Ford picks up buyers on upped guidance; Chesapeake shares sink, converts up on acquisition

By Ronda Fears

Nashville, Dec. 22 - It was a thin trading day in the convertibles market Monday with the Christmas holiday approaching. Dealers reported only a few high-profile convertibles trading around though on whole the market was quiet.

After the close, players were anticipating the Roper Industries Inc. deal to price after being delayed from last week.

Roper is pitching $150 million in proceeds of discount cash-to-zero convertible notes talked to yield of 4.0% to 4.5%, up 27.5% to 32.5%.

Roper shares ended Monday down 80 cents, or 1.62%, to $42.56 ahead of the convertible pricing, which is alongside 3.955 million shares of common stock. The company also is negotiating a new $650 million senior secured bank facility.

"We've got this one Christmas deal and a lot of people are really busy with end-of-year paperwork," said a convertible trader at one of the big bulge firms.

There just wasn't a lot of trading going on in converts, the trader added, outside of what he referred to as some "cherry picking."

Several buyside sources also acknowledged lots of "office work" ahead of the holiday.

As for year-end stats, Merrill Lynch convertible analysts reported Monday that year-to-date the firm's convertible hedge index is showing a total return of 15.1%, before fees. Returns in the past week, the Merrill report said, came largely from an improvement in yields as the 10-year Treasury yield decreased from 4.25% to 4.13%, and cash flow.

Looking forward, Merrill Lynch's head of U.S. convertible research, Yaw Debrah, said in the report that interest rate risk will be an important factor for hedge fund returns.

"Year to date, we estimate that interest rates have largely been neutral to convertible hedge portfolios," Debrah said.

"With our fixed income strategy team calling for a 6% 10-year Treasury by the end of 2004, we estimate that rising yields will deduct about 4% from convertible arbitrage returns, unless a convertible fund is carrying a full interest rate hedge."

Speaking of hedging, Chesapeake Energy Corp. announced Monday a trio of acquisitions and said it also has made a significant boost to its hedging activity related to natural gas and crude oil and now has hedged nearly all of its oil and gas production volumes through the end of 2004 with swap instruments, cap swaps and basis protection swaps.

Chesapeake also increased its production forecasts.

In light of the latest acquisitions, totaling $510 million, however, the company said it would not yet consummate the exchange offer for its 8.125% senior notes due 2011. Already some $280 million of the notes had been tendered. A further announcement is forthcoming as to how to proceed, the company said.

The company said it anticipates financing the latest acquisitions with roughly 50% common equity and 50% short-term and/or long-term borrowings.

Chesapeake has been a very aggressive acquirer and has a high leverage on reserves, but it also is widely considered a strong candidate as an acquisition target, one trader said. That makes it popular among many investors who like the oil and gas space.

"The stock was hit, probably by a combination of things," including the expected delay or other changes to the note exchange, "plus probably adding more debt," said a dealer.

"But this is a popular name in spurts. This has been an extraordinary year for them."

Moody's said the price tag for the acquired reserves was very high and also pointed to Chesapeake's acquisition activity and leverage, but confirmed its ratings.

Chesapeake shares closed off 9 cents, or 0.69%, to $13.01.

While the stock declined, the perpetual convertibles were both sharply higher on the day. The new 5% convertible preferred gained 2.5 points to 106.625 bid, 107.125 offered, and the old 6% convertible preferred added 1.875 points to 71.625 bid, 72.125 offered.

Ford Motor Co. also saw a lot of traffic in what one dealer referred to as "pedestrian" buying.

Ford announced revised agreements with Visteon Corp. and increased its guidance for 2003 earnings from $0.95 to $1.05 per share to $1.05 to $1.10 per share from continuing operations, excluding special items. Also, the company said new contributions of $1 billion to Ford's U.S. pension fund and $6 billion to its Voluntary Employees' Beneficiary Association trust will show up in fourth quarter.

Standard & Poor's affirmed Ford's ratings but said it views the changes in the Visteon agreements as adverse to Ford's credit quality, noting that Ford will effectively re-assume from Visteon $1.65 billion of retiree medical liabilities for which Ford had previously been only contingently liable. This will add to Ford's massive unfunded retiree medical liability, which stood at $27.4 billion at year-end 2002. Separately, however, S&P noted that better-than-expected investment returns - 20.9% through November - in Ford's U.S. pension plan have helped to bolster its pension funding position.

Ford shares gained $1.55, or 10.17%, to $16.79 on the news.

The Ford 6.5% convertible trust preferred saw heavy volume, gaining 3.6 points on the day, or 6.59%, to close at 58.19 on the New York Stock Exchange. There were 1.32 million shares that changed hands, compared with the three-month running average of 789,845.

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