The question is how many will surive that long.
Any thoughts? Still like the stock?
When your company wants to venture into an entirely different business, which they have absolutely no experience, pay the CEO's other company huge penalties for a broken deal, etc. it is not a company you should be looking to invest in, it is one you should be running away from.
DRYS is just the next in line like LHSP and ACLN.
seekingalpha.com/artic...
"Why doesn't the article mention the debt load? Especially since we are in a credit crunch - what is the re-financing risk here? $2.9 billion in debt is not a fun place to be for a company with a marketcap around $500 million. How does this company raise capital in this environment?
I think that there is a real chance of insolvency here and certainly that risk can not be ignored. But my real reason for running as far away as possible has to do with the related party business connections. "
It raises funds by further diluting existing shareholders - I hope some sold today before this debacle. $500 million would mean at least 50 million shares although I note that the November filing they sold 25 million for $167 million - in other words they sold at a discount to market to get it done. Add this to the breaching of debt covenants on around half ther loans.
You should read the filing it has a lot of info (don't think that Debra read one!) Here's the stuff on spot charters
" The general decline in the drybulk carrier charter market has resulted in lower charter rates for some of our vessels exposed to the spot market and our time charters and bareboat charter linked to the BDI. Specifically, we have 12 vessels trading in the spot market that are currently exposed to the downturn in the drybulk charter rates, five newbuilding drybulk carriers that we expect will operate on spot charters when delivered in 2009 to 2010, as well as two vessels on time charter and one vessel on bareboat charter at rates that adjust with the BDI. The duration of our spot charters is between 60 and 90 days. Eleven spot charters expire in the period January 28, 2009 through February 28, 2009. Should drybulk charter rates continue to decline or remain at their current low level, our charter revenue with respect to these vessels will remain low or decline even further.
In addition, the general decline in the drybulk carrier charter market has resulted in lower drybulk vessel values. We previously entered into contracts for the sale of the M/V La Jolla, the M/V Paragon and the M/V Toro for an aggregate purchase price of $190.4 million. Due to the steep decline in the drybulk market, we do not expect to deliver these vessels to the sellers. As a result, we will retain the current indebtedness on these vessels. Only the M/V Toro is chartered, and therefore we will have to seek employment for the vessels M/V Paragon and M/V La Jolla at the current low charter rates in the spot market."
The company has 12 vessels on spot, 20 on time charters and 3 on bareboat charters - 2 vessels are unfixed. 11 spot charters due in the next month & this is really bad because they will either be fixed at really low rates or possibly remain unfixed. None of the time charters are up before 2011 & most longer than that.
This should make you run = Economou gets the cash & you don't!
"Cancellation of Purchases of Four Panamax Vessels
We previously entered into separate agreements to acquire four Panamax vessels, including two newbuildings, for an aggregate purchase price of $400 million, from companies beneficially owned by George Economou, our Chairman, Chief Executive Officer and Interim Chief Financial Officer. In December 2008, we agreed to cancel these transactions in exchange for a cash payment by us of $105.0 million in addition to the sellers’ retaining the deposits totaling $55.0 million we previously paid for the four vessels. The vessels were: (i) a 75,228 dwt Panamax vessel built in 2008, (ii) a 75,204 dwt Panamax vessel built in 2007, (iii) a 75,000 dwt Panamax vessel under construction in China scheduled to be delivered during the fourth quarter of 2008 and (iv) a 75,000 dwt Panamax vessel under construction in China scheduled to be delivered during the first quarter of 2009. As part of the termination agreement, we will have the exclusive option to purchase the abovementioned four Panamax drybulk carriers on an en bloc basis at a fixed purchase price of $160.0 million. The exclusive purchase option granted to us by the selling companies will terminate on December 31, 2009. The agreement was negotiated and approved by a committee consisting of the independent members of our board of directors.
Cancellation of Purchases of Nine Capesize Vessels
In October 2008, we agreed to purchase nine Capesize drybulk carriers for consideration aggregating $1.17 billion, consisting of 19.4 million of our common shares and the assumption of an aggregate of $470.4 million in debt and future commitments. The sellers were clients of Cardiff Marine Inc., including affiliates of George Economou, our Chairman, Chief Executive Officer and Interim Chief Financial Officer, and unaffiliated parties. In light of the considerable decrease in asset values of the nine Capesize vessels, we have reached an agreement with the sellers to cancel this transaction. The consideration to cancel the transaction will consist of the issuance of 6.5 million of our common shares to entities that are unaffiliated with us nominated by the third-party sellers, which will be subject to a six month lock-up period. The consideration received by entities controlled by George Economou will consist solely of 3.5 million warrants with strike prices, depending on the relevant tranches, of between $20 to $30 per share. Each warrant entitles the holder to purchase one share of our common stock. The warrants will vest over an 18-month period and will expire after five years. This transaction has been approved by the independent members of the board of directors and is subject to negotiation and execution of definitive documentation.
