Vladimir Jelisavcic is Bullish on DryShips Convertible Bonds

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Vladimir Jelisavcic imageNote to readers: I am writing all these posts very informally. I have found that readers like this the best, and it enables me to take the most notes possible and get them up in real time. I will be updating the presentations in real time, and tweeting, so make sure to check back frequently or on Twitter, Facebook or Feedburner. Also you can check out this website announcement Value Investing Congress Website Announcement.

All notes are the speakers, except words in the brackets which are mine.

Co-founder of Longacre Fund Management, LLC, 1998 and LSE Fund Management, LLC, 2005. Vladimir Jelisavcic is a member of Longacre’s Investment Committee. Since inception the fund has produced returns of ~9.7% annually net of fees. Mr. Jelisavcic was, until November 1998, a Vice President in the High Yield Department of Bear, Stearns & Co. Inc., where he was responsible for trading distressed bank loans and private notes as well as the identification and analysis of investment opportunities in distressed securities.  Mr. Jelisavcic joined Bear, Stearns in 1993.  In 1991, Mr. Jelisavcic worked as a law clerk for the U.S. Securities and Exchange Commission in Los Angeles.  From 1987 to 1990, Mr. Jelisavcic worked in the Tax Department of Deloitte & Touche.  Mr. Jelisavcic was a C.P.A. and the author of articles on trading claims and creditors’ rights published in the Journal of Corporation Law.  Mr. Jelisavcic earned a J.D. (cum laude) from the University of Iowa College of Law in 1993 and a B.S. in Accounting from New York University in 1987.

I missed some notes which I will fill in when I get the presentation.


It owns nine ultra-deep water rigs.

The key value driver is not shipping, but rather the drilling. These rigs can drill 7-10k feet. It decided to expand this by ordering the most modern, 6th generation drill ships. We expect this to continue in coming years.

the ultra deep water fleet is the most interesting which they acquired back in 2008. Four are in the process of being constructed, and three delivers expected in 2013. Dryships also has the option to purchase three more seventh generation units.

Dryships last September spun off part of ocean Rig to existing Dryships shareholders. Dryships owns about 74% of Ocean Rig today, which trades over the counter in Norway.

The market which DryShips operates in is really tight.

We think that everything is able of being contracted but the owners are waiting for a later date.

Last Wednesday, Ocean Rig announced that one of their older rigs received two contracts to operate in West Africa at $500k a day. It was announced today that Ensco’s drills received multiple offers to drill in the Gulf of Mexico.


Off-shore capex is running much higher than on shore equipment cap-ex. We expect this trend to continue. This explains why the market is so tight: there are only a few drill ships that can reach the required depth.

In August, TransOcean announced an acqusition of Aker Drilling. Aker owns two deep water subs, and was awaiting order of two drills. The value per unit was $800m per unit based on the price paid.

Based on Ocean Rig, we believe that it should be based at $613m per rig. We back out the debt, and back out the semi sub-it has a $2 billion market cap, despite the nine drills which are worth close to $ -net debt $950m . Dryships owns about $1.1 billion of equity value that supports a $700 face of bonds. We think the convertible bonds are a good value.

Ocean Rig and DRYS are sending different signals to the market. DRYS owns 1.5b of equity value of Ocean Rig. You have a negative 500m value just by buying the DRYS stock. We are making the case for the bonds, but the equities are also important.

The bonds have a yield of 5.0%

For major oil companies the largest reserves are in ultra deep and offshore so DRYS has some good assets.

Distressed debt is sometimes better than equity because you have more protection. In this case the debt seems to have a very attractive valuation. We are not as optimistic about the equity, although if things go well the stock could go up 100-200%. But we are not so confident with the equity.

About 15% of distressed debt is owned by hedge funds according to my estimates.


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