George Economou’s New, Revolutionary Approach to Ship Financing

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Mfame Team
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DryShips: George Economou’s New, Revolutionary Approach To Ship Financing

By Henrik Alex

dry

Summary

  • Discussing the recent events around the company.
  • Expect some renewed volatility following today’s reverse stock split.
  • The shares will most likely resume their descent rather quickly due to the ongoing overhang from the remaining Kalani equity line.
  • Don’t expect Economou to stop utilizing this new, highly successful financing scheme anytime soon.
  • With the chairman’s interest being diametrically opposed to the common shareholders, the stock continues to be a screaming short.

DryShips common shares will undergo its fourth reverse split in less than a year.  As a consequence, investors who owned 12,000 shares twelve months ago, will see their holdings being down to just one single share.

After the third reverse split at the beginning of November, DryShips’ stock had a short-lived but nevertheless absolutely breathtaking comeback as the share count was temporarily reduced to just 1.1 mln shares, quickly attracting hosts of momentum traders which propelled the stock from $5 to a peak of more than $100 within a few sessions.

At this point, the company’s colorful chairman, Greek shipping magnate George Economou, decided to step up to the plate and most likely orchestrated the ultimate masterpiece of self-dealing:

  1. On November 17, DryShips announced a $100 mln toxic equity financing agreement with a suspicious, allegedly unaffiliated investment vehicle called “Kalani Investments Limited” (Kalani) domiciled on the British Virgin Islands.  In my previous articles, I strongly suspected Economou to secretly pull the strings behind Kalani and the entity to have pocketed a gain of up to $200 mln from the transaction.
  2. On December 1, Economou became DryShips’ biggest lender by taking over most of the company’s remaining bank debt.
  3. On December 12, DryShips announced the successful completion of the $100 mln financing transaction which increased the sharecount from 1.1 mln to 33.8 mln.
  4. On December 15, DryShips announced a “comprehensive refinancing, de-leveraging and strategic repositioning” aimed to make “DryShips great again”.  In quintessence, Economou extended the company’s revolving credit facility to $200 mln while at the same time pocketing $33.5 mln in repayments.  He also lowered some management fees in return for a 30% participation in future realized asset value increases.
  5. On December 27, DryShips entered into another toxic financing agreement with Kalani, this time for up to $200 mln in new equity.
  6. On January 5, DryShips entered into an option agreement to purchase up to 4 very large gas carriers (VLGCs) currently under construction in South Korea from companies controlled by George Economou for $334 mln ($83.5 mln per vessel).
  7. On January 9, the company exercised its first option to acquire a VLGC from its chairman. In a separate filing, DryShips stated its new share count to be 48.0 mln.
  8. On January 13, DryShips updated the share count to 69.3 mln shares after selling an aggregate $86.1 mln in equity under the second Kalani agreement.
  9. On January 19, DryShips announced a 1:8 reverse split as the share price was quickly approaching the $1 mark.
  10. On January 20, the company updated the share count to 107.9 mln after having utilized an aggregate $130.5 mln under the Kalani equity line.

Until now, George Economou has not only managed to recapitalize DryShips with $230 mln in cash without investing a single dollar himself (most likely except for the $20 mln needed to initially fund the Kalani vehicle), he also orchestrated another, highly profitable self-dealing by selling four VLGCs to DryShips that have been ordered by his privately owned companies in late 2015 at a price point of $76 mln per unit.  The aggregate profit from this transaction for him would be $30 mln in addition to passing the risk for operating in this currently heavily oversupplied market segment to DryShips.

Personally, I don’t have the slightest doubt, that DryShips will quickly utilize the remaining $69.5 mln under the Kalani equity line which will continue to put heavy pressure on the company’s share price.

But will Economou stop at this point? As long as there’s substantial trading volume in DryShips’ stock, the scam would theoretically work in perpetuity.  So investors better prepare for another dance with Kalani in the not too distant future and more self-dealings to be financed by the additional proceeds.

That said, investors should keep in mind that the stock price might very well see some initial recovery following the execution of the reverse split as banks and brokers are usually slow to make the new shares available for trading for their customers and momentum traders might very well remember the stock’s trading pattern after the last reverse split.

So with the chance for the momentum crowd to return and Kalani / DryShips potentially choosing to suspend additional equity sales for a couple of sessions, I would expect some heightened volatility this week until the shares will inevitably resume their descent to new all-time lows in the weeks and months ahead.

Unfortunately, this time the setup for another mega-run doesn’t look that favorable as the new share count will already be 12x higher than after the last reverse split in November and moreover, there will be still an almost $70 mln overhang from the remaining Kalani equity line with potentially more to follow.

Bottom line:

George Economou might have just invented the perpetuum mobile of modern vessel financing but shareholders will continue to be screwed this way as all proceeds from the company’s ongoing equity issuances will be used to purchase overpriced vessels from companies privately controlled by Economou.

As evidenced by the recent VGLC transaction, Economou will not only reap instant profits from these deals, he will also chose to unload some of his most risky and least promising assets to DryShips.

Today’s reverse split might cause some initial volatility in the shares, but given the substantial overhang from the remaining Kalani equity line, the stock should move lower again as soon as next week.

Don’t get caught in some initial short squeeze attempts and wait patiently until shares are losing their potentially newly found momentum.

As always, don’t bet the farm and adequately manage your risk.

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Source: Seeking Alpha