Disposal of Three Capesize Newbuildings
In July 2007 and April 2008, we entered into separate agreements to acquire three Capesize newbuildings from unaffiliated third parties for an aggregate purchase price of $364.0 million. We have agreed to transfer our interests in the owning companies of these vessels to an entity that is not affiliated with us. In connection with this transfer of interest, the sellers will release us and our relevant subsidiaries from the purchase agreements for these vessels. This release reduces our aggregate obligations in the amount of $364.0 million in exchange for a total consideration of $116.4 million. The consideration consists of $36.4 million in deposits toward the acquisition of the three vessels already made by us, $30.0 million in cash that has been paid to the purchaser, and two additional tranches of $25.0 million each payable to the purchaser within 30 and 60 days, respectively. The two additional tranches may be paid in cash or, at our option, by issuing 2.6 million shares of our common stock for each tranche.
Cancellation of Vessel Sale
On March 15, 2008, we entered into a memorandum of agreement to sell the M/V Delray (ex M/V Lacerta), a 1994 built, 71,862 dwt Panamax drybulk carrier, to an unaffiliated third party for a sale price of $55.5 million. The sale will not close due to the buyer’s repudiation of its obligations under the memorandum of agreement. A deposit on the vessel in the amount of $5.6 million was made by the buyer. We intend to pursue all legal remedies against the buyer.
Sale of Vessel
In November 2008, we delivered the M/V Tonga, a 1984 built, 66,798 dwt Panamax drybulk carrier, to her new owners for the sale price of $3.8 million, resulting in a loss of $3.0 million.
Suspension of the Payment of Dividends
In light of a lower freight rate environment and a highly challenged financing environment, our board of directors, beginning with the fourth quarter of 2008, has suspended our common share dividend. Our dividend policy will be assessed by the board of directors from time to time. The suspension allows us to preserve capital and use the preserved capital to enhance our liquidity. The payment of dividends to our shareholders in the future is subject to limitations imposed by our lenders."
Debra your credibility is shot - just a little research could have found this out
Investment in our shares involves a high degree of risk.
The abrupt and dramatic downturn in the drybulk charter market, from which we derive the large majority of our revenues, has severely affected the drybulk shipping industry and has harmed our business. The BDI fell 94% from May 2008 through December 2008, and there is no indication that the drybulk charter market will experience any significant recovery over the next several months. These circumstances, which result from the economic dislocation worldwide and the disruption of the credit markets, have had a number of adverse consequences for drybulk shipping, including, among other things:
● an absence of financing for vessels;
● no active second-hand market for the sale of vessels;
● extremely low charter rates, particularly for vessels employed in the spot market;
● charterers' seeking to renegotiate the rates for existing time charters; and
● widespread loan covenant defaults in the drybulk shipping industry.
Two of our leading banks, which collectively held $751.8 million of our indebtedness as of December 31, 2008, have notified us that we are in breach of certain financial covenants contained in our loan agreements, and we have been in communication with another lender that currently holds $650 million of our outstanding indebtedness regarding breach of loan covenants. Currently, we are in discussions with these and other lenders for waivers and amendments of certain financial and other covenants contained in our loan agreements. Given the depressed charter market, the values of our vessels could fall even further and be below our outstanding debt. If we are unable to obtain waivers or covenant amendments from our banks, our lenders could accelerate our indebtedness and foreclose on our vessels. In addition, if conditions in the drybulk charter market remain depressed, we may seek to restructure our outstanding indebtedness.
Accordingly, your investment in our shares could lose most or all of its value. Please read the risk factors described herein, in the base prospectus and in the documents incorporated by reference herein.
The drybulk carrier charter market has continued to deteriorate since October 2008, which has adversely affected our revenues, earnings and profitability and our ability to comply with our loan covenants.
The BDI declined from a high of 11,793 in May 2008 to a low of 663 in December 2008, which represents a decline of 94%. The BDI fell over 70% during the month of October alone. Over the comparable period of May through December 2008, the high and low of the Baltic Panamax Index and the Baltic Capesize Index represent a decline of 96% and 99%, respectively. The decline in charter rates is due to various factors, including the lack of trade financing for purchases of commodities carried by sea, which has resulted in a significant decline in cargo shipments, and the excess supply of iron ore in China, which has resulted in falling iron ore prices and increased stockpiles in Chinese ports. The decline in charter rates in the drybulk market also affects the value of our drybulk vessels, which follows the trends of drybulk charter rates, and earnings on our charters, and similarly, affects our cash flows, liquidity and compliance with the covenants contained in our loan agreements.
