Qwest adds on merger news; DryShips' follow-on issuance tugs notes lower; SanDisk gains

By Rebecca Melvin

New York, April 22 - Qwest Communications International Inc. added a couple of points in active trade Thursday after news that the Denver-based phone company agreed to be acquired by CenturyTel Inc. in a deal that put a 15% premium on Qwest shares and includes shouldering Qwest's large debt load.

Qwest, which priced its $1.265 billion principal amount outstanding of 3.5% convertibles in 2005 with takeover protection, accounted for a good chunk of the day's trading, or about $280 million of bonds traded, according to Trace data.

DryShips Inc. was another big trader Thursday after the Athens-based shipping and contract drilling company priced an upsized $220 million follow-on offering at a discount to the company's existing 5% convertibles.

The new issue ended higher, but the original DryShips paper slid as both sets of bonds, which will trade as one series, ended the day at about 105ish, according to a syndicate source.

SanDisk Corp.'s 1% convertibles were in trade after the flash memory maker posted first-quarter results that were much better than expected. And United Rentals Inc. surged after the Greenwich, Conn.-based equipment rental company's results showed a milder-than-expected loss - still larger than last year's loss - on lower revenue.

Trico Marine Services Inc.'s 8.125% convertibles, which have been active and higher in recent sessions amid speculation of a possible transaction, were quiet and little changed Thursday after news that the Texas-based oil and natural gas subsea services provider amended its credit agreement.

And MGIC Investment Corp.'s new 5% convertibles extended gains, with one sellsider reporting a trade at 117.5 versus a share price of $11.80 on their second day of trade, compared to trading up to as high as 114 on their debut.

Elsewhere, airline and health care convertibles were in focus amid airline earnings and news that the latest merger talks between UAL Corp. and US Airways Group Inc. fizzled, and as health care companies begin enumerating the effects of health care reform.

Overall, traders said the market was pretty quiet as players are reluctant to trade paper that is generally in short supply and amid few opportunities to replace it.

More new issuance and volatility are wanted to spark the marketplace, a Connecticut-based sellside trader said.

Qwest adds on merger news

Qwest's 3.5% convertibles due 2025 traded much of the session right around the 115 mark, with one sellsider reporting a trade of 115 versus a share price of $5.50 in the afternoon.

That represented a move up of a couple of points, as the convertibles on Tuesday were trading at 113.875 versus a share price of $5.35, with a parity of 108.73.

Qwest shares ended the day up 13 cents, or 2.48%, at $5.37 in ultra heavy volume.

The convertibles were very active as well. "A lot traded this morning, mostly at or right around those prices," the sellsider said.

The Qwest acquisition will allow Monroe, La.-based CenturyTel, which has sought to press its advantage of scale with multiple purchases, to be the third-largest provider of local phone service in the United States.

The approximately $10.6 billion Qwest acquisition follows the $5.8 billion purchase of Embarq that closed last year.

The Qwest 3.5% notes were going to be callable and putable in November. Convertibles players had been weighing call risk, which exposed convertible holders to 5.145 points of risk, or the difference between the convertible price and parity, according to Barclays Capital research published Tuesday.

The company had a cash balance of $2.4 billion as of the fourth quarter of 2009 and was expected to generate positive cash flow going forward, the Barclays Capital analysts said.

CenturyTel, which is renaming itself CenturyLink, is offering 0.1664 of a share of its stock for every Qwest share, valuing the latter at $6.02, or a 15% premium to Wednesday's closing share price.

CenturyTel also will shoulder Qwest's debt of $11.8 billion.

Moody's Investors Service affirmed CenturyTel's credit ratings, saying the combined company will cut costs and generate abundant cash.

Fitch Ratings said it placed on rating watch negative CenturyTel's long-term issuer default rating of BBB-, senior unsecured revolving credit facility of BBB-, senior unsecured debt of BBB-, short-term issuer default rating of F3 and commercial paper rating of F3.

Fitch placed on rating watch positive Qwest's issuer default rating of BB, senior unsecured notes of BB+ and convertible senior notes of BB, along with Qwest Corp.'s issuer default rating of BB, Qwest Services Corp.'s issuer default rating of BB and Qwest Capital Funding's issuer default rating of BB and senior unsecured notes of BB.

Following the all-stock transaction, CenturyTel's shareholders will own slightly more than 50% of the company and four Qwest directors will join CenturyTel's existing board of directors, the agency said.

The transaction is expected to close in the first half of 2011, following regulatory and shareholder approvals.

DryShips settles at 105

DryShips' 5% convertibles due 2014 settled the day at about 105 after an upsized $220 million add-on was priced after the close of markets on Wednesday.

The price meant holders of the original paper lost about 6 or 7 points. But it meant that the newer paper, which priced at a discount to the older paper, gained.

"It was kind or peculiar. It was not good for the existing holders, but it was good for the company," a New York-based sellside analyst said.

Deutsche Bank Securities Inc. is the bookrunner.

The 5% convertible senior notes due Dec. 1, 2014 initially priced last November. The follow-on came to market at 101 plus $4.64 million of accrued interest. And the size of the add-on was increased from a planned $150 million.

The new notes were 101 versus a lower stock reference of $6.00, a syndicate source pointed out.

Nevertheless the existing bond was trading at "way above par," the analyst said.

Proceeds of the add-on will be used for vessel acquisitions and other general corporate purposes.

DryShips also planned to offer up to 10 million of its common shares at $6.00 per share to borrower Deutsche Bank AG, London branch, under a share lending agreement.

The borrowed shares will be considered issued and outstanding for corporate law purposes, but DryShips believes that under current accounting standards they will not be considered outstanding for purposes of calculating earnings.

Mentioned in this article:

DryShips Inc. Nasdaq: DRYS

MGIC Investment Corp. NYSE: MTG

Qwest Communications International Inc. NYSE: Q

SanDisk Corp. Nasdaq: SNDK

Trico Marine Services Inc. Nasdaq: TRMA

United Rentals Inc. NYSE: URI

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