Genco Shipping Bites the Dust. What Does It Mean for DryShips Inc.?

Should DryShips investors worry that Genco’s fate could befall DryShips too?

Apr 28, 2014 at 1:23PM

Genco Shipping & Trading has filed for bankruptcy restructuring. You might not know it from looking at its tiny market cap, but Genco has one of the largest fleets among publicly traded dry shipping companies. It has over a dozen more ships and almost as much deadweight tonnage as DryShips (NASDAQ:DRYS) does. The company itself will live on, but its current shareholders will be all but wiped out. This may serve a canary in the coal mine for Dryships investors.

Source:  Genco Shipping & Trading

The Genco bankruptcy
Genco had been in negotiations for several quarters with its creditors to try to save the common shareholders. The company had scored waivers in the semi-distant past. DryShips' lenders gave its company some rope, so Genco investors thought that was that was a good omen for their company. They were wrong.

Genco had previously dropped a few clues that the lenders are still too conservative and have their own balance sheet issues, so a deal might not be reached. In the end, the negotiations failed. It probably didn't help that dry shipping rates are still substantially below levels seen this past calendar year's fourth quarter. This leaves Genco losing thousands of dollars per day.

The plan, pending court approval, calls for "cancellation of all equity interests in the Company, with such equity interests receiving seven year warrants for 6% of the New Genco Equity struck at a $1.295 billion equity valuation." In English, this means that 94% of the current shareholder value will be eliminated, and the other 6% will only have even a tiny bit of value is if the company's new stock's market cap runs wildly above $1.295 billion.

DryShips' own debt problems
For DryShips, a substantial recovery in the dry shipping market is needed. The company's filings warn that if the low charter rates continue or decline further, it could cause its lenders to cease providing the waivers on its debt terms that have allowed DryShips to avoid bankruptcy so far.

DryShips has waivers in place until the end of this year. Like Genco was, DryShips is negotiating for further leniency. If the new Genco stock begins to trade at favorable market levels, it could hurt DryShips' negotiations chances. The creditors will become the new owners of the new Genco stock. Any rally above the expected trading values could entice DryShips' creditors to also want to cash in by having DryShips mimick the Genco bankruptcy. The new stock will also compete for drybulk investor dollars in general.

The bankruptcy risk is a very real risk, despite what DryShips CEO George Economou said in the most recent conference call. He stated, "Based on our current debt service profile and even if the industry does not stage a recovery we estimate that DryShips is now fully funded." That's probably true operationally. The fate of DryShips' common shareholders will be at the mercy of creditors next year regardless of operational funding, however.

Failure to get that mercy could result in, as the filings describe, the "lenders may accelerate [the] indebtedness under the relevant credit facilities, which could trigger the cross-acceleration or cross-default provisions contained in [the] other credit facilities relating to our drybulk and tanker fleet, under which a total of $942.8 million was outstanding as of December 31, 2013." That could mean lights out.

Foolish final thoughts
Personally I think there is a good chance that DryShips will score the waivers it needs, but I thought the same about Genco at one time too. Bankruptcy wouldn't completely surprise me as DryShips has a history of being less than friendly toward shareholder value in the form of dilution. Maybe DryShips can dilute its way out of its problems if necessary, though this still isn't good for the common shareholder. It will be interesting to see what updates DryShips has when it reports its first quarter results in May.

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