We currently employ 12 vessels in the spot market with their charters scheduled to expire in the next ninety days, by which time we will have to negotiate new employment for all of these 12 vessels in the currently very depressed charter market. In addition, two of our vessels are employed on time charters and one of our vessels is employed on a bareboat charter at rates that adjust with the BDI. If the very low charter rates in the drybulk market continue through any significant period in 2009, this would have an adverse effect on our revenues, profitability, cash flows and our ability to comply with the financial covenants in our loan agreements. In such a situation, unless our lenders are willing to provide waivers of covenant compliance or modifications to our covenants, our lenders could accelerate our debt and we could face the loss of our vessels.
We have received notices from certain of our lenders that we are in breach of certain financial covenants contained in our loan agreements and are currently in discussions with these and other lenders for waivers and amendments of certain financial and other covenants contained in our loan agreements, and if we are not successful in obtaining such waivers and amendments, our lenders may declare an event of default and accelerate our outstanding indebtedness under the relevant agreement, which would impair our ability to continue to conduct our business.
Our loan agreements require that we maintain loan to value ratios ranging from 120% to 200% of the total amount outstanding under the relevant agreement. The current low drybulk charter rates and drybulk vessel values have affected our ability to comply with these covenants. In addition, if the value of our vessels deteriorates significantly, we may have to record an impairment adjustment to our financial statements, which would adversely affect our financial results and further hinder our ability to raise capital. We have received notices from certain of our lenders that we are not in compliance with our loan to value covenants and we are currently in discussions with these and other lenders for waivers and amendments of certain financial and other covenants contained in our loan agreements. There can be no assurance that we will be successful in obtaining such waivers and amendments.
If we are not in compliance with our financial covenants, and are unable to obtain waivers, our lenders could require us to post additional collateral, enhance our equity and liquidity, increase our interest payments or pay down our indebtedness to a level where we are in compliance with our loan covenants, sell vessels in our fleet, or they could accelerate our indebtedness, which would impair our ability to continue to conduct our business. In addition, if we are unable to obtain waivers, we may be required to reclassify all of our indebtedness as current liabilities, which would be significantly in excess of our cash and other current assets. In addition, we may be unable to obtain a report of our independent registered public accounting firm relating to our annual audited financial statements without a “going concern” qualification, which may trigger further defaults under our loan agreements.
If our indebtedness is accelerated, it would be very difficult in the current financing environment for us to refinance our debt or obtain additional financing and we could lose our vessels if our lenders foreclose their liens.
If we receive waivers and/or amendments to our loan agreements, our lenders may impose additional operating and financial restrictions on us and/or modify the terms of our existing loan agreements.
Our lenders may impose the following restrictions that limit our ability to, among other things:
● pay dividends to investors,
● make capital expenditures,
● incur additional indebtedness, including through the issuance of guarantees,
● create liens on our assets, and/or
● drop below certain minimum cash deposits, as defined in our credit facilities.
Therefore, our ability to engage in some corporate actions may be restricted. In addition to the above restrictions, our lenders may require the payment of additional fees, require prepayment of a portion of our indebtedness to them, accelerate the amortization schedule for our indebtedness and increase the interest rates they charge us on our outstanding indebtedness. We may be required to use a significant portion of the net proceeds from this offering to repay a portion of our outstanding indebtedness. These potential restrictions and requirements may limit our ability to pay dividends to you, finance our future operations, make acquisitions or pursue business opportunities.
We are dependent upon key management personnel, particularly our Chairman, Chief Executive Officer and Interim Chief Financial Officer, Mr. George Economou.
Our continued operations depend to a significant extent upon the abilities and efforts of our management team, particularly our Chairman, Chief Executive Officer and Interim Chief Financial Officer, Mr. George Economou. The loss of Mr. Economou’s service to our Company could adversely affect our discussions with our lenders and management of our fleet during this difficult economic period and, therefore, could adversely affect our business prospects, financial condition and results of operations. We do not currently, nor do we intend to, maintain "key man" life insurance on any of our personnel, including Mr. Economou.
The failure of our counterparties to meet their obligations under our time charter agreements could cause us to suffer losses or otherwise adversely affect our business.
