“It was surreal. When someone asked why he was doing the
deal, here–now, he actually said, basically, ‘Because Americans are the
dumbest investors around, and there’s lots of liquidity in this market.’”
The man sputtering on the other end of my phone line several weeks back is
no innocent abroad in the wilds of Wall Street. Not with more than 40 year’s
experience in buying and selling institutional securities under his belt.
And not with the sort of rare and enviable track record he has to his
credit, one based on consistently preserving, as well as increasing, other
people’s capital. Turns out that this consummate pro had just gotten back
from a “roadshow” lunch for a Cantor Fitzgerald deal. A luncheon he’d
attended, quite frankly, because his sardonic sense of humor has, if
anything, only been sharpened by his years of toil in the Street. He had
expected, he admitted, to be provided “a little mid-day comic relief.”
Instead, he’d gotten acid indigestion and yet another “in your face”
demonstration of how utterly the institutional investment world has changed
over the last decade or so—not to mention a little real-time immersion in
the rising sea of speculative sap flowing around anything even remotely
connected to the energy sector. He shouldn’t have been so taken aback, he
later reflected. For he knew darn well that the marine transportation group,
linked at the hip, as it is, with surging Far Eastern demand for energy and
basic commodities, has been one of the stock markets’ few truly bright spots
for more than a year. He knows well, too, that institutional memory in the
investment world, other than in a few “relics” like himself, these days has
a lifespan rivaling that of a fruit fly. Still, he’d thought, the red
herring was so outrageous, the deal’s timing so brazenly on the heels,
practically, of its principal’s last disastrous (for the public) foray into
the public markets, that sparks would just have to fly when this fellow
dared show his face in New York. Where the audience was sure to include more
than a few investment pros whose very own institutions had been stiffed in
his last deal, floated barely seven years earlier.
“I was treated to a spectacle, all right,” he recounted. “The spectacle of a
room full of portfolio managers being led like lambs to slaughter. No one
even asked what happened to the $175 million this fellow raised in junk bond
financing for something called Alpha Shipping Plc, back in 1998. Granted,
these were mostly equities guys, and everyone’s a specialist in his own
little area these days, but someone besides me has to remember how this guy
hung some of the biggest institutions in the Street out to dry. How he
defaulted within a year of selling that package of 10-year 9.5% senior
unsecured notes through Citicorp” Securities, with Credit Suisse First
Boston and SBC Warburg Dillon Read as co-managers.
The gentleman in question is one George Economou, a MIT-educated scion of a
prominent Greek shipping family. The 51-year-old has been actively involved
in the shipping trade in both New York and Athens for more than 25 years.
Mr. Economou is chairman and chief executive of Dryships Inc., the company
subject to the latest underwriting; he had styled himself general manager of
the failed Alpha Shipping.
On the available evidence, “Gorgeous George” Economou, (as a long-term
professional observer of the shipping scene swears Economou is familiarly
known in industry circles, in part for his “louche mane of blonde hair” and
in part for a reputation for really knowing how to party) is one persuasive
wheeler-dealer.
Case in point No. 1: No fewer than 20 of the 26 Alpha Shipping vessels on
which he raised the $175 million in 10-year junk financing were then already
more than 20 years old—and described at the time as “elderly” by the
authoritative Lloyd’s List.
Point No. 2: Though the shipping and junk markets cratered—and Alpha’s bonds
were downgraded—within months of that February 1998 deal, and although Alpha
defaulted within a year on interest due to U.S. institutional investors,
Economou negotiated a sweet restructuring deal via a quick “scheme of
arrangement” in the Isle of Man courts and a related pre-packaged Chapter 11
in the Southern District of New York. Bottom line: He convinced UBS/Credit
Suisse (which had scooped up three-quarters of the junk issue at distress
prices) to settle for 37 cents on the dollar. Sure, he had to scrap and sell
a few ships, but by July ’99, LLoyd’s List was headlining that Economou had
regained control of his fleet.
No. 3: The success of Dryships’ recent IPO, in which this latest Economou
venture raised some $270 million through the sale of 15 million shares
(roughly a 50% stake) to U.S. investors at $18—despite a 194-page prospectus
(not counting amendments and exhibits) that is eloquent testimony to the
well-intentioned futility of the full-disclosure standards enshrined as
“investor-protection” in the U.S. securities laws. (While it’s true, as
Judge Learned Hand wrote, that sunshine is the ‘best disinfectant,” it’s
also true that there are none so blind as those who will not see.)
The candid if legalistic disclosures in the document run the gamut from the
mildly spicy (both Mr. Economou’s wife, and his ex-wife, through separate
Liberian corporations, called (respectively) Advice Investments and Magic
Management, are listed with him as principal shareholders in Dryships), to
the familial: Among the first vessels Dryships planned to buy with the
offering proceed were six owned by companies controlled by Economou’s
sister. Likewise, both Cardiff Marine, the affiliated Liberian-registered
shipping management company that will actually handle Dryships’ operations,
and Drybulk, S.A., its Liberian-registered broker for charters and ship
trading, are strictly family affairs. Economou owns 70% of each through
something called the Entrepreneurial Spirit Foundation, a Liechtenstein
entity he controls. (This same foundation acquired 70% of Dryships,
pre-offering, in exchange for transferring effective ownership of its
initial six-ship fleet to the IPO company). Meanwhile, the other 30% of both
Cardiff and Drybulk are held by his sister’s Prestige Finance S.A., yet
another Liberian entity.
