DryShips' Drillships Hit Another Wave

NEW YORK (TheStreet) -- DryShips (DRYS) 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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