Twenty of our vessels are currently employed under time charters, while three of our vessels are currently employed on bareboat charter, with 11 customers, with 85% of our revenues for the nine months ended September 30, 2008 generated from 30 customers chartering our drybulk carriers. The ability and willingness of each of our counterparties to perform its obligations under a time charter agreement with us will depend on a number of factors that are beyond our control and may include, among other things, general economic conditions, the condition of the drybulk shipping industry and the overall financial condition of the counterparties. In addition, in depressed market conditions, there have been reports of charterers, including some of our charterers, renegotiating their charters or defaulting on their obligations under charters and our customers may fail to pay charterhire or attempt to renegotiate charter rates. The time charters on which we deploy 20 of the vessels in our fleet provide for charter rates that are significantly above current market rates. Should a counterparty fail to honor its obligations under agreements with us, it may be difficult to secure substitute employment for such vessel, and any new charter arrangements we secure in the spot market or on time charters would be at lower rates given currently decreased charter rate levels, particularly in the drybulk carrier market. If our charterers fail to meet their obligations to us or attempt to renegotiate our charter agreements, we could sustain significant losses which could have a material adverse effect on our business, financial condition, results of operations and cash flows, as well as our ability to pay dividends, if any, in the future, and comply with covenants in our credit facilities.
We may be unable to fulfill our obligations under our agreements to acquire one vessel and to complete the construction of five newbuilding drybulk vessels that are expected to be delivered to us in 2009 and 2010.
We currently have contracts to acquire one vessel and to complete the construction of five newbuilding vessels, for which we will be required to procure additional financing of approximately $280.5 million. Our ability to obtain financing in the current economic environment, particularly for the acquisition of drybulk vessels, which are experiencing low charter rates and depressed vessel values, is limited and unless there is an improvement in our cash flow from operations and we are successful in obtaining debt financing, we may not be able to complete these transactions and we could lose our deposit money, which amounts to $70.6 million for the drybulk carriers as of January 26, 2009 and we may incur additional liability and costs.
S-11
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If the spin off of our subsidiary, Primelead Shareholders Inc., is delayed or does not occur, we will have significant additional indebtedness and payment obligations relating to the two drillships under construction that it will acquire.
Prior to or concurrently with the spin off of our subsidiary, Primelead Shareholders, which now owns the stock of Ocean Rig ASA, it will acquire (i) our existing subsidiary, DrillShips Investment, which has contracts for construction of the two drillships, Hulls 1865 and 1866, to be delivered in July 2011 and September 2011, respectively, and (ii) DrillShips Holdings, an entity not currently owned by us, which has contracts for construction of Hulls 1837 and 1838, to be delivered in December 2010 and March 2011, respectively, in exchange for 25% of the then-outstanding shares of Primelead Shareholders. Drillships Holdings is controlled by clients of Cardiff, including Mr. Economou. Due to the disruptions in the credit markets worldwide and weakness in the energy sector, we do not expect to complete the spin off until the second half of 2009. If the spin off is delayed or does not occur, we will retain liability for the $173.4 million of indebtedness for Hulls 1865 and 1866 already incurred to finance payments made under the drillship newbuilding contracts, with no newbuilding installment payments due within the next year and $1.2 billion of newbuilding installment payments due thereafter. We have signed contracts to purchase two additional newbuilding ultra-deep water drillships, identified as Hulls 1837 and 1838, for which there are $1.1 billion in remaining installment payments. Financing has not been arranged for these installment payments. If the spin off does not occur, we currently anticipate that we will not close our acquisitions of Hulls 1837 and 1838. This indebtedness would be in addition to the indebtedness we have incurred and will incur to finance our drybulk fleet and its operations, would adversely affect our ability to comply with our loan covenants and service our indebtedness and would adversely impact our profitability and cash flows. If for any reason we fail to take delivery of the two newbuilding drillships, Hulls 1865 and 1866, we could lose our deposit money, which amounts to $430.8 million as of January 26, 2009.
An impairment of goodwill and intangible assets could reduce our earnings.
At September 30, 2008, our balance sheet reflected approximately $692.6 million of goodwill associated with the acquisition of Ocean Rig ASA. Goodwill is recorded when the purchase price of a business exceeds the fair market value of the tangible and separately measurable intangible net assets. U.S. generally accepted accounting principles require us to test goodwill for impairment on an annual basis or when events or circumstances occur indicating that goodwill might be impaired. Long-lived assets such as intangible assets with finite useful lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If we determine that any of our goodwill or intangible assets were impaired, we would be required to take an immediate charge to earnings with a correlative effect on our equity and balance sheet leverage as measured by debt to total capitalization.
We cannot be assured that we will be able to raise equity and debt financing sufficient to meet our future capital and operating needs.
