Chesapeake slips on debut; Alpha Natural jumps; AMR drops; Four deals on tap in primary

By Rebecca Melvin

New York, May 21 - Convertible bond players were focused primarily on new issuance on Wednesday, with Chesapeake Energy Corp.'s large, new issue of 2.5% convertible bonds dominating trade early in the session and four proposed new issues getting a once over ahead of pricing expected after the close, market sources said.

Also after the close, two additional deals were launched, including Rite Aid Corp.'s $150 million of seven-year convertible notes, expected to price after the market close on Thursday, and a NorthStar Realty Finance Corp. subsidiary's up to $75 million of five-year exchangeable notes, expected to price pre-open on Thursday, sources said.

Chesapeake's convertibles slipped below par after initially trading higher in Wednesday's session. The significantly upsized deal had traded up a point in the gray market on Tuesday.

The natural gas company's stock was also lower Wednesday, with convertibles sources surmising that perhaps the dilutive aspect of yet another convertible issue from the company was taking a toll on its equity despite the forceful pull upward of higher energy prices.

"Today, people are not doing a lot of trading outside new issues," a West Coast-based sellside trader said.

Surprisingly, energy names were mixed despite another record-breaking close for crude oil, which gained $4 to close over $133 a barrel.

The convertibles of coal company Alpha Natural Resources Inc. were in trade on Wednesday, extending gains from Tuesday.

Airline paper was also in trade, moving inversely to energy prices - as is typically the case - but also pulled lower by news from AMR Corp.

AMR, the parent company of American Airlines Inc., announced "significant" cutbacks in domestic flights as well as plans to retire 75 aircraft and other initiatives to combat record fuel prices, growing concerns about the economy and a difficult competitive environment.

The stock markets sold off amid the move up in oil and word from the Federal Reserve that it isn't likely to cut interest rates again.

"CFC was weaker. AMD was weaker than the prints on Monday; I think things are coming off their recent firmness," a Connecticut-based sellside trader said.

Chesapeake slips below par

The new Chesapeake 2.25% convertibles traded at 99.75 outright after being offered at par versus a share price of $55.90 late in the session, according to a New York-based sellsider. Earlier in the day, they had traded higher, with a West Coast source quoting the new issue at a little over 101 versus a share price of $57.26.

A variety of other existing Chesapeake convertibles traded mixed. On Tuesday, ahead of pricing, the Chesapeake 2.5% bonds due 2037 (CUSIP 165167BZ9) lost 2 points to 154, while the Chesapeake 2.75% due 2035 (CUSIP 165167BW6) added 4 points to 162.4.

The new deal was significantly upsized to $1.2 billion from $500 million, while a concurrent offering of 7.25% straight bonds was unchanged at $800 million.

The smaller coupon of the cheaper debt probably was behind the upsizing of the convertible offering, sources said.

"They raised a lot more than they thought they could, which is a good thing," one market source said.

Chesapeake, an Oklahoma City-based oil and natural gas producer, said it will use the proceeds to redeem its 7.75% senior notes due 2015, to temporarily repay a revolving bank loan and for general corporate purposes.

According to independent research firm CreditSights, Chesapeake had $3.2 billion drawn on its $3.5 billion secured credit facility at the end of the first quarter. "While the reduction in secured revolver borrowings will benefit unsecured bondholders, and the company has accounted for its increased capital spending plans with a $1 billion equity offering and additional pledged asset sales, it remains likely secured revolver borrowings will increase over time, in line with the company's historical financing trends," CreditSights said.

"Thus we believe it is unlikely Moody's will reverse its one-notch downgrade to Ba2 back in December when it cited the company's plan to maintain higher secured revolver borrowings," CreditSights wrote.

Chesapeake shares (NYSE: CHK) closed down $1.55, or 2.7%, at $55.71.

Carrizo Oil to price $275 million

Also in the energy space, Carrizo Oil & Gas Inc. said Wednesday it planned to price $275 million of 20-year convertible senior notes via joint bookrunners Credit Suisse Securities and RBC Capital.

Pricing on the notes, seen Thursday, was talked at 4% to 4.5% on the coupon and 45% to 50% for the initial conversion premium, according to a syndicate source.

Proceeds of the deal were earmarked for repaying debt and partially funding 2008 capital expenditures, according to a company release.

The deal was seen as fairly sizable, although nothing was heard on it in the gray market.

Houston-based Carrizo is an oil and natural gas exploration and development company.

Alpha Natural jumps

Alpha Natural's 2.375% convertible senior notes due 2015 jumped to the high 150s, compared to about 148 Tuesday, as its share price (NYSE: ANR) added $1.33, to 1.9%, to $71.67 on the day.

The shares had been higher Wednesday but pared gains after the Fed minutes news tempered enthusiasm in the stock market in general.

The biggest coal consumers in the United States are steel companies and utilities, according to a Connecticut-based sellside analyst. And demand particularly from utilities is ramping up as the high prices of oil and natural gas are making peaking units uneconomical and increasing the use of coal, which is already a large baseload generating fuel for power plants.

Alpha Natural is an Abingdon, Va.-based coal company.

Among the new deals expected to price Wednesday was Patriot Coal Corp., which planned to price $175 million of convertible senior notes. The St. Louis-based coal company saw its shares (NYSE: PCX) add only 47 cents, or about 0.5%, to $96.67.

Airlines drag lower on oil, outlook

AMR's 4.5% convertibles due 2024 dropped at least 6 points on Wednesday to 79.625 versus a share price of $6.22, compared to a price of 86.375 versus a share price of $8.20 on Tuesday.

The Forth Worth, Texas-based airline said the airline industry, as currently constituted, "was not built to withstand oil prices at $125 a barrel, and certainly not when record fuel expenses are coupled with a weak U.S. economy," according to a company news release.

AMR chairman and CEO Gerard Arpey said, "Our company and industry simply cannot afford to sit by hoping for industry and market conditions to improve. We must work to overcome our near-term challenges and to secure our company's long-term future...."

To that end, the company in the fourth quarter of 2008 will reduce domestic flight capacity by 11% to 12%, compared to the fourth quarter of 2007.

In addition, the company will retire aircraft and reduce workers and introduce a $15 fee for the first checked bag as a means to boost revenue.

As evidence of the crisis caused by soaring fuel prices, Arpey cited the U.S. airline industry's first-quarter 2008 pre-tax loss of nearly $2 billion excluding special items and the fact that eight U.S. airlines that have filed for bankruptcy protection this year, including five that have ceased service.

AMR paid $665 million, or 45%, more for fuel in the first quarter than it would have paid at prices from the year-ago period.

Soleil downgraded AMR and United operator UAL Corp. to "sell," while cutting Continental to "hold" from "buy."

Rite Aid, NorthStar new issues

Rite Aid plans to price $150 million of seven-year convertible notes after the market close on Thursday. The notes were talked with a coupon of 8.5% to 9% and with an initial conversion premium of 22.5% to 27.5%.

Citigroup is the bookrunner of the notes, for which there is an option to purchase up to an additional $8 million in notes to cover over-allotments.

Rite Aid is a retail drugstore operator based in Camp Hill, Pa.

NorthStar Realty Finance Corp. subsidiary NRFC NNN Holdings LLC plans to price up to $75 million of five-year exchangeable notes on Thursday.

The exchangeables were talked with a coupon of 11% to 11.5% with an initial conversion premium of 20%.

Wachovia is the bookrunner of the Rule 144A deal.

New York-based NorthStar is a real estate investment trust.

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