DryShips' Drillships Hit Another Wave

DryShips' most recent bond offering points to challenges in the market for drillships, a key business for the company.
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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) - Get Report

, 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) - Get Report

-- 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

.

More on DryShips

Dryships COO: Stock Should Double

Sell DryShips!: Against the Grain

Deutsche Bank, as it turns out, is also the underwriter of the convertible bond offering. It's also perhaps not surprising that the $700 million that DryShips has raised in those bonds over the last six months is roughly the same as the cost of one drillship.

The stock declined nearly 7% during the two trading sessions after the bond offering annoucement, but has since clawed back some of those losses. DryShips shares finished trading Monday at $6.19, up 2 cents, or 0.3%.

DryShips has pinned many of its ambitions for growth on these undersea energy exploration vessels. The company has long had plans to sell off a piece of that business in an initial public offering -- a strategy that has met with a series of delays.

Before the company can even think about proceeding with an IPO, it must find fixtures for at least two of the four newbuilding drillships, all of which remain unchartered. In late March, DryShips' COO Pankaj Khanna told

TheStreet

that the company would likely

strike a deal to hire out the drillships

"within the next two quarters."

-- Written by Scott Eden in New York

RELATED STORIES:

>>DryShips COO Talks Drillships IPO

>>DryShips' Drillships Face Weaker Market

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Scott Eden has covered business -- both large and small -- for more than a decade. Prior to joining TheStreet.com, he worked as a features reporter for Dealmaker and Trader Monthly magazines. Before that, he wrote for the Chicago Reader, that city's weekly paper. Early in his career, he was a staff reporter at the Dow Jones News Service. His reporting has appeared in The Wall Street Journal, Men's Journal, the St. Petersburg (Fla.) Times, and the Believer magazine, among other publications. He's also the author of Touchdown Jesus (Simon & Schuster, 2005), a nonfiction book about Notre Dame football fans and the business and politics of big-time college sports. He has degrees from Notre Dame and Washington University in St. Louis.