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DryShips Seeks Bank Loan as $700 Million Debt Comes Due

DryShips Inc. (DRYS), the drybulk carrier
that faces a potential funding shortfall as $700 million of debt
comes due in less than two months, is seeking a bank loan after
a bond sale fell through over the weekend.

The shipper would use the loan in addition to sources that
include a $350 million financing from ABN Amro Group NV, $100
million available in a credit line from Nordea Bank AB, cash on
hand as well as a funding commitment from Chief Executive
Officer George Economou, according to two people with knowledge
of the company’s plans, who asked not to be identified because
the talks are private.

The conveyer of dry goods such as iron ore, coal and grain
pulled the bond offering to pay its convertible note due Dec. 1
after funding costs for speculative-grade borrowers surged to
the highest in a year and potential buyers demanded at least 12
percent interest. The financing deal comes after DryShips, which
also has tanker and offshore drilling units, said as of June it
was negotiating with creditors to get waivers or restructure
some of its $6 billion of debt that ran afoul of rules governing
loan agreements.

“It’s a perfect storm of the capital markets being shut
and oil going down,” Andrew Casella, an equity analyst at
Imperial Capital LLC that cut DryShips’s shares to
“underperform” yesterday, said in a telephone interview.
“These two things blew up at the same time. And I am shocked
they waited this long to refinance.”

Pulled Offering

DryShips canceled a $700 million offering of secured notes
over the weekend that would have refinanced the convertible
after potential investors demanded a sweetened yield, one of the
people said. The average yield on speculative-grade bonds rose
to 6.54 percent Oct. 10, the highest level in a year, according
to Bank of America Merrill Lynch Index (BDIY) data.

“We had a fully covered book, but we consider the terms
and structure offered as expensive and therefore not in the best
interests of our shareholders,” Ziad Nakhleh, chief financial
officer of DryShips, said in an e-mailed statement. “We
currently intend to refinance the convertible notes due on Dec.
1 using funds from a number of alternative options at our
disposal,” including the funding from ABN Amro and Nordea, he
said.

Contracting Market

Shares of the carrier plunged 21 percent to $1.47 yesterday
after it announced the sale had been canceled in an Oct. 12
statement. DryShips’s $700 million of 5 percent convertible
notes were quoted down 2.5 cents to 90.5 cents on the dollar at
11:05 a.m. in New York, according to Trace, the bond-price
reporting system of the Financial Industry Regulatory Authority.

The new loan DryShips is seeking would be secured by assets
tied to its Ocean Rig UDW Inc. unit, one of the people said. The
bridge financing from ABN Amro will have a one-year maturity,
according to an Aug. 6 U.S. Securities and Exchange filing.

DryShips has lost money in the last three years as the
shipping market has contracted by 59 percent since Dec. 12. The
Baltic Dry Index, a measure of commodity shipping costs by the
London-based Baltic Exchange, fell 0.9 percent to 954 points
yesterday, down from 2,337 on Dec. 12, according to data
compiled by Bloomberg.

The company had $459 million in cash and equivalents as of
June 30, Bloomberg data show. It’s current liabilities exceeded
its current assets by $1 billion on that date, according to the
filing.

Covenant Violations

“Cash expected to be generated from operations assuming
that current market charter hire rates would prevail in the 12-month period ending June 30, 2015, will not be sufficient to
cover the company’s unfinanced capital commitments,” according
to the filing.

DryShips fell out of compliance with rules governing loan
agreements relating to its shipping segment, according to the
Aug. 6 SEC filing. “These breaches constitute events of default
and may result in the lenders requiring immediate repayment of
the loans,” according to the filing.

While the company is current on all its debt payments,
“for the past several years, we have reported certain technical
breaches in some of our financial covenants, something which has
been an industry-wide phenomenon during the challenging shipping
markets,” DryShips CFO Nakhleh said in the statement. “Certain
of these breaches have since returned into compliance as asset
values have increased, certain others have been cured with
waivers while others remain outstanding.”

Even with financing to repay the $700 million convertible
due December, the company will have to raise $500 million for
loan amortization payments over the next two years, according to
Casella.

“The company needs to come up with sticky capital soon to
get the refinancing deal done in order to avoid a downward
spiral of both DryShips’s and Ocean Rigs’s stock prices,” said
Casella. “Then there is a longer-term question: how are they
going to find the money for their operations and chunky loan
amortizations that are coming up in the next two years?”

(An earlier version of this story was corrected because it
misspelled the CFO’s name.)

To contact the reporter on this story:
Jodi Xu in New York at
jxu205@bloomberg.net

To contact the editors responsible for this story:
Shannon D. Harrington at
sharrington6@bloomberg.net
Richard Bravo, Mitchell Martin

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DryShips Seeks Bank Loan as $700 Million Debt Comes Due

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