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DryShips' Drillships Hit Another Wave

NEW YORK ( TheStreet) -- DryShips (DRYS - Get Report) shares have rebounded from a selloff last week, when investors reacted to news that further dilution was coming their way from another planned notes offering.

At first, DryShips said it would sell $150 million worth of convertible notes, plus an overallotment option that would raise another $22 million. Then, on Wednesday, DryShips upped the offering by 47% to $220 million. The notes are convertible into DryShips common stock at $7.19 per share, for a total of 30.6 million shares. That would dilute the company's float (about 270 million shares) by a little more than 11%.

So why raise capital now, and dilute shareholders yet again? (Between this bond issuance and another one in November, DryShips has raised about $700 million.)

It would seem the company is attempting to give itself a bit of wiggle room. DryShips has a credit facility, syndicated by Deutsche Bank (DB), for the financing of two of the four deepwater exploration vehicles, known as drillships, that are currently on order from a shipyard in Korea (DryShips still lacks financing for the other two rigs).

According to the terms of the facilities (which total about $1.13 billion, $940 million of which remains undrawn) Deutsche has the right to yank the loans if fixture rates for these vessels sink below about $500,000 a day. Because the deepwater market has come under pressure, with the most recent charter fixture fetching about $440,000 a day -- a deal made by energy exploration company Seadrill (SDRL) -- DryShips may need to renegotiate the terms of its credit agreement.

In a note to clients on Friday Credit Suisse analyst Greg Lewis wrote, "While we expect DryShips to be able to renegotiate the terms of this existing debt facility (if required) it will come at a price."

As a result of the equity dilution from the notes offering, Lewis cut his first-quarter EPS target for DryShips to 20 cents from 24 cents. He also scaled back his 2010 forecast to 87 cents a share from $1.02.

Analysts on average are looking for earnings of 22 cents a share for the first quarter and 85 cents for the year, according to Thomson Reuters.

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