Convertibles soft as energy lags; Chesapeake weaker; Whiting down; Harmonic notes on tap

By Rebecca Melvin

New York, Dec. 7 – U.S. convertibles were generally weaker on Monday, but trade was muted as equities traded down, led by a steep drop in crude oil prices and a lower energy sector.

Chesapeake Energy Corp. was a market focus as the Oklahoma City-based energy company’s convertibles slumped again – albeit in light volume – after a sharp drop on Friday.

The drop was caused by a combination of the company’s news last week that it is offering to exchange $1.5 billion of its straight notes and also the tumble in oil prices following Friday’s meeting of the Organization of Petroleum Exporting Countries, which revealed disarray among its member nations.

Weaker oil also pulled down other energy names. Whiting Petroleum Corp.’s convertible bonds dropped to about 77.5, which was down more than 5 points from Friday, a Connecticut-based trader said.

“It’s pretty ugly,” the trader said. Hedge funds, which have performed dismally this past year, are attempting to prevent any further losses and make it through year-end and at the same time they are trying to make some money before year-end, sources said.

Hedge funds have had an awful year across multiple strategies as high-yield debt has lagged equities.

“They have underperformed, but they are still hoping to make money,” a New York-based trader said.

Elsewhere, there was some focus on the new issues that priced last week. Pandora Media Inc.’s 1.75% convertible senior notes were seen changing hands on Monday at about 100.5 versus a $12.25 share price, which was Friday’s market close.

“Those bonds are still up about 2 points on a hedged basis since issue,” a New York-based trader said. Pandora was also the issue that outperformed compared to the others last week, including the Vitamin Shoppe, he said.

“There are some new deals from last week but no real discernable flow,” he said.

After the market close, Harmonic Inc. launched an offering of $125 million of five-year convertible senior notes.

The Harmonic issue was talked at a 2.75% to 3.25% coupon and a 37.5% to 42.5% initial conversion premium ahead of pricing expected late Tuesday.

Chesapeake extends losses

Chesapeake’s 2.5% convertibles, which have a 1.5-year put/call, fell to about 55 on Monday, from 61 to 62 on Friday. The 6-point to 7-point drop was on top of a 5-point drop from Thursday.

Chesapeake shares fell another 28 cents, or 6%, to $4.27, which was on top of a 6.6% drop on Friday.

The Chesapeake 2.25% convertibles, which are longer-dated, fell to about 40 from 42. And the Chesapeake convertible preferreds were seen at around 20.

The exchange offer – for which investors have until Dec. 15 to tender – is another step the company is taking to stay afloat as oil, energy and other commodity prices remain depressed and are expected to continue to remain depressed for some time given the current outlook for energy prices.

But one New York-based trader predicted on Monday that crude oil prices, which fell to about $38.00 per barrel on Monday, would continue to drop to about $25.00 per barrel, and “then will rip back up, hard and fast.”

West Texas intermediate crude oil for January delivery fell $2.27, or 5.7%, to $37.70 a barrel on the New York Mercantile Exchange, which was near lows notched this year.

The Chesapeake convertibles have been a focus of traders since the company said last week it is issuing $1.5 billion of newly issued 8% senior secured second-lien notes due 2022 for its outstanding senior notes from its 10 series with maturities ranging from 2017 to 2023.

“Hedge funds are looking at the whole capital structure to see where things stand. Few people want the second-lien straight debt and they are trying to figure out how to get people to roll their debt out for the longer-dated, more secure paper,” a trader said.

Also among energy names, Whiting Petroleum’s convertibles traded down to about 77.5 from 83 on Friday, and SunEdison Inc.’s convertibles were trading unchanged to a little better given where shares were trading.

Overall the market was quiet however. Things were offered but not trading, a trader said.

Harmonic to price

Harmonic, a San Jose, Calif.-based video infrastructure products maker, launched an offering of $125 million of five-year convertible senior notes after the market close on Monday that were seen pricing after the market close on Tuesday. The notes were talked to yield 2.75% to 3.25% with an initial conversion premium of 37.5% to 42.5%, according to market sources.

BofA Merrill Lynch is the bookrunner for the Rule 144A deal that has an $18.75 million greenshoe.

The notes are non-callable and will be convertible into cash, shares of Harmonic’s common stock, or a combination thereof, at Harmonic's election.

About $70 million of the net proceeds are expected to be used to pay a portion of the costs associated with its previously announced acquisition of Thomson Video Networks SAS. Harmonic also intends to use up to $25 million of the net proceeds to repurchase shares of its common stock from purchasers of the notes in privately negotiated transactions effected through the initial purchaser or its affiliate as Harmonic's agent concurrently with the offering.

Harmonic may use a portion of proceeds from the greenshoe to repurchase additional shares of its common stock under its existing share repurchase program. Any remaining proceeds will be used for working capital and general corporate purposes.

Mentioned in this article:

Chesapeake Energy Corp. NYSE: CHK

Harmonic Inc. Nasdaq: HLIT

Pandora Media Inc. NYSE: P

SunEdison Inc. Nasdaq: SUNE

Whiting Petroleum Corp. NYSE: WLL

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