Near the end of last week, a group of dry bulk ship owners and representatives of some of the biggest companies that charter their vessels huddled in Geneva, Switzerland, to talk about what was happening in their industry. The strange trading taking place in the shares of the publicly-traded dry bulk ship companies, which were soaring and then plunging by the hour, had stunned the group. They had no way to explain what was going on.
Ironically, some members of the group were bracing for a bit of a difficult start to 2017, expecting weakness in the industry during a first quarter period that usually sees a drop-off due to the Chinese New Year and reduced iron-ore shipments from Brazil to China, which make up a big chunk of the industry. Many were forecasting declines in shipping rates at the start of 2017 after a 2016 surge in those rates.
With the frenzy in shipping stocks, Amit Mehrotra, a Deutsche Bank shipping analyst who attended the Geneva meeting, was fielding more investor calls last week than he had in the previous year. “It is ridiculous the way the stocks have been trading, stocks should not go up by 1,500% in a week,” says Mehrotra. “It’s not good for the industry as a whole.” Mehrotra described the mood at the meeting as “cautiously optimistic.”
At the center of last week’s shipping stock madness was George Economou, the man who had initially led the Greek dry bulk shipping companies to list their companies on Nasdaq more than a decade ago. It was Economou’s DryShips that had its shares surge by 1,500% following Donald Trump’s election win before plummeting back down to Earth. Economou had orchestrated a reverse stock split in DryShips’ shares at the start of November that reduced the number of outstanding shares dramatically, leading some to argue that the DryShips stock surge was either the result of a short squeeze or casino-like retail speculation that overwhelmed the thinly traded shipping stocks last week.
The MIT-trained Economou has never taken what goes on in the stock market too seriously. “Who are my investors? Computer models, hedge funds and some institutions that go in and make $10 and get out,” Economou once told Forbes. DryShips has long been the poster boy for the kind of poor corporate governance that has dominated the dry bulk shipping sector since Economou brought these stocks to the Nasdaq.
DryShips was once worth billions of dollars, making Economou a paper billionaire, but even as its stock soared last week it was never worth more than $50 million. Even though they have real businesses, all the dry bulk shippers are micro-cap penny stocks and many of their balance sheets are in terrible shape after years of dilutive equity financings and recent tough times in the shipping market. Any investor who buys a dry bulk shipping stock is betting more on those balance sheets than how much a Capesize vessel is earning in a given day.
In the middle of the stock surge last week, Economou inked a deal to sell $20 million of preferred shares to Kalani Investments. But DryShips remains in default on some $200 million of bank loans having not made payments on credit facilities that have matured. On Monday, DryShips said it had reached a settlement with one of its lenders, which will write off about 50% of what it’s owed after DryShips repaid $8.2 million and agreed to repay another $2 million.
The Dry Bulk Index, which measures the cost to ship dry bulk materials like coal, grain and iron ore, has surged since hitting multi-year lows in February. The surge was first sparked by increased activity in China, which has long been the key determining factor of the strength of the dry bulk shipping market, at least partly because of Beijing’s new stimulus program. Trump’s election win fueled speculation that new U.S. infrastructure spending would benefit shipping, a sector that has traditionally not really been influenced by what happens in the U.S. The shipping stock boom and bust in the thinly-traded micro-cap shares followed.
Diana Shipping, another publicly-traded Greek shipping company, said last week after its stock had surged that it was calling off discussions with its lenders to get debt relief, sinking its stock, which is still up 36% since Trump won the White House. Regardless of what happened in the stock market last week, the balance sheets of most dry bulk shippers remain a wreck.
Source: ForbesPrevious Next