Patriot Coal drops, postpones credit facility; Chesapeake slips further; Molycorp quiet

By Rebecca Melvin

New York, May 15 - Many energy names were under pressure and weighing on the convertible bond space on Tuesday.

Patriot Coal Corp. saw its convertibles drop sharply to about 94 from 99.5 after the St. Louis-based coal producer cut its outlook for metallurgical, or steelmaking, coal sales, and word circulated that the company pulled its senior secured credit facility that was earmarked to fund repurchase of the company's $200 million of 3.25% convertibles due next year.

The credit facility, which was supposed to launch with a bank meeting on Tuesday afternoon, consisted of a $250 million revolver due June 30, 2016 and a $375 million second-lien term loan due Dec. 31, 2017.

"Clearly, people are nervous," a New York-based convertibles strategist said. "Basically, the money was there specifically for the refunding of the bonds."

Other convertible coal names also came into the cross hairs of investors. James River Coal Co.'s 4.5% convertibles due 2015 traded down to 42.125 from 44 earlier in the session. And Alpha Natural Resources Inc.'s 2.375% convertibles due 2015 traded in the context of 89 bid, 90 offered, which was pretty much where that yield play has been.

Chesapeake Energy Corp.'s convertibles were weak and down another point on a dollar-neutral, or hedged, basis, following a drop on Monday, on headlines Tuesday that the natural gas driller increased its $3 billion bridge loan to $4 billion and Standard & Poor's lowered the company's credit rating further into junk territory, dropping it a notch to BB-. S&P cited covenant concerns and the gap between operating cash flow and planned capital expenditures.

"People are paying a lot of attention to it today," a sellsider said of the energy complex. "Oil is down; but I think that anyone who gets long now would be happy in six months."

Crude futures closed below $94 a barrel on Tuesday, with traders leery about demand against a backdrop of political concerns in Greece, fresh economic data from Europe and the United States and an extended rally in the dollar.

Crude for June delivery fell 80 cents, or 0.8%, to settle at $93.98 a barrel on the New York Mercantile Exchange.

Meanwhile, Molycorp Inc. has begun a roadshow for $650 million of eight-year straight notes, which are expected to price later this week. Proceeds of the deal are earmarked for its acquisition of Neo Material Technologies Inc., but the convertibles of the Greenwood Village, Colo.-based producer of rare earth oxides, metals and alloys weren't heard in trade.

Patriot Coal slumps

Patriot Coal's 3.25% convertibles due May 31, 2013 traded down sharply to 94 from 99.5 on Tuesday as shares of the St. Louis-based coal miner plunged 89 cents, or 18%, to $3.94.

"Patriot got barfed," a convertibles strategist said, adding that the paper was down more than 5 points.

"The news was pretty bad, but unless the bank deal is getting revoked, it's crazy for the bond to be down where they are now."

But in fact, the deal was pulled. Patriot pulled its $625 million senior secured credit facility in connection with the announcement that its sales volume outlook was revised due to the potential default by a key customer, according to a market source.

Based on an 8-K recently filed with the Securities and Exchange Commission, initial pricing on the revolver was expected at Libor plus 475 basis points with a 75 bps unused fee, and pricing on the term loan was expected at Libor plus 800 bps with a 1.5% Libor floor.

Citigroup Global Markets Inc., Barclays Capital Inc. and Natixis were the lead arrangers and bookrunners on the deal, with Citi the administrative agent.

Meanwhile, the company cut its sales forecast for the year to 3.9 million tons of metallurgical coal, from 4.9 million tons in an earlier forecast.

The spot market price for lower-quality coal was about $25 to $30 per ton lower than the original contracted price to the customer.

The Patriot bond had traded up to 99.5 from the mid 90s when the news came out last week.

Citi cut its price target on Patriot Coal stock to $6.00 from $7.00 while Barclays cut its target to $5.00 from $6.00.

Chesapeake slips further

Chesapeake was "definitely weaker," a Connecticut-based trader said, putting the Chesapeake convertibles as a group down at least a point delta neutral.

The Chesapeake 2.75% convertibles due 2035 traded last at 84.5, which was down from 86 bid, 87 offered on Monday.

Chesapeake's 2.5% convertibles due 2037 traded down to 78 from 80 or 80.875.

But Chesapeake's 2.25% convertibles due 2038 traded at 74, which was up a point or more from 72.25 Monday.

Shares of the Oklahoma City-based natural gas company fell 87 cents, or 5.6%, to $14.65 on Tuesday.

S&P cut its rating after expressing concerns about how quickly the natural gas driller will be able to fix its financial troubles and said "mounting turmoil" from chief executive Aubrey McClendon's personal financial dealings could make it tough for the company to raise funds in the future.

The company faces major ongoing uncertainties to adverse business, financial and economic conditions.

In addition, there were reports that the rushed, $3 billion unsecured loan from Goldman Sachs Group Inc. and Jefferies Group Inc. was raised to $4 billion.

"Something bad every day seems to come out on that name," a Connecticut-based convertibles analyst said.

On Monday, bondholders were concerned about Chesapeake having to rush to market with an expensive loan that came at Libor plus 700 bps.

Molycorp quiet

Molycorp's 3.25% convertibles due 2016 are seen in the upper 80s price range but were not seen in trade.

The bonds rarely trade, sources say, as it's primarily an outright play. The stock is difficult to borrow and it has a high premium that inhibits hedged interest.

Molycorp's 5.5% series A convertible mandatory preferred stock due 2014 is seen in the 61 bid, 67 offered range.

The U.S. based miner and processor of rare earth elements is planning to issue $650 million of notes to fund a portion of its Neo Material acquisition.

S&P is assigning its preliminary B corporate credit rating to the company and a preliminary B issue-level rating and 2 recovery rating on the proposed notes. The outlook is stable and reflects S&P's expectation that demand and pricing for rare earth elements will remain high enough to allow the company to complete the build out of its mine and that it will complete the Neo Material acquisition with proceeds from the offering and existing cash resources.

Sara Rosenberg contributed to this review

Mentioned in this article:

Alpha Natural Resources Inc. NYSE: ANR

Chesapeake Energy Corp. NYSE: CHK

James River Coal Co. Nasdaq: JRCC

Molycorp Inc. NYSE: MCP

Patriot Coal Corp. NYSE: PCX

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