Chesapeake Energy mixed on asset sale; SunPower mostly steady; Mentor, KKR quiet, shares slide

By Rebecca Melvin

New York, Nov. 11 - The convertible bond market was quiet and a little heavier Tuesday in trading thinned by the Veterans Day holiday, market sources said.

Fixed-income markets were closed in observance of Veterans Day.

"Overall the feeling is heavier and better for sale," a West Coast-based sellside trader said of the market.

Another sellsider in New York said it was "uneventful," noting very light trading volume both Monday and Tuesday, compared to last week.

Chesapeake Energy Corp. convertibles were mixed on news that the natural gas producer agreed to sell a 32.5% interest in its Marcellus Shale assets in Appalachia to StatoilHydro for $3.375 billion.

SunPower Corp. was mostly steady in active trade after Deutsche Securities downgraded its equities to "hold" from "buy."

Fannie Mae missed third-quarter estimates, and together with Freddie Mac and the U.S. government announced plans to modify trillions of dollars of loans held by the GSEs.

The Fannie Mae convertibles remained quiet, however, as they have been since the government stepped in to bail out the mortgage financing giant and cut dividends in September.

Mentor Graphics Corp. convertibles were indicated lower but not heard in trade as their underlying shares skidded 17% on lowered guidance.

KKR Financial Holdings LLC convertibles were also supposed lower but not heard in trade as their underlying shares plunged 39% after the real-estate-investment trust said it would suspend its dividend and several analysts downgraded the company.

"My guess is that it was down with the rest of the sector," a trader said, regarding the REIT.

Chesapeake mixed on asset sale

Chesapeake's 2.75% convertibles due 2035 traded lower by 0.75 point and closed at 76.82 Tuesday versus a share price of $22.36, compared to about 78 versus a share price of $23.67 on Monday.

Chesapeake's 2.5% convertibles due 2037 were better by 0.75 point, however, at 69 bid, 70 offered, a West Coast-based sellsider said.

The Chesapeake 2.25% convertibles due 2028 didn't trade, the trader said.

"In theory, they should have been better, but they were generally better for sale, which was true for the whole energy sector," the trader said.

"There were two views: either Chesapeake's viability was in question due to its need to sell off assets - selling off the goose that lays the golden egg - or you could look at it that they are selling assets and making the whole more viable. I think most people were looking at it from the first perspective," the trader said.

Chesapeake said that it has agreed to a joint venture with StatoilHydro in which StatoilHydro will buy a 32.4% interest in Chesapeake's Marcellus Shale assets, leaving Chesapeake with a 67.5% working interest.

StatoilHydro will pay $1.25 billion in cash at closing and will pay a further $2.125 billion from 2009 to 2012 by funding 75% of Chesapeake's 67.5% share of drilling and completion expenditures until the $2.125 billion obligation has been funded, Chesapeake said in a release.

Chesapeake plans to continue acquiring leasehold in the Marcellus Shale play and StatoilHydro will have the right to a 32.5% participation in any such additional leasehold.

Additionally, Chesapeake and Norway-based StatoilHydro have agreed to enter into an international strategic alliance to explore jointly unconventional natural gas opportunities worldwide.

Helge Lund, president and chief executive of StatoilHydro, said his company is establishing a strong platform for further developing its gas value chain business and growing its position in unconventional gas.

Chesapeake has now completed three shale joint ventures that collectively value Chesapeake's Haynesville, Fayetteville and Marcellus Shale assets (before the joint ventures) at about $34 billion.

Previously, Chesapeake sold a 20% working interest in its Haynesville Shale assets to Plains Exploration & Production Co. for $3.3 billion and a 25% working interest in its Fayetteville Shale assets to BP America for $1.9 billion.

SunPower mostly steady

SunPower's 0.75% convertibles due 2027 were indicated to close at 64.25 on Tuesday, compared to 64.5 on Monday.

Shares of the San Jose, Calif.-based solar power company lost $3.80, or 12%, to $28.73.

The company's convertibles traded actively both Monday and Tuesday. On Monday, Deutsche Securities downgraded the company after it announced a supply agreement with Ecoware Spa under which SunPower will supply solar panels to Ecoware for four years, with delivery of the first panels totaling at least 130 megawatts seen in the first quarter of 2009.

Fannie Mae quiet

Fannie Mae's 8.75% mandatory convertible preferred stock due 2011 was seen closing at 1 bid, 1.5 offered versus a share price of $0.68.

The 8.75s priced May 8 with a par price of $50.

The older Fannie Mae 5.375% series 2004-1 convertible perpetual preferreds were at 3 bid, 5 offered, according to a source.

Shares of the Washington, D.C.-based U.S. mortgage lending giant lost 5.3% on Tuesday when Fannie and Freddie unveiled a plan to speed up the modification of loans they hold as part of the latest effort to prevent more foreclosures.

The initiative, called the stream line modification program, will target loans that are 90 days or more past due, and aims to bring the ratio of mortgage payments for these homeowners to 38% of their income by modifying interest rates and in some cases forgiving portions of principal.

On Monday, Fannie Mae reported a third-quarter loss of $29 billion, compared to a loss of $2.3 billion in the second quarter, and a loss of $1.4 billion in the third quarter of 2007.

The company noted that if the trends in housing and financial markets continue and there is a significant loss in the fourth quarter, it's possible that Fannie Mae could have a negative net worth by year-end.

"If this were to occur, the company would be required to obtain funding from the Treasury under the senior preferred stock purchase agreement in order to avoid a mandatory trigger of receivership," independent research firm CreditSights said in a report Tuesday.

Mentor quiet, seen lower

Mentor Graphics' 6.25% convertible debentures due 2026 were indicated to close at 58 versus a share price of $5.06, compared to 61.5 on Monday.

In June the convertibles were at about 108 versus a share price of $15.00.

Mentor also has a floating-rate convertible due 2023 that isn't widely traded.

Shares were 5% lower Tuesday after the Wilsonville, Ore.-based maker of electronic design automation systems lowered guidance, citing slowing customer activity.

Revenue is expected to be about $185 million for the fiscal third quarter ended Oct. 31, with a non-GAAP loss of about $0.05 per share.

For the fiscal fourth quarter ending Jan. 31, the company now expects revenues of about $270 million, with non-GAAP earnings per share of about $0.55 and GAAP earnings per share of about $0.60.

For fiscal 2009, the company expects full-year revenues of about $815 million, non-GAAP earnings per share of about $0.40 and a GAAP loss per share of about $0.65.

Mentioned in this article:

Chesapeake Energy Corp. NYSE: CHK

Fannie Mae NYSE: FNM

Mentor Graphics Corp. Nasdaq: MENT

KKR Financial Holdings LLC NYSE: KFN

SunPower Corp. Nasdaq: SPWRA

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