We expect that the net proceeds of this offering will be $487.2 million; however we cannot assure you that we will be able to sell such amount of common shares. Furthermore, even if we raise these net proceeds, we cannot be assured that the proceeds will be sufficient to meet our capital and operating needs, particularly if the charter rates in the drybulk charter market remain low for a prolonged period of time. Based on an assumed offering price of $11.40 per share, which was the last reported closing price of our common shares on the Nasdaq Global Select Market on January 26, 2009, this offering of $500 million of our common shares would result in an offer and sale of 43,859,649 common shares. While we have recently sold 27.05 million common shares since October 2008 and are offering up to $500 million of our common shares pursuant to this prospectus supplement, we may have to attempt to sell additional shares in the future to satisfy our capital and operating needs. As our working capital deficit continues to grow, lenders may be unwilling to provide future financing or will provide future financing at significantly increased rates. If we sell shares in the future, the prices at which we sell these future shares will vary, and these variations may be significant. Purchasers of the shares we sell pursuant to future offerings, as well as our existing shareholders, will experience significant dilution if we sell these future shares at prices significantly below the price at which previous shareholders invested.
S-12
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Our board of directors has determined to suspend the payment of cash dividends as a result of market conditions in the international shipping industry, and until such market conditions improve, it is unlikely that we will reinstate the payment of dividends.
As previously mentioned, in light of a lower freight rate environment and a highly challenged financing environment, our board of directors, beginning with the fourth quarter of 2008, has suspended our common share dividend. Our dividend policy will be assessed by the board of directors from time to time. The suspension allows us to preserve capital and use the preserved capital to capitalize on market opportunities as they may arise. Until market conditions improve, it is unlikely that we will reinstate the payment of dividends. In addition, other external factors, such as our lenders imposing restrictions on our ability to pay dividends under the terms of our loan agreements, may limit our ability to pay dividends. Further, we may not be permitted to pay dividends if we are in breach of the covenants contained in our loan agreements.
The continued steep decline in the price of crude oil may affect the revenues that we are able to earn from our drilling rigs and the rates we are able to negotiate for our newbuilding drillships.
The price of crude oil is volatile and has continued to fall sharply over the past few months despite significant reductions in crude production announced by OPEC. Changes in crude oil prices often affect oil exploration and drilling activities that, in turn, drive changes in the contract rates for oil drilling equipment, such as deep sea oil rigs and drillships, or, possibly, the suspension of exploration and drilling programs. Such changes and any such suspension could affect the rates which we receive for these rigs when their contracts expire, with the result that we will recognize less revenue from their operations. The employment contract for the Leiv Eiriksson, which currently earns $517,000 per day, expires in September 2009. We have not yet secured subsequent employment for the Leiv Eiriksson after the current contract expires. The contract for the Eirik Raude, which earns $637,000 on average over the contract period per day, expires in October 2011. The counterparty to the contract, Tullow Oil, has an option through March 31, 2009 to extend the contract for one or two additional years. Similarly, were the spin off of our subsidiary, Primelead Shareholders Inc., not to occur, and if the price of crude oil were to fall, we may not be able to negotiate charter agreements for the four newbuilding drillships that are scheduled to be delivered to us in 2010 through 2011 at attractive rates or at all. If the spin off does not occur, we currently anticipate that we will not close the acquisition of the additional two newbuilding drillships identified as Hulls 1837 and 1838.
Acts of piracy on ocean-going vessels have recently increased in frequency, which could adversely affect our business.
Acts of piracy have historically affected ocean-going vessels trading in regions of the world such as the South China Sea and in the Gulf of Aden off the coast of Somalia. Throughout 2008, the frequency of piracy incidents has increased significantly, particularly in the Gulf of Aden off the coast of Somalia. For example, in November 2008, the M/V Sirius Star, a tanker vessel not affiliated with us, was captured by pirates in the Indian Ocean while carrying crude oil estimated to be worth $100 million. If these piracy attacks result in regions in which our vessels are deployed being characterized by insurers as “war risk” zones, as the Gulf of Aden temporarily was in May 2008, or Joint War Committee (JWC) “war and strikes” listed areas, premiums payable for such coverage could increase significantly and such insurance coverage may be more difficult to obtain. In addition, crew costs, including due to employing onboard security guards, could increase in such circumstances. We may not be adequately insured to cover losses from these incidents, which could have a material adverse effect on us. In addition, detention hijacking as a result of an act of piracy against our vessels, or an increase in cost, or unavailability of insurance for our vessels, could have a material adverse impact on our business, financial condition and results of operations.
United States tax authorities could treat us as a "passive foreign investment company," which could have adverse United States federal income tax consequences to United States holders
A foreign corporation will be treated as a "passive foreign investment company," or PFIC, for United States federal income tax purposes if either (1) at least 75% of its gross income for any taxable year consists of certain types of "passive income" or (2) at least 50% of the average value of the corporation's assets produce or are held for the production of those types of "passive income." For purposes of these tests, "passive income" includes dividends, interest, and gains from the sale or exchange of investment property and rents and royalties other than rents and royalties which are received from unrelated parties in connection with the active conduct of a trade or business. For purposes of these tests, income derived from the performance of services does not constitute "passive income." United States shareholders of a PFIC are subject to a disadvantageous United States federal income tax regime with respect to the income derived by the PFIC, the distributions they receive from the PFIC and the gain, if any, they derive from the sale or other disposition of their shares in the PFIC.
