Convertibles steady to higher in line with stocks; Chesapeake Energy gains; Ford, Cephalon steady

By Rebecca Melvin

New York, Nov. 26 - The convertible bond market was fairly active early Wednesday, but activity thinned by mid-session ahead of the bond markets' early close for the Thanksgiving holiday, sources said.

Prices were fatter, up in line with generally higher stocks, which was in keeping with the spirit of the holiday.

Financial markets will be closed Thursday for Thanksgiving.

"There was some stuff gong on, but it's going to get really quiet ... I think prices were generally in line with where they've been, pretty much steady," a New York-based sellsider said.

Chesapeake Energy Corp. convertibles jumped in line with their higher underlying shares as energy names in general gained with higher oil and natural gas prices.

Chesapeake convertibles are still depressed from previous levels, however, as investors question the outlook for exploration and production companies in light of the U.S. recession and slowing global economies, a West Coast-based sellsider said.

El Paso Corp. convertible preferreds were also higher in trade.

Ford Motor Co. convertibles were steady as their underlying shares jumped in heavy volume as optimism regarding government help for the U.S. auto industry remained high.

Cephalon Inc. was called plus 2 points versus a share price of $70.60 as its shares wavered after the Frazer, Pa.-based biotechnology company said it was suing generic drug makers Mylan Inc and Barr Pharmaceuticals Inc. for alleged patent infringement of Amrix, a muscle relaxant.

The Dow Jones Industrial Average and S&P 500 closed up for the fourth day in a row for the first time since last spring. The Dow jumped 247 points, or 2.9%, to 8,726.6.

President-elect Barack Obama held his third press conference in as many days to outline parts of his plans to deal with the nation's economic crisis. On Wednesday, he said that he has selected Paul Volcker, a former chairman of the Federal Reserve, to head the President's Economic Recovery Advisory Board, a new panel he is instituting to help keep him informed about how government policies are affecting various parts of the economy specifically.

"I think Volcker is a good choice, and I think generally Obama is making some good decisions, and the market has liked it," a West Coast-based sellsider said.

Primary market still stalled

As far as the potential for new issuance in December, convertibles players weren't overly optimistic.

"I wish there was some catalyst we could point to that could get things going, but I don't know what it would be. I see everyone trading around the same names, with no new issues, and there doesn't look like there's anything coming along to change that," a New York-based sellsider said.

New issuance for the year ended November stands at about $62 billion - which is where it stood at the end of September, compared to about $80 billion for the comparable year to November 2007.

"The fact that there's no new issuance is a symptom of the market. No one is issuing, there are no IPOs, no corporate issuance. No one is willing to lend, including for debt in the open market. So for companies that do need money, anything that gets done is going to be a tough sell, a really tough sell," another sellsider said.

Chesapeake rises with energy

Chesapeake's 2.75% convertibles due 2035 closed at about 73.59 versus a share price of $20.24, compared to earlier in the day when the paper was quoted at 68.75 bid, 70 offered versus a stock price of $18.45. On Nov. 11, the Chesapeake 2.75s closed at 76.82 versus a share price of $22.36.

Shares of the Oklahoma City-based oil and gas exploration and production gained $2.00, or 11%, on Wednesday.

Not only were natural gas prices higher with a government report that revealed tighter supplies, but the company also announced that it closed its Marcellus Shale joint venture transaction with StatoilHydro, under which Chesapeake sold a 32.5% interest in its Marcellus Shale assets in Appalachia for $3.375 billion and retained a 67.5% working interest.

In addition, Chesapeake announced Tuesday that it has reduced the amount of convertibles outstanding by exchanging some of the paper for shares.

Shrinking that supply wasn't supposed to make much of a difference to the market, one source said.

In exchange for $79.14 million of the 2.75% convertible paper due 2035, the company issued holders 3,029,656 shares. It also exchanged $10 million of its 2.5% convertibles due 2037 and $35 million of the 2.25% contingent convertible senior notes due 2038.

Natural gas futures in New York advanced the most in more than two months after a government report showed a larger-than-forecast drop in U.S. stockpiles.

Inventories declined 66 billion cubic feet in the week ended Nov. 21 to 3.422 trillion cubic feet, the U.S. Energy Department said.

Analysts had forecast a withdrawal of 45 billion cubic feet. Stockpiles tend to fall as cold weather turns up demand for heating fuel.

Natural gas for January delivery rose 49.2 cents, or 7.7%, to settle at $6.878 per million British thermal units at 3:06 p.m. ET on the New York Mercantile Exchange. It was the biggest one-day gain since Sept. 17.

Chesapeake and StatoilHydro are evaluating opportunities for their international strategic alliance to jointly explore unconventional natural gas opportunities worldwide.

Aubrey McClendon, Chesapeake's chief executive, commented in a press release: "We are pleased to close our joint venture with StatoilHydro and look forward to creating substantial value for both companies in the years ahead. We are honored to partner with one of the leading international oil and gas companies and are excited about the opportunities to jointly export our world class unconventional natural gas technology for further long-term growth."

Chesapeake was advised on the transaction by Jefferies Randall & Dewey of Houston.

Chesapeake's 2.5% convertibles due 2037 closed at 62.98 compared to 60.38 on Tuesday, and the Chesapeake 2.25% convertibles due 2028 were seen at 57.5 versus 53.6 on Tuesday.

El Paso's 4.99% convertible preferreds traded at 7 points versus a share price of $6.75.

Ford flat as shares rise

Ford Motor's 4.25% convertibles due 2036 traded at 20.5 versus a share price of $1.67 Wednesday, which was unchanged compared with trades Tuesday.

Shares of the Dearborn, Mich.-based automaker surged 49 cents, or 29.5%, to $2.15.

According to a Reuters report, Ford and General Motors Corp. jumped after Deutsche Bank said chances have improved for the struggling automakers to receive a government bailout.

Deutsche Bank's comment noted growing concern about the risks that failure of the automakers would pose to the U.S. economy.

Cephalon steady

Cephalon's 2% convertible due 2015 was called plus 2 points versus a share price of $70.60 and closed at 152.5 versus a share price of $70.86.

That compared to 153 versus a share price of $70.62 on Tuesday.

Cephalon shares opened up much lower from their previous close but rose late in the session to end up 24 cents, or 0.34%.

Mentioned in this article:

Cephalon Inc. Nasdaq: CEPH

Chesapeake Energy Corp. NYSE: CHK

El Paso Corp. NYSE: EP

Ford Motor Co. NYSE: F

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