Parker Drilling CDS narrows on bond, guidance
July 22 (IFR) - Parker Drilling saw its short and intermediate dated CDS spreads tighten dramatically in a wave of protection selling Monday, as the company came to market with a new bond offering while second-quarter earnings forecasts are showing a big improvement in revenues.
The B1/B+ rated international drilling contractor and services company saw its three-year spreads narrowed 25.25bp to 189.75, while the company's 5-year spreads saw tights early in the session of 358, or 22bp tighter.
The CDS market appeared to price in the possibility that Parker Drilling will opt to refinance or make whole its outstanding 9.125% bonds due April 2018. The next call date is April 1 2014 at $104.56.
The company stepped into the high-yield bond market Monday with a USD225m senior notes 7NC3 deal due 2020 which will be used to repay in full the outstanding debt and other amounts owed under a USD125m five-year term loan with Goldman Sachs Bank USA. The term loan funded the acquisition of ITS.
Proceeds are also slated to repay in full its senior secured term loan facility, which it recently amended to allow for borrowings through April 30, 2014.
"Proceeds from the 7NC3 due 2020 offering will mainly be used for the acquisition, with an eye on the 2014 callable deal," said one syndicate source.
This eye on the 2014 callable deal has likely facilitated an attractive avenue to sell protection in Parker CDS, especially the 3s, which saw significant selling today.
A CDS market source said there is already an expectation the 2018s will be called next year prior to the April 1, 2014 call. He said the bond is considered to be limited in upside and that it would make sense for Parker to issue new debt while rates are relatively stable - especially if they can price a cheaper coupon on the deal.
The 2018s were last transacted on July 18 at $105.522, which the source said was close enough to its call level to incite additional bouts of protection selling. This type of selling occurs when the CDS, a kind of protection against a bond default, is considered a more attractive long risk trade than the high cash price of the callable bonds - especially when a bond is trading above par.
Some of Monday's spread tightening is also linked to its updated preliminary Q2 forecasts, which are now expected to show an increase in revenues to USD215m-USD230m versus USD167.2m in the first quarter. The company's new estimates are above consensus view of USD204m in Q2 revenue and higher than soft Q1 results.
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