DryShips, CEDC extend drops; new paper mixed, AK Steel falls to 96; Vector pushes over 104

By Rebecca Melvin

New York, Nov. 16 - Convertibles were generally weaker Friday, and market players continued to demonstrate a tendency to take to task issuers with obvious, or even hints of, financial problems by decisive selling.

The week's action was against a backdrop of lower U.S. equities, which slid for much of the week as investors continued to digest the implications of the U.S. elections and potential political deadlock pertaining to the fiscal cliff.

"There was weakness in a lot of things," a New York-based trader said. "Speculative things have been for sale for a week now, but everything looks like it's 'in' a little bit now; and anything that blows up even a little bit takes a hit."

DryShips Inc. extended losses Friday, slipping into the upper 60s from about 73 on Thursday and 79 or 80 on Wednesday. The Athens-based dry bulk ship and tanker operator reported poor quarterly results late Wednesday and gave a bleak outlook.

Central European Distribution Corp. traded all the way down to 60 on Friday after putting in a relatively strong showing on Thursday in the aftermath of a letter from its largest stockholder and chairman of the board, Roustam Tariko, outlining problems plaguing the Polish vodka maker and beverage distributor, including a bribery investigation.

The week's two new issues remained mixed, with AK Steel Holding Corp.'s new 5% convertibles falling for the second day after its debut Thursday and Vector Group Ltd.'s new 2.5% convertibles notching another solid gain on its second day in the market.

But one trader suggested that the AK Steel convertible should retrace a decent portion of its losses as shares stabilize and outright players step back in to the issue.

On the bright side, Gilead Sciences Inc. and most homebuilders were better; and the convertible preferreds of Iridium Communications Inc., which have dropped in line with a slide in the underlying shares since Nov. 1, looked poised for a bounce.

"If you covered some deltas you're doing OK," a West Coast-based trader said regarding homebuilder D.R. Horton Inc.

Overall, however, "the week ended with a thud, and not a lot of trading," the New York-based trader said.

The lackluster session was despite an uptick in equities intraday that was in response to lawmakers making positive comments about reaching compromise needed to avoid going over the fiscal cliff.

"They are backing down from the fiscal cliff; automatic cuts are off the table, and proving once again that they can't bring themselves to cut spending," a trader said.

DryShips, CEDC extend decline

DryShips' 5% convertibles due 2014 traded down to 68 bid, 69 offered on Friday, from about 73 on Thursday and 79 to 80 on Wednesday.

Shares of the Athens-based dry bulk and tanker operator were down another 5 cents, or 3%, to $1.61, after tumbling 20% on Thursday.

The shares were downgraded to "neutral" from "buy" by Global Hunter Securities on Friday.

DryShips warned that the shipping market remains severely depressed, with both its tanker and dry bulk spot charter rates standing well below cash breakeven.

Central European's 3% convertibles due 2013 traded down to 60 on Friday after earlier in the session changing hands at 66 bid, 67 offered, a New York-based trader said.

The paper traded at 73 and 74 on Thursday, and on Wednesday, it was quoted at 55 bid, 75 offered, but wasn't heard in trade.

"If he doesn't give them money, they aren't going to pay back these bonds," the trader said, referring to Tariko. Management hasn't been holding up its end of the bargain, he added.

This past week the company disclosed in a regulatory filing, via the Tariko letter, that its executives are subject to a U.S. government investigation that is potentially serious.

The company had previously determined that payments were made in a foreign country where the company operates and that there was insufficient accounting about the payments.

AK Steel drops, recoups small

AK Steel's new 5% convertibles traded down to 96 on Friday but recouped a little bit with shares, to trade at 97 to 98 later in the session versus the shares at $3.60.

"They are lifting now," a trader said. "I thought the stock would lift a little earlier than this."

He thought that the nearly 30% plunge in the underlying shares was related to the large size of a secondary stock offering that came concurrently with the bonds.

"It was a lot of stock," the trader said. "Once the stock stabilizes, the outrights will need to come in, and it will expand."

AK Steel shares settled at $3.55 on Friday, which was down 8 cents, or 2.2%.

The West Chester, Ohio-based steel manufacturer sold an upsized $150 million of the notes at pricing beyond the rich end of talk.

The company also priced a downsized offering of 22 million shares at $4.00 each, reduced from 25 million shares, as well as $350 million of senior secured straight notes due 2018 with an 8.75% coupon at par.

Vector Group's new 2.5% convertibles were seen up to 104.25 on Friday with the underlying shares up 73 cents, or 5%, to $15.27.

That was up from Thursday's 102.85 bid versus an underlying share price of $14.60 during the session.

The Miami-based tobacco holding company sold an upsized $200 million of the notes that priced at the rich end of talk. Allocations of the paper looked to have been balanced between hedged and outright players.

Iridium in focus

Iridium Communications' 7% convertible perpetual preferred was seen Friday at 89.5, which was said to be down in line with the underlying shares on a 60% delta hedge.

The underlying shares have dropped 24% since Oct. 31.

"The stock has gotten crushed; but the $1,000 preferred has a good yield," a West Coast-based trader said.

And given the high barrier to entry in the company's satellite communications business, he suggested, outright players may want to get into this name at the lows before it recovers.

Mentioned in this article:

AK Steel Holding Corp. NYSE: AKS

Central European Distribution Corp. Nasdaq: CEDC

D.R.Horton Inc. NYSE: DHI

DryShips Inc. Nasdaq: DRYS

Gilead Sciences Inc. Nasdaq: GILD

Iridium Communications Inc. Nasdaq: IRDM

Vector Group Ltd. NYSE: VGR

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