Chesapeake Energy lags other new paper at par; Grey Wolf talked at reoffer price of 99

By Ronda Fears

Nashville, March 25 - Convertible players remained on the sidelines or were busy elsewhere Thursday, at least the arbitrageurs. Outright players, however, were very active; thus, a lot of the smaller convertible shops were hopping with business.

"It was very quiet here today," said a convertible trader at one of the bulge bracket firms.

At another major investment bank, a convertible trader commented, "The arbs are busy with other things right now. They are really concentrated on volatility right now, looking to hedge that risk."

At some of the smaller shops, boutiques and the like, the action was a lot sexier with mention of several "forgotten" convertible issues, such as those of biotech firms Durect Corp., Indevus Pharmaceutical Inc. and BioMarin Pharmaceutical Inc.

A dealer at one of the smaller shops also observed that there seems to be "new faith" in a bullish stock market, as the major indexes gained ground Thursday, which was driving growth-oriented fund managers to put bids out for low delta convertibles.

The primary side of the market was busy but not without some pain. With growing signs of buyers' unwillingness to bend to aggressive terms, Chesapeake Energy Corp.'s new convert lagged other new paper at par. And, after the close a bought deal from Grey Wolf Inc. was getting reoffered below par.

"They are having trouble over in the high-yield market; they have slowed down an awful lot in the last week or so," said a buyside convertible trader at a hedge fund in New Jersey.

"We have to be aware of that; convertible bankers have to be aware of that. There always comes a time when you start pushing back, you know."

Grey Wolf seen repriced at 99

Grey Wolf returned to the convertible market, selling $100 million of convertible floating-rate notes to yield the three-month Libor minus 5 basis points, or 1.06% initially, with a 60% initial conversion premium. The yield is capped at 0% on the lower end and 6% on the upper end.

Deutsche Bank Securities, sole bookrunner of the Rule 144A deal, was marketing the issue at a reoffer price of 99, according to buyside sources.

Final sale terms are anticipated before the market opens Thursday.

An observer not associated with the Grey Wolf deal suggested it may be an effort by the Houston-based domestic oil and gas drilling company to improve its credit standings, noting that proceeds from this deal are earmarked to redeem the company's 8.87% notes due 2007. Proceeds from Grey Wolf's $150 million of 3.75% convertible senior notes due 2023, which were sold in May 2003 with a 65% initial conversion premium, were used to partially redeem the 8.875% notes as well.

He also noted that earlier this month, Standard & Poor's put Grey Wolf's credit ratings (BB- senior debt) on a negative outlook.

S&P said the outlook followed its review of Grey Wolf's acquisition of New Patriot Drilling Corp. - a $51 million transaction consisting of $30 million in cash, which would result in reduced liquidity at a time of diminished cash flow and ongoing weakness in the deep drilling market. Since June 2003, S&P said Grey Wolf's liquidity - cash and available borrowing capacity - has decreased by nearly 40% including the New Patriot acquisition, with cash on hand dropping by nearly $60 million.

New paper mixed, choppy

Buyside sources complained of aggressive terms on Chesapeake Energy as well as Freeport McMoRan Copper & Gold Inc., but were cheering the smaller deals from Sunterra Corp. and Avatar Holdings Inc. Freeport nevertheless was bid up along with Sunterra and Avatar, but Chesapeake was underwater out of the gate and closed at par.

Chesapeake sold $255 million of perpetual convertible preferreds at par to yield 4.125% with a 37.5% initial conversion premium - at the cheap end of talk for a 3.625% to 4.125% dividend and a 37.5% to 42.5% initial conversion premium.

Lehman Brothers, stabilization agent among the joint bookrunners, closed the new Chesapeake convertible at 100 bid, 100.0125. The issue had been bid at 99.5 in the gray market before pricing and was seen at the open by a buyside trader at 99.625 bid. Sellside analysts not associated with the deal had put it about 2.75% rich, at the middle of price talk.

Freeport priced $1 billion of perpetual convertible preferreds at par to yield 5.5% with a 40% initial conversion premium - also at the cheap end of price talk for a 5.0% to 5.5% dividend and a 40% to 45% initial conversion premium.

Merrill Lynch, a joint bookrunner on the deal, closed the new Freeport convertible at 100.75 bid, 101 offered. In the gray market just before pricing, it was bid at 99.875. Sellside analysts put the new Freeport McMoRan convertible from about 1% cheap to as much as 2% rich, at the midpoint of price talk.

Avatar upsized its deal to $100 million from $75 million and sold the 20-year convertible senior notes at par to yield 4.5% with a 40% initial conversion premium - at the cheap end of yield talk for a 4.0% to 4.5% coupon and in the middle of premium guidance of 38% to 42%.

Citigroup Global Markets Inc., sole bookrunner on the Avatar deal, closed it at 102.75 bid, 103.25 offered.

Sunterra's small $75 million deal was a home run right out of the gate Wednesday and gained more ground Thursday. It price at about the midpoint of guidance, at 3.75%, up 30.5%. The issue added 2.75 points to close Thursday at 106.875 bid, 107.375 offered.

Akamai holders wait for call

Akamai Technologies Inc.'s newest convertible, the 1% issue, was gained more than 5 points outright to 111.25 bid, 112.25 offered, as the stock moved up and as spectators watched the saga regarding the 5.5% issue and its unsuccessful tender.

Purely as a matter of speculation, one market source commented that with Akamai bagging new money from the 1% convertible in December, why would anyone tender the big 5.5% coupon issue for anything below the call price.

The tender price ended up at 101.25, after having been boosted once during the modified dutch auction. Merrill Lynch analysts put the 5.5% issue's theoretical fair value at 87.25 to 89.25.

The issue is currently callable at 103.14 but drops to 102.36 on July 1.

Forgotten converts resurface

A market source from among the outright ranks mentioned three small biotech issues as ideas Thursday that have been largely forgotten - Durect Corp., a Cupertino, Calif.-based biotech, Indevus Pharmaceuticals Inc., a Lexington, Mass.-based biotech and BioMarin Pharmaceutical Inc., a Novato, Calif.-based biotech.

Dealers at the big Wall Street type desks, though, barely remember these issues and say they never trade. With borrow on the underlying stock being an issue for hedgies, not to mention small deal sizes, most of the traffic in these converts is limited to outright or high-yield players.

At least Durect traded Thursday, according to the source in the outright convertible community.

Durect's non-callable 6.25% due 2008 was pegged at a bid of 18 points over parity of 96.825. The stock closed up 5 cents, or 1.67%, to $3.05.

The source noted that there is 24 points of cash flow through hard call. Durect is involved in pain management treatments, the market source said, and trial data appears to be imminent. He also noted an interesting fact - the company's chief financial officer used to work in the convertible market on the sellside.

Indevus's 6.25% due 2008, callable in July 2006, was quoted at 123.5 bid, 124.5 offered, while the stock ended up 4 cents, or 0.68%, to $5.90.

It's a similar story - no one follows it or makes calls on it. The market source, however, noted that Indevus has three drugs in Phase 3 trials, two in Phase 2 trials and one in Phase 1.

BioMarin, though, trades occasionally even on the big desks.

The BioMarin issue is for $125 million. Durect's is for $50 million and Indevus is for $60 million.

BioMarin's 3.5% issue due 2008 were quoted up 1.875 points to 93.125 bid, 93.625 offered as the stock gained 47 cents, or 6.56%, to $7.63.

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