recently sat down with Anastassis "Stacey" Margaronis, president of Diana Shipping ( DSX - Get Report), the dry bulk carrier based in Athens.

Margaronis has worked for Diana nearly his entire career, joining the company in 1980, well before it went public. Like his boss, Diana CEO Simeon Palios, and like executives across the Greek dry-bulk trade, Margaronis comes from a long line of shipping pros whose histories interconnect in a complex network of familial and business relationships across the centuries. Margaronis's father was a shipping lawyer, and his uncle a ship owner. And in the early part of the twentieth century, his grandfather worked as a captain on a ship owned by the grandfather of Simeon Palios. How is Diana preparing for an eventual rebound in the economy, after such a severe collapse?

Anastassis "Stacey" Margaronis: I'll give you the answer I gave to many of the people with whom I've met over the last few days, who asked more or less the exact same question.

The collapse in rates that we witnessed last year -- and I doubt anybody would disagree with us on this -- was probably caused by problems in the credit markets. This affected shipping in two main ways. Firstly, they effectively denied ship owners of credit, when they needed it in order to go ahead with the purchasing of newbuilding ships, if they had not arranged that credit in advance. And even some, apparently, who had commitment letters signed by banks, had those commitments reneged. There's very little, unfortunately, that an owner can do when a bank suddenly decides not to go ahead.

Did this happen to Diana?

No. We did not have such problems. Firstly because we didn't have any deliveries during that period, and secondly because our banks didn't renege on any of their commitments to others, let alone to us.

But the main problem of the credit crunch was that shippers of goods from the producing areas -- raw materials such as iron ore and coal -- were denied letters of credit. And letters of credit, as you know, are the lifeline of international trade. So you can imagine the combined effect that the credit crunch had on shipping was a total collapse in the demand for commodities.

The problem now, this year, is that some people within or outside shipping have interpreted this collapse as having been a recession in shipping which was part of the shipping cycle. The shipping cycle, we know, was at its high point about a year ago. It suddenly collapsed last year, and then it picked up again this year. Now, shipping cycles are very, very rarely V-shaped. If this were the recessionary part of the cycle, it would be the first V-shaped recession in shipping in living memory.

We strongly believe we haven't seen the bottom of the shipping cycle proper. This was a sharp drop which was caused by extraneous factors to shipping. Lack of credit did not come about because of shipping problems. Now, we will have to cope over the next three quarters with the effects of the shipping cycle, per se. The real shipping cycle. In other words, we're going to be dealing with a downturn -- I'm not saying it's going to be deeper, I'm not saying it's going to be shallower. I'm just saying that now shipping is going to be allowed, effectively, to go through its own cycle, hopefully not influenced by another exogenous shock like the credit-market shock of last year.

And why will that happen? As usual, it's supply and demand factors. You know very well that there's a huge order book, and that economies are struggling with the recession, which will have the effect of keeping rates under pressure over the next few quarters. I'm not foreseeing doom, and I'm not foreseeing a total collapse, necessarily.

But we are expected weakness in freight trades for a few quarters, which will effectively establish once again that shipping cycles are not V shaped. They are either U or L shaped, depending how bad things are.

As far as the imbalance between supply and demand is concerned, that's where we differ quite a bit with our colleagues ... who, you may have heard, foresee steady growth during 2010, not only as far as world economic growth is concerned, but as far as shipping is concerned. In the first quarter, we do not disagree necessarily. We might have some sort of steady growth in the world economies. That is positive for shipping. But it will not, let's call it, save the day, or help us escape the basic cyclicality of the industry, which will be there long after we have gone from involving ourselves in this industry.

Why do you differ from competitors so much, if everyone's looking, essentially, at the same data?

We can afford to be honest, and the reason for that is our balance sheet, which is amongst the strongest in the shipping industry, not only the dry bulk industry. We have very little debt compared to the value of our ships and our cash flow.

And also, it is possible -- I'm not saying that that is the reason -- but some of our competitors might be coloring their views about the future based on what they hope will happen, in order to enable them to expand their fleets and not incur problems with their banks. Because the soft freight market is bound to create issues with asset covenants, and various covenants of their loan agreements, for which most of those companies are getting waivers now.

We have not been told for how long the waivers have been obtained. Because, I suspect, they don't want to tell us, for obvious reasons. But by telling us that they have received waivers, this usually results in strength in their share price, because people get more positive. Short-term loans are reclassified as long-term loans, because of the fact that they're not technically in default anymore, and investors rejoice as result. It's part of life now as part of the public market.

Therefore, even if they are coloring their views due to this, we don't have to do the same. Because we have no covenants which are anywhere near showing default situation from a technical standpoint.

