On Oct. 4, DryShips (NASDAQ: DRYS ) made an agreement to raise capital by selling $200 million new shares. While soon-to-be-diluted shareholders rarely greet such equity raises warmly, further analysis suggests that this one might not be as bad as it looks -- and may even be an overall positive.
Unlike most other equity raises, this one's run through a sales agent called Evercore (NYSE: EVR ) . Evercore will facilitate the at-the-market or "ATM" offering, which acts almost like a future line of credit though through equity. DryShips can tap into this amount on an as-needed basis, and offer to sell shares based on the then-prevailing market rates or stock price.
Typically, an equity raise involves a large number of shares at a fixed price all at once. But the ATM strategy gives DryShips the freedom and opportunity to raise money at potentially higher stock prices if business conditions improve, and lets Evercore earn a commission on those sales.
Declining cash needs
The Baltic Dry Index, a basket of dry shipping rates, has roughly tripled since the beginning of 2013. There are many factors causing the steep rise in average rates, but iron ore and coal volume rank at the top. Demand from China and Japan for these commodities has been surging. Likewise, export volume of iron ore from Brazil and Australia has been robust. This is an interesting fact, but it's tough to tell how it fits into your argument. You need to make sure your readers clearly understand how each bit of info you introduce relates to the larger point you want to make.
DryShips believes that rising rates are here to stay. In its Aug. 8 conference call, CEO George Economou stated that DryShips would only need $30 million in 2013, down from an original $100 million forecast, and $200 million for 2014, for a total of $230 million. At the time, that $70 million reduction in needs for 2013 suggested strong third-quarter results.
Two months later, Economou now says DryShips now only needs $150 million for 2013 and 2014 combined -- another $80 million decline. This suggests cash from operations might be greatly improving. DryShips may end up ultimately tapping significantly less than the $200 million available. This would mean far less dilution for shareholders and higher fundamental value.
Based on the current trend in reduced cash expectations and optimistic forecasts, DryShips may end up tapping significantly less than the up to $200 million available.
Economou also mentioned that the company expects to finalize a deal with its lenders that will save it cash outflows over the next year. This is in line with his Aug. 8 statements, in which he mentioned that discussions with lenders had begun and expected it would lead the company to "reduce our cash breakeven meaningfully."
He further confirmed that's there's no pressure concerning the company's debt until its first maturity on Dec. 1, 2014. This, plus the sales agreement, gives DryShips ample breathing room. Successful negotiations with its lenders would further reduce DryShips' cash needs, and subject its shareholders to less dilution.
Less shareholder-friendly equity raises
Compare DryShips to other dry shippers' recent equity raises. Navios Maritime Partners (NYSE: NMM ) raised $82 million at a fixed $14.26 per share. The fixed nature of the raise doesn't give shareholders the opportunity to realize potentially less dilution as fundamentals and stock prices rise further.
DryShips laid out a clear plan on its equity raise, which included only tapping its equity on an as-needed basis, while the dilution from Navios is guaranteed and immediate. Navios didn't even specify how long this cash would last it, leaving the possibility of more dilution in the future.
Star Bulk Carriers (NASDAQ: SBLK ) is another example of a less promising equity raise than DryShips'. Star announced an equity raise on Oct. 2 at a significant discount to market price, immediately diluting shareholders. The share price closed at $10.22 the day before the announcement of a fixed equity raise of $8.80 per share.
Star stated the raise would be used "to partially fund the acquisition of nine identified newbuilding vessels, future vessel acquisitions and general corporate purposes, including working capital." The term partially fund leaves open the possibility of further dilutive equity raises, breeding uncertainty among the company's shareholders.
In contrast, DryShips' equity raise offers investors transparency and a degree of certainty. Ultimately, all things being equal, if the fundamentals of dry shippers continue to improve drastically, DryShips could reward shareholders with higher future valuation multiples (such as P/E) than those dry shippers with less shareholder-friendly histories.
DryShips is building its credibility through action as a shareholder-friendly company, tapping the equity markets only if absolutely necessary and then at terms it sees as favorable. While capital raises from other shippers such as Navios or Star dilute shareholders sooner, DryShips prefers to wait in an effort to improve shareholders' value. As shipping demand to China raises dry bulk rates, shareholders in DryShips could be poised for bigger gains with less dilution.
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