On April 9, I wrote about how certain companies have death spiral financings in place and you could literally short them at will for almost risk free returns. Now, barely 7 weeks later, Dryships Inc (DRYS – USA) is already down by 90% since I wrote that piece. I’ve been shorting DRYS and a few others like it for quite some time and re-loading as the position size declined—hence my returns have been even better than that 90% return. However, based on last Friday’s update, the balance sheet is now;
$220.6 million of cash
$413.7 million of vessels
$200 million of debt
Net book value of $434.3 million.
With 13.778 million shares outstanding, net tangible book value per share is $31.52 and DRYS closed at $2.38, or 7.6% of tangible book value. Additionally, DRYS is likely cash flow positive with the recent vessel deliveries.
This all got me thinking; how would someone with plenty of cash, who controls this situation and has a total disregard for shareholder interests, play his hand? Is it better to dilute shareholders by continuing to raise $4 to $6 million a week that you can abscond with through related party transactions? Or is it better to end the Kalani program through one last large sale to yourself for $50 million worth of shares at $1.00 and effectively own 78% of the company at 3 cents on the dollar of asset value?
The first method will get you additional cash to siphon off, if new buyers continue to show up to get diluted—a questionable assumption based on the rapidly declining pace of recent equity sales—in fact, I wouldn’t be surprised if equity sales trickle to under $50 million of annual run-rate very soon. Isn’t the smarter move at this point, to get a disproportionately large percentage of the $434.3 million of book value at a cost of roughly 3 cents on the dollar and then control a collection of assets for almost no net capital after a 1-time special dividend? That then gives you the most optionality for the next stage of your schemes.
I don’t know which direction this goes, but the recent loan committments, the decline in the rate of share sales and the ridiculous discount to current book value, have convinced me to cover my position and move on. Let’s just say that there are some guys in Greece who are very entrepreneurial with their capital structuring and I wouldn’t be surprised if someone re-reinvented the death spiral by inverting it and grabbing the assets for his own advantage–especially as he controls the price of the shares and the issuances of equity. Hence, it is time to move on and declare victory. In any case, after the past few months of very profitably shorting these death spirals, I’ll always have a warm spot in my heart for unscrupulous Greek shipping magnates.