We have to keep in mind that a company like Diana is not going to suffer if we are wrong in our prediction about the downside. We're just going to make less than we would have otherwise made had we invested our 220 million in cash now, together with 50% debt, in acquiring assets. Of course you could tell me that you're going to be making significantly less. Yes, but nobody's going to worry about the company's survival. They might be disappointed with the increase in our revenue and our cash flow, but they're not going to worry about the survival of the company. They could lose interest it in the stock -- because they would consider it, possibly, management being boringly conservative, and having missed the upturn. But we're quite sure we're not running the risk of missing an upturn in the medium term, over the next 10 to 12 months.

Having said that, toward the end of the year, we intend to start buying ships regardless of their price. And when I say 'regardless of price' I don't mean we're going to pay anything people are asking for. We're going to pay anything the market dictates at the time. We're going to start an acquisition program, which we're going to continue for about 18 months or so, on a gradual basis.

We don't want to get caught having made no acquisitions by waiting for the trough in the shipping market, because we don't know when that will happen. We don't know how shallow or deep it will be, as I mentioned earlier, and we don't know at what specific asset values the turn will happen. Whether a modern Capesize ship, for example, goes down to 50 million dollars, or 40 or 30.

And by implementing this acquisition program, we're absolutely certain we're going to be buying before, at and after the trough of the shipping cycle. We are not saying we're absolutely sure because we're such geniuses. We're saying it because that's how it works.

If you buy anything in a downturn, and you keep buying, whether it's bonds, stocks or real estate, you're bound to buy some at the very bottom, some before, and some after.

How much will you spend?

In an ideal world, as we've said during our presentations, we'd like to spend most of our liquidity. Not all, of course, because you have to keep a certain amount of money to support your loan repayments if the recession for longer than you anticipate, but most of our cash. And have the company leveraged 75% in total. That would be the ideal scenario.

But we're not going to do that, because we cannot pinpoint the trough of the market. Ideally you'd like to be in that position because it would maximize profitability during the upturn, but it's extremely dangerous. So you ask me how much, and I can't really answer the question.

But it will be -- as far as number of ships is concerned -- a possible doubling of the fleet over the next few years. That's a possibility, but it's not a target.

But the root of all this was fleet expansion.

Yes, aggressive fleet expansion at a time when asset values were high. And a relatively conservative loan has become nearly 100% of the value of the asset the purchase of which it financed, initially. And that in itself is a breach of covenants.

So Diana was much more conservative in the boom years?

Yes. We started with nine, and we're now at 19. We bought 10 ships over a period of four and half years. So we were not exactly going wild in purchasing. And we sold one ship in that period, too.

You more than doubled your fleet size, though.

But we were buying on average about two and a half ships a year. Others were buying whole fleets in a year: ten, 15, 20, 25 ships. And that's why they are much larger than we are now. We are amongst the smaller companies in the public markets on the dry bulk side. We don't care about that, but I'm just saying it as a fact. We are amongst the smallest. Market cap, we're amongst the largest. So it shows the effect of the policy.

We were pressed, not only by investors, but some analysts as well from investment banks, to increase our debt during the good years. But we tried to resist this by financing the acquisitions through equity offerings.

And because those ships were expensive, we would charter them long term. In other words, we were buying the ships for the cash flow -- and we secured that cash flow with very good charterers -- rather than for any other reason, like increasing earnings per share or a dividend. Well, OK, we wanted to be accretive to our dividends per share. That was one of the criteria. But it was important for us was to secure the future revenue stream, in order to bring down the cost of the acquisition. Because there are ships we have paid in excess of a hundred million for, but they came with 50,000 or higher dollars a day charters, for five years.

Any desire to get into other sectors of the shipping business, such as tankers?

We have lots of desires, but we have to control them, unfortunately. Because shipping now, it has become very sophisticated. And we feel that, as a public company, we have to have a real focus in a certain sector, so that people can identify us as experts in that sector of the market.

This business of having a bit of everything in order to diversify risk has lost strength as an argument since specialized companies have appeared in the public domain. Why should somebody buy Diana with six tankers and not buy Teekay ( TK - Get Report) a pure-play tanker concern? They are better at it than we will ever be.

So we will concentrate on buying bulk and, possibly, container ships. We had 15 years experience in operating them before going public. But if we get into container ships, we will spin it off for the reasons we just explained, so people can invest in that if they want to invest in container ships. If they want to own container ships and bulkers and still have Diana management, they can have both these shares."

Would buying container ships be part of your upcoming expansion program?

Yes. Initially it would have to be, because we would be using part of the same war chest, or dry powder.

The container trade has the beauty of having very long term contracts. You don't end up spending too much time on it, as management. Once you sign the contracts, then it's a matter of operating a ship like any other ship. But we have the expertise in the sense of knowing how to keep the strict time table that a container chaterer wants to have. And we have contacts in the container trade.

But nothing is set in stone. It's something we might look at. The container shipping cycle is more advanced in sequence than the bulk trade. In other words, valuations have more or less collapsed in containers. Prices are down, rates are down, values are down. Ships are laid up. Things look as black as they ever did. And usually that is the time to invest.

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