The prospectus for Dryships (a company Economou formed, perhaps for
variety’s sake, in the Marshall Islands) is rife, in other words, with
convoluted related party transactions.
Not that it isn’t up-front about them. Take the fact that Dryships has only
two employees, its CEO and a CFO, and so will conduct virtually all of its
operations through Cardiff, which Economou created back in 1991. It’s right
there, under risk factors, on page 12. And all that a prospective
shareholder had to do was flip to the top of the next page to learn, “you
will have no recourse against Cardiff.” A little farther down that same
page, furthermore, some fairly standard boilerplate verbiage about
Economou’s stakes in both Cardiff and Dryships creating potential conflicts
of interest is capped with an unusually blunt warning that blood is thicker
than water: “Cardiff may give preferential treatment to vessels that are
beneficially owned by related parties because Mr. Economou and members of
his family may receive greater economic benefits.”
By then, however, even a mildly attentive reader should have been getting
the idea. As early as page 3, the document revealed that, immediately prior
to the public offering, Dryships planned to dividend $69 million, or
substantially all of its retained earnings and cash on hand (save $7
million), to the private Economou-family interests that controlled it.
Stacked up against that sort of candor, it’s perhaps an unseemly quibble to
note that the little matter of Alpha Shipping’s junk bond default, and the
lead roles that both Mr. Economou and Dryships CFO Christopher Thomas,
played in it, are relegated to the disclosure document’s 67th page, where
they’re dispatched in a brief paragraph.
And my telephone informant, the sort who long ago cultivated a habit of
inquiring, before he’d even open a red herring, about which firms had turned
down the deal, wasn’t really terribly surprised that this “detail” had
escaped his luncheon companions’ ken. “The shipping space has been hot for
quite a while now, Dryships isn’t the first of these deals to come to
market, nor will it be the last. It would be wonderful if people learned,
but they don’t. The market has changed, it’s all about demand. Everybody
needs merchandise. The brokers will make good money this year, if they can
keep these deals coming at a pretty good rate. Because the liquidity is out
there. Especially in the hedge funds, most of which hold nothing long enough
to concern themselves with anything as old-fashioned as fundamental
investment value. They care only whether they can use the positive carry and
highly leveraged money to trade vehicles like this—and show some
performance.”
On that score, so far, DRYS has yet to disappoint, as the chart over yonder
shows, climbing from its $18 offering price to a high of 23.75, before
closing last Friday at 23.16, up .26 on the day. To be sure, “Gorgeous
George” has been visibly doing his part, even participating in the “opening
bell” photo op at the Nasdaq market site on Feb. 7. So even the most
skeptical of observers I’ve encountered expect the stock “to take time” to
develop into a great short. Although I found little doubt that it will.
“Korean shipbuilders have record orders for drybulk carriers—and no one
knows how many the Chinese, who are developing even greater shipbuilding
capacity, have on tap,” marvels the portfolio pro who phoned after DRYS’
roadshow. “Yes, freight rates are way up, but this is a very cyclical
industry—always has been, and always will be.”
Another shipping analyst, one who took the time to delve into the numbers in
the prospectus, came away “stunned that Economou made so little” on DRYS’
vessels while day rates soared over the last couple of years; increasing
their “time charter equivalents” (a standard industry measure) only by a
factor of four, while the relevant index soared better than six-fold. That
performance leakage, and the lack of any indication in the prospectus that
the valuations of DRYS’ ships have been independently certified, signal
“something isn’t right,” he warned.
But it took a call to a senior shipping industry observer in London, a man
oddly enough rather sympathetic to Mr. Economou, to get to the nub of what
“isn’t right” about the Dryships deal.
“It isn’t that, in any other business, Economou would be dismissed as a
disgraced junk bond salesman trying to float a bag of old ships—though that
is true. The bigger issue is what does it say about the market that, given
his track record, he’s succeeded in floating Dryships?
“You very well could interpret Economou’s deals as much as criticisms of the
extreme naïveté of the professional investing—and banking—communities, as of
Economou himself,” this Brit suggests. “No debate, he’s an opportunist. But
I venture that he’s been as much talked into doing the deals as he’s talked
others into doing them. It takes two to tango, and the investment banks who
brought these deals, I promise you, got their fees. They did their figures
and decided these things were good enough to shove down the throats of their
professional investor clients.“
Clients, it must be said, for whom this fellow in London feels little pity.
“The rule is caveat emptor. If you spent even 15 minutes doing research
before buying a tanker or bulk ship, you’d realize there is no guessing
where these markets are going to go. Yet here’s DRYS, a deal clearly priced
on current earnings in an extremely volatile market. This, in a business
where the only real profits, historically have come not from operations, but
from timely asset sales! It doesn't take a rocket scientist to see that it
is the private Economou family companies, again, that are making money in
the deal—by locking in profits on ships. So it is the public investors who
can go swing with the markets.”
Such a deal...
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