Ocean Rig bankruptcy: Another ball in Economou's juggling act
This story originally published on Fairplay.IHS.com.
After a long period of escalating distress in the wake of lower oil pricing, George Economou-led Ocean Rig UDW has finally sought court protection. On 28 March, the NASDAQ-listed drillships owner announced a comprehensive restructuring via four separate but connected main court proceedings in the Cayman Islands and an ancillary proceeding in New York under the Chapter 15 bankruptcy code.
The company, which migrated its domicile from the Marshall Islands to the Cayman Islands in April 2016 (and shifted its executive office address to the Caymans in September 2016), owns 11 ultra-deepwater drillships and has three on order. Six of its drillships are laid up and of the remaining five, four have contracts expiring in 2017-18. As of 31 December 2016, Ocean Rig had assets of USD4.09 billion and liabilities of USD4.08 billion.
A restructuring agreement has been reached with holders of 73% of Ocean Rig's debt whereby USD3.7 billion in existing debt would be exchanged for equity in the restructured company, plus USD288 million in cash, and USD450 million in new secured debt. The restructuring agreement also calls for new ten-year management contracts for the company's drillships with Economou-controlled TMS Offshore.
US court protection is being sought to stave off what the company's CFO, Anthony Kandylidis, described as "speculative distressed-debt traders" seeking to "stymie the debtor's restructuring efforts in order to extract value which they are not entitled to". Kandylidis, who is Economou's nephew, said in his affidavit that these "recalcitrant creditors" include some holders of the company's senior secured notes as well as the largest holder of Ocean Rig stock. The company's largest stakeholder (with 16% ownership, topping Economou's 9%) is James Dondero, founder of Dallas-based Highland Capital Management.
Ocean Rig noted that the company's largest equity holder (i.e., Dondero) is also "through his company the largest holder of the senior unsecured notes and a holder of loans under the credit agreements".
Highland's recent behaviour suggests that Economou and Ocean Rig may be in for a fight. On 17 March, Highland issued a press release that disclosed Ocean Rig's plan for a "drastic restructuring" after a confidentiality agreement between Highland and Ocean Rig was terminated. Highland disclosed that it had multiple talks with the company and its executives, including Economou, in January and February, and publicly posted a memo marked 'Confidential' on Ocean Rig's restructuring assumptions that was titled 'Project Olympus' and dated 18 February.
By the time Ocean Rig filed for bankruptcy relief, the value of Economou's stake in the company had long since evaporated. He owns 7.4 million shares of Ocean Rig, worth just USD1.7 million as of the closing bell on 28 March, and that remaining equity value would be lost in the restructuring (it was not clear from the bankruptcy filing if and to what extent Economou owns any Ocean Rig debt that would be converted to equity in the restructured entity). To put this in perspective, Economou's equity holdings in Ocean Rig in May 2014, including direct holdings and indirect holdings through his DryShips stake at that time, had a 'paper' value of around USD275 million.
The Ocean Rig bankruptcy is just the latest plot twist in the ever-evolving, often-controversial business drama that has swirled around Economou for many years. Currently, the Greek magnate's most significant equity interests in shipping are in his private vessel ownership and management entities: TMS Tankers, TMS Bulkers, TMS Cardiff Gas, and TMS Offshore. He also holds a 19.7% stake in NYSE-listed container-ship owner Danaos Corp and a 49% stake in Connecticut-based pool operator Heidmar, which is reportedly in the process of being sold.
At NASDAQ-listed DryShips, the company Economou is most commonly associated with in the United States, his ownership is now below 1% and his income is derived from related-party commercial management fees and interest payments, as he now owns the vast majority of the company's debt - USD85.1 million of which he obtained at a 44% discount. Despite owning very few common shares, he retains control of the company's voting rights through his Series D preferred shares.
DryShips, where Kandylidis serves as president and CFO and Economou is chairman and CEO, has become increasingly active in its fleet rebuilding process, pursuing an eclectic multi-sector strategy. On 27 March, DryShips announced the acquisition of four 206,000 dwt Newcastlemax bulkers from unaffiliated third parties for USD124 million. The bulkers will be delivered by the end of June, with two to be deployed in the spot market and two on time charters. Economou highlighted the "historical low prices" of the acquisitions and noted that "spot rates have continued to improve", with the outlook being positive "given the modest orderbook and continued strength in the Chinese economy, which generates demand for raw commodities".
Although the ships were ultimately acquired from third parties, broker reports indicated that Economou's private bulker arm served as a 'middle man' in the transaction. In mid-February, Allied Shipbroking reported the sale of the four ships - the 2013-built Moritz Oldendorff and Valley Star, the 2014-built Super Star, and the 2015-built Wish Star - to Economou's TMS for an aggregate price of USD121.2 million. According to IHS Markit Sea-web data, the previous owner was China-based Hongxiang Shipping.
Overall, DryShips has committed USD393.5 million to fleet acquisitions in the year to date, including deals for the four Newcastlemaxes, as well as for two very large gas carrier (VLGC) newbuilds acquired from Economou's TMS Cardiff Gas for USD83.5 million each, and two tankers acquired for USD102.5 million from third parties (a 2011-built very large crude carrier and an Aframax newbuild resale for delivery in the second quarter).
DryShips has options to purchase two more VLGC newbuilds from Economou that expire on 4 April, implying an imminent decision on those deals. If both options are exercised, the amount committed by DryShips to fleet growth would increase to USD560.5 million. Acquired tonnage is in addition to a legacy fleet of 13 older Panamax bulkers and six offshore support vessels.
DryShips' recent vessel acquisitions have been facilitated by a highly successful series of so-called 'equity line' offerings to Kalani Investments. Three offerings to Kalani since November 2016 have raised USD500 million, with Kalani purchasing discounted shares from DryShips and reselling them to other stock traders. Under the sales agreements, Kalani was not able to own more than 5% of DryShips' stock, but high demand for DryShips' shares among retail investors allowed Kalani to promptly conclude its share 'recycling' transactions, allowing DryShips to swiftly raise funding for vessel acquisitions.
Kalani's footprint in the US-listed shipping sector is expanding. Following its DryShips purchases, it signed and then twice expanded an equity line deal with Evangelos Pistiolis-led Top Ships for the purchase of up to USD12.5 million worth of shares, then provided a USD10 million promissory note to Top Ships on 28 March. On 22 March, Kalani agreed to purchase up to USD150 million of securities from Simeon Palios-led Diana Containerships.
Little is known about Kalani Investments beyond the fact that it is registered in the British Virgin Islands, its listed directors are attorneys at Malta law firm Hassans, and it has New York legal representation specialising in alternative investments. DryShips and Diana Containerships have stated that Kalani is an unrelated third party. A source in a position to have knowledge of Kalani told Fairplay that a Canadian funding source is behind the entity.
For DryShips, the success of the Kalani offerings and the steady pace of its fleet rebuilding imply that more share issuances are on the horizon. Indeed, the company's annual report promised more stock sales, affirming that this year's operations will be funded by "cash generated from operations, bank debt, and equity offerings, or a combination thereof".