Chesapeake Energy adds 0.75 point dollar neutral; Micron, SanDisk active; Amarin to price

By Rebecca Melvin

New York, Jan. 3 - Stronger bids marked the first trading session of 2012 for the convertible bond market Tuesday, as stocks kicked off the new year with strong gains.

"It was not too busy, but definitely better to buy," a New York-based convertibles trader said.

Equities were higher across the board with investors cheered by better-than-expected economic data, including the Institute for Supply Management's read on U.S. manufacturing, which rose to 53.9 for December, up from 52.7 in November , and the highest reading in six months.

Chesapeake Energy Corp. saw its large, 2.5% convertible issue gain on a dollar-neutral, or hedged, basis, meaning that the paper expanded compared to its higher equity price, after the Oklahoma City-based natural gas company announced that it is selling a minority stake in its Ohio shale discovery to a subsidiary of France's Total SA energy company for $2.32 billion.

Micron Technology Inc. was also in trade, with the stock higher, after Barclays Capital Inc. upgraded the shares, saying pricing on its DRAM chip technology should probably bottom out in the first quarter and then move higher from there.

The convertibles of Boise, Idaho-based Micron moved slightly higher but didn't look like they were keeping pace with a 7.4% stock move.

Fellow memory chip maker SanDisk Corp. was also in trade after a ratings action, but this time the action was a downgrade from Goldman Sachs & Co., and the convertibles looked to have contracted about 0.5 point on a hedged basis, according to one trader, who said that his last marks on the name may have been a little higher than others' marks.

A broad-based rally in the markets included commodities markets, and that pulled Alcoa Inc. into trade, with those convertibles looking to have done better on Tuesday compared to the last several weeks, when the paper was under pressure, a trader said.

There were a couple of markets reported in Accuray Inc. convertibles, which has a few listed holders and doesn't trade often, market players said.

In the primary arena, Amarin Corp. plc subsidiary Corsicanto Ltd. launched an overnight offering of $150 million exchangeable senior notes under Rule 144A via bookrunners Citigroup Global Markets Inc. and J.P. Morgan Securities LLC.

Many traders on Tuesday were marking their books and finalizing their month end from last week.

One trader said that the convertible market had pushed up over the last week or so.

Chesapeake up dollar neutral

Chesapeake's 2.5% convertibles due 2037 were trading at 91.5 with the stock at about $23.00 during the session.

Shares of the Oklahoma City-based natural gas company ended higher by $1.31, or 5.9%, at $23.60 in heavy volume.

"That's up 0.75 point on a dollar-neutral basis," a New York-based trader said.

The paper trades on a 50% to 60% delta.

The Chesapeake 2.5% paper of 2037 was the most active of the natural gas company's convertible bonds. But there are others from the company, which has been labeled in the past as a serial convertibles issuer.

Chesapeake and a smaller partner are selling part of their Ohio oil and gas business to Total for $2.32 billion. That will give the French oil major a 25% ownership interest.

Chesapeake has been buying up land in the U.S. to give it more access to oil deposits. It has also been selling assets to meet its operating expenses and debt-reduction targets in the midst of very low pricing for natural gas.

Micron slightly higher

Micron's 1.875% convertible due 2014 ended the session at 97.375 versus an underlying share price of $6.76, which compared to 96.5 bid, 97 offered versus the underlying share price of $6.41 recently.

The newer Micron 1.875% B convertibles, which priced in July, were at 91.25, according to a market source.

Shares of the Boise, Idaho-based memory chip maker jumped 46.5 cents, or 7.4%, to $6.755 in active trade on Tuesday.

A convertibles analyst said he hadn't looked at the bonds to determine if they were improved or worse on a dollar-neutral basis.

Barclays Capital upped the stock's rating to "overweight" from "equal weight," saying that considering its extremely cheap valuation and expectation for DRAM pricing to bottom out in the first quarter of 2012 and move higher in the second quarter and beyond, the bank expects outperformance as pent-up PC demand and hard disk drive normalization develops in the second half of the year.

SanDisk contracts slightly

SanDisk's 1.5% convertibles due 2017 were seen at 115.625 versus an underlying share price of $47.00.

SanDisk's 1% convertibles due 2013 were seen at 97.125 versus an underlying share price of $47.00.

This paper looked to be in about 0.5 point, according to a sellside trader.

"There are some pictures in the Street, a couple million [dollars of bonds] traded and they were in about half a point from where I had them marked," the trader said.

SanDisk saw its ratings of its stock cut by Goldman Sachs to "neutral" from "buy."

Goldman cited significant risk of industry oversupply and NAND flash in the first quarter of 2012, which could accelerate near-term price declines.

"While we continue to view SanDisk as a structural winner, we see greater near-term trading risks with the stock trading near fair value," the Goldman analyst wrote.

Mentioned in this article:

Accuray Inc. Nasdaq: ARAY

Alcoa Inc. NYSE: AA

Amarin Corp. Nasdaq: AMRN

Chesapeake Energy Corp. NYSE: CHK

Micron Technology Inc. NYSE: MU

SanDisk Corp. Nasdaq: SNDK

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