Chesapeake Energy, Avatar deals emerge; Akamai drops 7.25 points outright on executive departure

By Ronda Fears

Nashville, March 23 - Convertibles activity picked up somewhat Tuesday but traders said events in the Middle East continued to impact the market.

The primary arena also continued to trot along, with Chesapeake Energy Corp. and Avatar Holdings Inc. returning to tap convertible investors for some new capital.

The pair of newly launched deals join Freeport McMoRan Copper & Gold Inc. to price after Wednesday's close.

Sunterra Corp. was pricing after the close Tuesday.

Spreads were still in a widening trend, dealers said, and that was supporting some fresh bids on a fair number of high-yield issues.

Chesapeake spuds for growth

Chesapeake Energy (Ba3/BB-) is an acquisitive independent oil and gas company, and has been speculated as a takeover target itself, but several buyside contacts in the convertible market said its latest convertible should get a warm reception.

The Oklahoma City-based company returned to the convertible market for the second time in four months, this time to fund acquisitions that along with better drilling results should help boost its production levels by more than 2% this year. It will be the company's third convertible, however.

The new $255 million of perpetual convertible preferreds, with a par of $1,000, are talked to yield 3.625% to 4.125% with a 37.5% to 42.5% initial conversion premium.

Chesapeake Energy plans to use proceeds to repay debt under its bank credit facility and to fund $100 million of pending acquisitions of oil and gas properties, or in the event the acquisitions are not completed, for general corporate purposes including possible acquisitions.

In mid-November, Chesapeake Energy sold $150 million of 5% perpetual convertible preferreds at with a 37.5% initial conversion premium and, concurrently, sold $200 million of 6.875% senior notes due 2016 to yield 7.0% with a three-year equity call at 105.875. Chesapeake used those proceeds to fund a tender for its $111 million outstanding 8.5% senior notes due 2012 and toward repaying its bank facility.

In January, the company also completed the exchange of $458.5 million of its 8.125% senior notes due 2011 for new 7.75% senior notes due 2015 and new 6.875% senior notes due 2016.

"Chesapeake has had tremendous growth over the past year or two, lots of acquisitions, and they have had a lot of success [in drilling projects]," said a convertible fund manager in New York.

"Their [interest] coverage ratios still look good, probably better than, say, 6 times before this latest deal, but I'm pretty comfortable with the credit."

On Tuesday, Chesapeake Energy shares closed off 17 cents, or 1.34%, to $12.53. In after-hours trading, the stock was off another 28 cents, or 2.23%. The other two Chesapeake Energy converts were said to have closed down about 1.5 points each.

Akamai dives as exec leaves

Akamai Technologies Inc.'s convertibles plunged after the company announced that its chief operating officer, Michael Ruffolo, will be leaving effective April 9 and that no replacement would be named, although Ruffolo will provide consulting for the company's turnaround and restructuring.

The executive departure was seen as a red flag for a company in the throes of a turnaround, a dealer said.

Earlier this month, the Cambridge, Mass.-based distributed computing firm revealed that its tender for its old 5.5% converts was not going well. So, the modified dutch auction price ranges were bumped up to pay between 100 to 101.25 from the original offer of 100.5 and the deadline was extended.

The tender expires Wednesday, unless extended again.

Akamai's 1% convertible, sold in early December, plunged Tuesday by 7.25 points outright to 108 bid, 109 offered. Earlier this month when the tender for the 5.5s was amended and extended, the 1% converts were trading around 120.

Akamai shares Tuesday plummeted $1.43, or 10.13%, to $12.68.

Ford stalled in credit purgatory

Ford Motor Co.'s credit may linger in "a sort of purgatory" due to the overhang from an indication by Moody's Investors Service that it will not be moving quickly on its long awaited review of Ford, credit analysts at Banc of America Securities said in a report Tuesday.

Thus, barring stronger-than-expected first quarter results, or an upward revision to the company's earnings guidance, the name could be range-bound at the wider levels that are currently prevailing.

The Ford 6.5% convertible trust preferred saw a decent amount of action Tuesday, traders said, but indeed the issue was little changed, edging off 0.05 point to 52 bid, 52.25 offered.

Ford shares ended off 2 cents, or 0.15%, to $12.89.

"The much anticipated credit rating review of Ford by Moody's has been put on hold for the next couple quarters," Banc of America analysts said in the firm's daily "Situation Room" publication.

"In recent discussions with the Moody's auto analyst, it was our belief that a rating review was imminent. Now, however, Moody's is sticking more closely to its rating assessment of the company in published reports last November [and] suggests the agency does not intend to change its stance in the near future."

Unfortunately, since the Moody's rating overhang may linger, it may keep Ford spreads range bound at the current wider levels. After trading between 230 bps and 268 bps over Treasuries just two weeks ago, the benchmark 7s of 2013 have been between 240 and 260 bps in the last week.

The next impetus for any spike or dip could be first quarter earnings, which are due in mid-April.

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