S-13
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Based on our method of operation, we do not believe that we will be a PFIC with respect to any taxable year. In this regard, we intend to treat the gross income we derive or are deemed to derive from our time chartering activities as services income, rather than rental income. Accordingly, we believe that our income from our time chartering activities does not constitute "passive income," and the assets that we own and operate in connection with the production of that income do not constitute passive assets.
There is, however, no direct legal authority under the PFIC rules addressing our proposed method of operation. Accordingly, no assurance can be given that the United States Internal Revenue Service, or IRS, or a court of law will accept our position, and there is a risk that the IRS or a court of law could determine that we are a PFIC. Moreover, no assurance can be given that we would not constitute a PFIC for any future taxable year if there were to be changes in the nature and extent of our operations.
If the IRS were to find that we are or have been a PFIC for any taxable year, our United States shareholders will face adverse United States tax consequences. Under the PFIC rules, unless those shareholders make an election available under the Code (which election could itself have adverse consequences for such shareholders, as discussed below under “Taxation – United States Federal Income Tax Considerations – United States Federal Income Taxation of Holders – United States Federal Income Taxation of United States Holders”), such shareholders would be liable to pay United States federal income tax at the then prevailing income tax rates on ordinary income plus interest upon excess distributions and upon any gain from the disposition of our common shares, as if the excess distribution or gain had been recognized ratably over the shareholder's holding period of our common shares. See "Taxation – United States Federal Income Tax Considerations – United States Federal Income Taxation of Holders – United States Federal Income Taxation of United States Holders “ for a more comprehensive discussion of the United States federal income tax consequences to United States shareholders if we are treated as a PFIC.
We may have to pay tax on United States source shipping income, which would reduce our earnings.
Under the United States Internal Revenue Code of 1986, or the Code, 50% of the gross shipping income of a vessel-owning or -chartering corporation, such as ourselves and our subsidiaries, that is attributable to transportation that begins or ends, but that does not both begin and end, in the United States may be subject to a 4% United States federal income tax without allowance for any deductions, unless that corporation qualifies for exemption from tax under Section 883 of the Code and the Treasury Regulations promulgated thereunder.
We expect that we and each of our subsidiaries qualify for this statutory tax exemption and we have taken and intend to continue to take this position for United States federal income tax return reporting purposes. However, there are factual circumstances beyond our control that could cause us to lose the benefit of this tax exemption and thereby become subject to United States federal income tax on our United States source shipping income. Due to the factual nature of the issues involved, it is possible that our tax-exempt status or that of any of our subsidiaries may change.
If we or our subsidiaries are not entitled to this exemption under Section 883 for any taxable year, we or our subsidiaries could be subject for those years to an effective 2% (i.e., 50% of 4%) United States federal income tax on our gross shipping income attributable to transportation that begins or ends, but that does not both begin and end, in the United States. The imposition of this taxation could have a negative effect on our business and would result in decreased earnings available for distribution to our shareholders.
Our subsidiaries that engage in drilling activities may be subject to taxation in the jurisdictions in which they conduct activities.
Our subsidiaries that provide services relating to drilling may be subject to taxation in the jurisdictions in which such activities are conducted. Such taxation would result in decreased earnings available to our shareholders.
The spin off of our subsidiary, Primelead Shareholders Inc., may have adverse tax consequences to shareholders.
The proposed spin off of our subsidiary, Primelead Shareholders Inc., may be a taxable transaction to our shareholders depending upon their country of residence. As a result, a shareholder may recognize gain and be subject to tax as a result of receiving shares of Primelead Shareholders Inc. in the spin off, notwithstanding that cash had not been received. In addition, after the spin off, Primelead Shareholders Inc. may be treated as a passive foreign investment company, which would have adverse United States federal income tax consequences to a United States holder of shares of Primelead Shareholders Inc. Under the passive foreign investment company rules, unless those shareholders make an election available under the Code (which election could itself have adverse consequences for such shareholders), such shareholders would be liable to pay United States federal income tax at the then prevailing income tax rates on ordinary income plus interest upon excess distributions and upon any gain from the disposition of shares of Primelead Shareholders Inc., as if the excess distribution or gain had been recognized ratably over the shareholder's holding period in such shares.
Even her assertions of earnings topping $10 this year don't seem realistic & info available from the company on 23rd January indicated a loss of around $7 to $8 for Q4 which when added to positive earnings in the first 3 quaters comes out somewhere around $9.
