Shares of Greek drybulk shipper DryShips Inc. (DRYS) cratered Friday, shedding as much as 23% after the debt-ridden company announced a secondary offering of its common stock.
Today’s precipitous fall is more of the same for DryShips shareholders, who have watched in horror as DRYS stock has fallen more than 65% in 2014.
Unfortunately, the shipper’s balance sheets demand some emergency attention, and unless it plans on being taken over by its creditors, DRYS had to raise some cash to pay back lenders.
Sometimes the best way to do that is through an equity offering, hence the company’s decision to issue and sell an additional 250 million shares of DRYS stock at $1.40 per share. With the number of current shares outstanding clocking in at around 434 million, the 250 million offering represents about a 58% increase in share count.
Expect DRYS stock price to keep falling in the coming weeks as markets adjust to the massive dilution.
The silver lining for DRYS investors is that the $350 million raised in the offering will go directly towards fixing its liquidity issues. Specifically, the company will use the funds to buy back “a portion of its $700.0 million principal amount of indebtedness under the 5.0% Convertible Senior Notes maturing on December 1, 2014,” according to a DryShips press release today. This should lower the cost of capital and be a long-term net positive for the business.
For shareholders, it’s a different story.
First of all, dry bulk shipping as an industry has seen better days. If you’re unfamiliar with the area, all you need to know is that it consists of shippers whose sole purpose is to move commodities from Point A to Point B.
As InvestorPlace contributor Susan J. Aluise explains it, the Baltic Dry Index, or BDI, is “a measure of how much it costs to move commodities by sea. Although the BDI has surged more than 100 points over the past couple of weeks, it is down more than 45% since December 2013.”
As you can imagine, slumping rates have been a nightmare for DRYS stock, which, as mentioned above, has fallen more than 60% this year. But hey, misery loves company, and fellow bulk shippers like Paragon Shipping (PRGN), Navios Maritime Holdings (NM) and Safe Bulkers (SB) have each suffered stock price declines of roughly 50% in 2014.
The other problem for DRYS shareholders is that its debt-loaded balance sheet restricts the company from paying a dividend, something that two of the three aforementioned competitors are able to do.
The announcement of the DryShips secondary stock offering today was necessary for the company’s survival, but I fear it signals a long and painful road ahead for DRYS investors.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid.