Why I Prefer Excel Maritime to DryShips

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Includes: DRYS, EXM
by: TraderMark

This is an ironic story because in the comments section last week, reader Keith P asked why I trade in Excel Maritime (NYSE:EXM) rather than everyone's favorite dry bulk shipper - DryShips (NASDAQ:DRYS). Monday's news which has been a long time coming explains why [Oct 31, 2008: Credit Tsunami Swamps Trade] [Nov 3, 2008: UK Telegraph - Investors Shun Greek Debt as Shipping Crisis Deepens]. While DryShips is the daytraders' / speculators' favorite stock, it is not for me, or my timeframe - not with the potential to wake up any morning and seeing banks pulling the plug. Back in January we posted how DryShips was breaching covenants and in talks with another bank about more covenants to be broken:

DryShips Inc (DRYS) said two of its banks notified the Greek dry bulk carrier that it is in breach of certain financial covenants and it is currently in discussions with its lenders for waivers and amendments to loan covenants.

The company added that it is in talks with another lender that currently holds $650 million of its debt regarding breach of loan covenants.

Speculators seem to ignore these things, and as long as it is hot money they like to play... which makes it difficult to short because this type of stock moves 20% in any random direction based on which way the wind is blowing.



Now again, we are in an era where individual stocks mean very little and sectors trade together - the tarnish of one stock stinks up the entire sector. That is illogical on many fronts but it is what it is. Other stocks in dry bulk are being hammered, even those that have no covenant issues. Hence we were able to pick up some EXM Monday AM at nearly 20% off Friday prices.

Via Reuters

  • Greek dry bulk carrier DryShips Inc (DRYS) said it got a going concern notice from its auditors as the company reclassified $1.8 billion of long-term debt as current.
  • Last week, DryShips said it was in discussions with some of its lenders concerning current breaches of loan covenants, and pending the outcome of such discussions it has reclassified about $1.8 billion in debt as short-term. In a regulatory filing with the U.S. Securities and Exchange Commission, the company said it may not be successful in obtaining covenant waivers or modifications or its lenders may accelerate its indebtedness.
  • "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," the company said in a regulatory filing.
  • However, DryShips said it will generate sufficient cash from operations and proceeds from new equity to satisfy its liquidity needs for the next 12 months.

Via TheStreet.com

  • "As discussed during our latest conference call, the going concern explanatory paragraph is the result of the previously announced reclassification of $1.8 billion of long-term debt as current," said DryShips CEO George Economou in a news release. "With the proactive approach already taken to reduce $2 billion in capital expenditures, the confidence of our three main lenders with whom we are in close ongoing discussions, secured revenues of over $2.4 billion in the next three years from drybulk time charters and offshore drilling contracts and the recent equity infusion of $380 million through the ATM Equity Offerings share issuance program, we have repositioned DryShips for the long-term and remain ahead of the curve."
  • In its filing with the SEC, DryShips outlined key reasons for the drybulk shipping market's deterioration in general and DryShips revenue specifically, citing: A lack of trade financing for purchases of commodities carried by sea, causing a sharp drop in cargo shipments. An excess of iron ore in China, leading to lower iron ore prices and increased stockpiles in Chinese ports.

The last point speaks to the hilarity of this market and its drive to create a thesis; after all - all things commodities and China are booming because of anecdotal reports of iron ore (and other metals) being shipped to China. Apparently to sit in ports. Thesis baby - thesis.

  • The company said that continued low charter rates in the drybulk market would harm its revenue, cash flows and ability to comply with covenants in its loan agreements. Should lenders not agree to waive or modify covenants, the filing continued, lenders could accelerate the payments of some debt, and the company could lose vessels.

As an aside, for an example of what happens when covenants are fully breached with no give from the banks - see Manitowec (NYSE:MTW) (thanks to reader Thomas) Again, another stock that rocketed upward in the Kool Aid of the past 3 weeks, and would have inflicted much pain on the short side ... but that darn reality keeps interjecting itself onto the bulls landscape.

  • Manitowoc Co (MTW) said it was likely to violate some debt covenants in the second half of 2009 as the proceeds from sale of its ice business were lower than expected.
  • The diversified manufacturer, which currently meets all covenant requirements, also withdrew its outlook for 2009 expects lower earnings to further increase the risk of covenant violation.

On the latter point, only pundits can somehow see clearly 6 months into the future - they assure us once again brighter times are ahead. I continue to scratch my head at how they keep reaching for the Magic 8 Ball which has failed them for a year +... yet somehow they continue to believe they know better than company after company which has rescinded guidance due to lack of visibility. Pundits rule.





Disclosure: Long Excel Maritime in fund and personal account