Standard & Poor's Cap IQ analysts are forecasting $3.60 in earnings for 2009 but I'll bet they will be negative - no chance of profit returning this year
You can't take analyst estimates seriously as some don't update their estimates very quickly - heck one is even projecting a share price of $60 - the guy forecasting $5 is closer to the mark imo
You Lost any credibility you had. Down 35% this morning.
NEWS TODAY:
"If DRYS is unsuccessful in these negotiations, the banks can foreclose on these vessels. In our view, this is not likely to occur as DRYS is in a better position to operate these vessels than the banks in question. Nevertheless, it is a possibility.
As to the sale of $500 million shares, this will dilute existing shareholder interests, particularly as the stock is already trading at distressed levels and is down over 25% from yesterday's close """""
YOU NOT ONLY HAVE BAD JUDGMENT,
BUT BAD TIMING AS WELL........
After making sure the company paid out HUGE cancellation fees to its affiliate Cardiff, here's the rest of the story, by Dryships herself:
"The company said it is trying to secure waivers or amendments to the contracts in order to postpone payments, but warned that they may not be able to push them off.
Even if the company is able to change its debt contracts, DryShips said the new terms might limit its ability to pay dividends, get more debt or make other capital investments.
DryShips warned that if vessel rates -- already teetering around record lows -- get even worse, it may try to restructure its debt.
If the shipper defaults on its loans, its shares could lost most or all of their value, the company warned.
DryShips also on Wednesday agreed to sell up to $500 million of its shares. The offering will allow the company to sell shares at any time."
Good work gall!
Shipping over the medium term has to be a very profitable recovery play. There is no question that shipping rates will rise significantly from where they are today, as will the shares of remaining shippers.
The only questions are when will the recovery start and which companies will go bankrupt first.
Anyone who invested in just this one shipper now based upon this article is silly, as is bashing the writer rather than having a meaningful disicsussion on what we can learn.
online.wsj.com/article...
JANUARY 29, 2009, 9:25 A.M. ET
DryShips Shrs Sink On Plan To Issue $500M In New Shares
I never considered DRYS (it was by far the riskiest of the shippers), but this sector is cratering. I'd stay out if I were you. Someone mentioned ESEA...I think that's the safest of the bunch. Still, no one is saying that shipping will suddenly cease. It's just that when it does continue, it may become corporately unrecognizable from where it is today.
On Jan 28 06:57 PM tiger71 wrote:
> Where are you getting this information from?
>
>
>
> On Jan 28 06:26 PM ramisle wrote:
seekingalpha.com/artic...
Regardless, the dry bulk shipping sector remains one of the best sector to be in, just look at how strongly the Baltic Dry Index surged back to life:
www.dryships.com/pages...
Within the sector I believe EXM currently has the best valuation and EGLE is the most over-sold. As for DRYS, it's time to tip-toe some shares into it, consider the very high short interest ratio and very high trade volume. Two many day traders in this one and they can push a stock either way violently, not just one way.
On the Yahoo board you fought with the people who tried to warn everyone about George being a crook.
While your timing of the trade was great, you had no idea of the fundamentals, and the bad management at DRYS.
So, now you are pumping EXM, when do you suppose you might get around to doing research? Do you have any idea what those 15 ships on Spot rates are going to do to earnings? Are you aware that the spot rate for Panamax is less than expenses?
I pounded the table to urge people to buy DRYS at the right time, and I pounded the table to urge people to switch from DRYS to EXM at the right time. The timing was right. In 2007 I called on JRCC right on the bottom and I called it right on the top 6 months later. So I am making quite some good calls.
Read my past articles.
I strongly recommend taking a look at EXM and DSX, although DSX is definitely the riskier play.
Absolute agree. EXM is way much better and cleaner than DRYS. I actually warned folks repeatedly to switch from DRYS to EXM:
seekingalpha.com/artic...
The shipping sector remains extremely bullish as the BDI shipping index has been going up strongly 9 days in a row. You just need to work with the volatility. Buy when there is massive sell off, and sell some when there is strong rally.
On Dec. 25, you were sill defending George, calling for Ruthie Ackeman to be put in jail, because she wrote a FACTUAL article about George Economou. On Dec. 28, you were still pounding the table for DRYS, and yet on Dec. 30, you said you were moving some of your money to EXM, and EGLE, but said DRYS should hit $50. Now you say you warned us about DRYS. You have a selective memory, but unless you can remove your posts at Yahoo, the proof is there.
You may have good timing on stock prices, but you know nothing about Dry Bulk, you missed the debt issues at DRYS, and you don't understand what the spot rates are going to do to DRYS and EXM's earnings..
