Newpark up a point in gray market; DryShips gains on new contract; LDK, Carnival active

By Rebecca Melvin

New York, Sept. 28 - Newpark Resources Inc.'s planned $150 million of seven-year convertible notes were at 101 bid in the gray market on Tuesday ahead of final pricing expected after the close of markets.

Newpark Resources' price talk was revised during the session to more aggressive terms, but the gray market bid remained steady.

DryShips Inc.'s convertible bond issue traded actively and at higher levels along with underlying shares after the Athens-based shipping company announced that it finally got a long-term contract for one of its new drilling vessels.

EMC Corp. was a top volume trader, with EMC's 1.75% convertibles due 2011, which has been on a tear higher in recent weeks, actually lower on Tuesday by about 1.625 points to 136. The 2011 EMC paper also traded at 137.5 versus a share price of $21.50 during the session, according to a New York-based sellsider. These notes had traded in the low 120s during the summer.

US Airways Group Inc.'s 7.25% convertibles due 2014 traded at 97.75 during Tuesday's session.

There was also a continuation of trade in names that made headlines in recent days like LDK Solar Co. Ltd.'s 4.75% convertibles, which gained in active trade on Monday's news that the Chinese solar power company had sealed a new multi-billion dollar borrowing agreement with the Chinese government; that paper was steady to lower.

Carnival Corp.'s 2% convertibles on Tuesday changed hands at 101.875 versus a share price of $37.90. The paper got crushed on Friday after the Miami-based cruise company announced a call of those notes, which had been trading well over par and over parity.

Newpark up in gray market

The revised terms of Newpark Resources' planned offering of $150 million of convertible bonds caused the deal to be considerably less cheap compared to initial talk, but the deal was still seen as attractive to investors, according to a Connecticut-based sellside analyst.

Talk was revised to a coupon of 4% with an initial conversion premium of 34% to 37%, compared to a coupon of 4% to 4.5% with a premium of 27.5% to 32.5%.

The change made the deal about 2% cheap at the midpoint of talk, using a volatility of 35% and a credit spread between about 750 basis points to 800 bps over Libor, according to the analyst. Initial talk had put the deal 6% cheap at the mids, the analyst said.

The gray market on the paper remained unchanged at plus 1 bid, after the change, however, sources said.

"The revised terms are better for the company and worse for investors in terms of cheapness," the analyst said. "But I'm not surprised; the original terms looked to be robbing the company."

But shares of the company got hammered on Tuesday, trading down as low as $7.52, or down 11%; and later paring some of the loss to end down 61 cents, or 7%, at $8.09.

Newpark deal sets up well

The structure of Newpark's new deal, which was really good based on the old terms, was still favorable for investors, especially given that the company is a takeover target and there is potential for its shares given its business model even going it alone.

Newpark provides drilling fluids, temporary worksites and access roads for oilfield and other commercial markets.

"It's a good little credit," a sellsider said. There's potential upside for the stock and the stock is volatile, "so you could capture higher vol. than you're buying," he said.

The Woodlands, Texas-based diversified oil and gas industry supplier has been hurt due to industry problems related to the Gulf of Mexico drilling moratorium. But it has been able to recoup some of the deficit with sales of its products that keep rigs from polluting, the sellsider said.

It's finding now that its expected losses from the moratorium won't be as bad as originally expected.

"They are expanding globally and have made inroads with big oil companies; and they even have a water-based drilling fluid that is showing promise. So the company could really gain traction," the sellsider said.

On the other hand, Newpark Resources is a very small company with only a $700 million market capitalization. And such small cap names are generally unappealing to investors.

Nevertheless, the company reported $28 million EBITDA for its latest quarter, and with about $100 million EBITDA a year, and such a small price tag, it's a potential target of both smaller competitors and large integrated companies.

There is consolidation underway in the industry, and even if a competitor was bought out instead of Newpark, it would bode well for Newpark in terms of valuations, the sellsider said.

Newpark's registered, off-the-shelf offering was being sold via bookrunner J.P. Morgan Securities LLC.

Bank of America Merrill Lynch was senior co-manager, with Wells Fargo Securities and Raymond James & Associates acting as co-managers. There is an over-allotment option for an additional $22.5 million of notes.

The notes will be non-callable, with no puts. They are convertible at any time into shares of the company's common stock.

Proceeds from the offering are earmarked to repay existing debt under Newpark's credit facility and for general corporate purposes.

DryShips adds

DryShips' 5% convertibles due 2014 traded at 94 versus a share price of $4.80 during the session, which was up 3.5 points to 4.5 points compared to previous levels.

Shares of the Athens-based shipping company, which has recently expanded into drilling rigs from drybulk alone, ended up 37 cents, or 8.3%, at $4.84 in ultra-heavy volume.

Concerns regarding DryShips' diversification have weighed on the company of late, given that the company hadn't contracted out the drilling rigs that it ordered.

"Now that they have contracted out one of the vessels, and there is potential for the other two, things look better," a Connecticut-based sellsider said.

In addition, the company has needed to get extensions of waivers on bank loan facilities.

Earlier this month, the company said that the waiver under its $230 million of loan facilities was extended to Dec. 1 from Aug. 15.

The company also signed supplemental waiver agreements with Piraeus Bank that extend the waivers under its $130 million loan facility dated March 31, 2008 and $90 million loan facility dated Oct. 5, 2007 to March 31, 2012, according to a company news release.

DryShips said in a news release on Tuesday that it has a letter of agreement from an unnamed U.S. oil company to explore for energy off the coast of West Africa for 300 days.

The contract, which is shorter in length than the norm, is worth $135 million, which translates into a rate of $425,000 a day.

The charter would apparently help DryShips find a loan to fund the more than $1 billion it still owes a South Korean shipyard for two drilling vessels it has an order for there.

Uncertainty surrounding the company's drillships business has dogged DryShips stock for the last year. The shares should now see an immediate lift and close the gap toward its real equity value following the contract.

Mentioned in this article:

Carnival Corp. NYSE: CCL

DryShips Inc. Nasdaq: DRYS

EMC Corp. NYSE: EMC

LDK Solar Co. Ltd. NYSE: LDK

Newpark Resources Inc. NYSE: NR

US Airways Group Inc. NYSE: LCC

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