You think that the BDI is "Soaring", it is barely above break even, EXM has 15 ships on spot, DSX has none, and very little debt, Who is riskier?
Ship cancelations and scrapping are not going to stop 2000 new ships hitting the water in the next two years, they just slowed it down. Shipping analysts say that the credit crisis caused cancellations, which avoided a disaster, but it's still a huge oversupply.
If EXM doesn't cancel or cut its dividend it would be a miracle, because most of the other shippers have, especially the ones with debt.
So today you say EXM is a buy, and you will hold till $50 ( Yahoo ) but two days from now you'll be saying "Oops, changed my mind" and two weeks from now you'll say " I warned You". Pump and Dump!
Folks, I've been in and out of Dry Bulk for three years, and the I don't pretend to know what the stock price will do, but I read the trade papers and these companies are hunkering down for tough year. No one is saying that Shipping has stopped or that it is going to, in fact, it has only moderated, but the supply and demand curve now favors those that have something to ship, not the shippers. Most will survive, but there is no growth. Some say that when the iron ore price drops, China will buy much more, Why would the big three miners agree to a 40% cut in price because of less DEMAND, and then agree to ship more?
George owns 35% of DRYS and 100% of Cardiff. George wears two hats, see if you can figure out which hat he was wearing in these deals.
Cardiff sold 4 pana's to DRYS at $100 m each when the BDI was falling like a rock, that holds the record for highest price paid for a Pana.
Cardiff sold 9 Capes to DRYS for $130 m each at a time when the BDI was falling and you could order a newbuild Cape for $90 m. That is if anyone was crazy enough to buy more ships at that time, great for Cardiff.
Then DRYS cancels the Pana's and paid $160 m in deposits and purchase options. Who needs an overpriced purchase option? George is smart, he knew, you defended this as saving money.
Then DRYS Cancelled the Capes and paid another fee to Cardiff, so DRYS keeps giving away money and stock for horrible decisions, and Cardiff gets to keep the ships and all DRYS money. George is smart, he moved his ships to spot in 2006 to take advantage of increased demand, he moved his Capes to Term charters last summer when he saw the market softening. ( Too many Panas are still on spot) You don't think he dumped these ships on DRYS when he saw how bad it was getting in Sept? By the way, Cardiff bought two of the drillships and then sold them to DRYS, for a fee.
Mark, this is research, we told you this in November, and you fought us. today you are on the DRYS board telling everyone to buy DRYS again. I wonder what George will do next, when he can't get a loan for those Drill Rigs?
His intentions are to wipe them out. Then when the BDI recovers which it will he can start all over again. Basically a modified ponzi scheme. I thought with the oil/gas drilling business as a backup this was a solid investment. The only thing I can add is I didn't put all my eggs but still to much into this crook.
1. All the specifics mentioned on this page by the very intelligent posters above.
2. Economou previously used one of his companies, Alpha Shipping, to profit another of his companies, leaving Alpha to default British banks of $175 million. Economou got to keep the fleet by paying a wholesaler (USB) 37 cents on the dollar.
3. The second CFO quit in three years. DryShips has two executives: Economou plus his internal auditor (do you trust him?) The last time I saw a structure like that and failed to sell, I lost $oh,crap.00 when it announced that their net income and cash growth were the result of related party transactions. I’ll never see a penny from those lawsuits. Speaking of related party transactions…
4. His young nephew, Antonios Kandylidis, is the CEO & largest shareholder in OCNF, which shares office space with Cardiff Marine, which in turn profits from DryShips. After OCNF’s chief financial officer quit (see a pattern?), Antonios also became CFO, just like uncle Economou (pattern confirmed.) OCNF then bought two tankers *privately* owned by Economou. Despite losses on credit default swaps (why were they into that?) OCNF beat estimates four quarters, even as DRYS disappointed. Anybody want to take bets on how long OCNF’s new finance guy lasts? But I digress… DRYS is following the same patterns as Alpha Shipping, while Cardiff Marine stays in the family and OCNF profits Economou.
5. DRYS financed a deep-sea oil driller. The price of crude is now down. When it defaults, DRYS will be damaged, but would Economou’s driller? No, just as the US government socializes losses and privatizes profits, so Economou does to the investor.
6. The only way DRYS could do well is if dry shipping rates exploded. But the Baltic Exchange rates were in a bubble, and people should not expect it to grow back quickly. Currently, there is demand destruction in the USA. Next year, there will be a worthless dollar. China is slightly dependent on American demand.
7. Economou's two former wives own a total 15% of DryShips. – That alone is an incentive for him to bankrupt DRYS.
Disclosure:
Made a fast buck selling my DRYS in May 2008 when Cramer called it a buy.