Convertibles mostly quiet; Peabody, Goodrich, Transocean higher; Entertainment Properties to price

By Rebecca Melvin

New York, March 26 - The convertible bond market was quieter on Wednesday, compared to the first two days of the week, with trading limited to mostly liquid names that were under pressure due to a lackluster performance in equities, market players said.

There were few if any standout names in trading, they said.

"It was quiet and trending down," a New York-based sellside convertibles strategist said.

Another New York-based sellsider said regarding activity on his desk: "It's not dead."

Financials and many tech names were under pressure, but several oil- or energy-related names were seeing gains.

The convertibles of Peabody Energy Corp. extended gains as those bonds continued to trade fairly actively as a winning streak for its underlying shares completed a fourth day.

The convertibles and preferred shares of Goodrich Petroleum Corp., a name that generally doesn't trade much in the convertibles market, was getting another look this week and both issues were quoted higher, a sellsider said.

Meanwhile, Transocean Inc. convertibles were also higher amid a 2.5% gain in their underlying shares. Oilfield-services companies followed crude prices higher after a government report showed inventories of oil and other fuels were lower than expected.

Also on Wednesday Transocean Inc.'s convertible bonds - particularly its 1.5% series C convertibles - were cited as attractive for both outright and hedge-based investing due to their strong credit and volatility by Lehman Brothers convertibles analysts. A research note by the analysts touted the value of Transocean's bonds both as a credit and a volatility play.

In the primary arena, Entertainment Properties Trust announced after the close that it plans to price $75 million of cumulative convertible preferred stock on Thursday after the close, according to a syndicate source.

Price talk for the real estate investment trust issue was for a dividend of 8.5% to 9% and an initial conversion premium of 15% to 20%.

Peabody Energy extends gains

The 4.75% convertibles of Peabody Energy due 2066 gained another 2 points on Wednesday as their underlying shares added 3.4%.

The 4.75s closed at 114.78, versus a closing share price of $52.39, compared to a close of 112.96 on Tuesday, versus a share price of $50.44. Earlier this week, the bonds were at 110.

Shares of St. Louis-based Peabody (NYSE: BTU) added along with other U.S. coal producers Wednesday after positive comments by analysts. A Goldman Sachs analyst increased his ratings of several coal companies and a Friedman, Billings, Ramsey analyst wrote in a client note that U.S. coal experts may rise to 61 million tons next year, from 23 million tons last year. In addition, coal prices have been climbing in recent weeks.

Goodrich gets another look

The convertibles and preferred shares of Goodrich Petroleum also extended gains along with their underlying shares.

The 5.375% perpetual preferreds gained a point to 51.67 versus a share price of $27.74. The 3.25% bonds added nearly a point to 80.6.

Shares of the Houston based independent oil and gas producer (NYSE: GDP) added another 4% on Wednesday after surging 16% on Tuesday due to promising prospects for drilling prospects. Competitor Chesapeake Energy Corp., a serial convertibles issuer, announced after the close plans to offer common stock.

Some had suspected another convertible perhaps. Chesapeake "came out Monday after the close and said that they were upping capex to develop new properties," a New York-based sellside trader said via email. "On that call, they said they would need to tap the capital markets an additional $275 million in 2008 and an additional $675 million in 2009. They didn't say what they were going to do and I think some people thought it would be another convert. This equity offering should give them enough liquidity where they hopefully will not have to come back to the market again," he said.

Transocean is attractive

All three Transocean Inc. three convertibles are attractive and recommended as a "core defensive holding" in an outright portfolio, but the 1.50% C series due 2037 bonds offer greater relative value, especially compared to the 1.63% series A convertibles, according to Lehman analysts

The three convertibles, with a combined total face outstanding of $6.6 billion, are attractive candidates for hedge-based volatility based trades as well, given a backdrop of a strong credit profile. Lehman analysts favor the Cs given their lowest decay (1.55) and carry (0.61) and highest vega (0.63)

Equity investors seeking more defensive exposure to Transocean should consider allocating a portion of their assets to the C convertibles, which are very liquid.

Lehman equity analysts continue to have a positive stance on Transocean with a 1-overweight stock rating and a price target of $170 per share. Meanwhile the convertibles are rated BBB+/Baa2.

The company's robust credit profile is based on a strong macro operating environment for drilling operations especially deepwater.

The 1.5% C series is currently priced at about 107.5 versus a stock price of $131.06. Its current yield is 1.4% with yield to maturity or yield to put at 1.2%, and a premium of 38.3%.

Assumptions on credit and volatility are Libor plus 105 basis points and a volatility of 35%. The bond floor is 86.61.

Transocean is a Houston-based offshore oil and gas driller

REIT to price $75 million preferreds

Entertainment Properties plans to price $75 million of cumulative convertible preferred stock, or 3 million shares with a $25 liquidation preference.

There is an over-allotment option to purchase an additional $11.25 million of preferreds.

Concurrent with the convertible offering, Entertainment Properties, a real-estate investment trust, plans to price 1.5 million common shares, with an over-allotment option for an additional 225,000 common shares.

J.P. Morgan Securities Inc. and Morgan Stanley & Co. Inc. are joint bookrunners for the convertible preferred share offering, with RBC Capital Markets Corp. acting as co-manager.

Both offerings will be sold off the company's shelf registration. They are independent of each other.

An application has been made to list the convertibles on the New York Stock Exchange.

Proceeds are expected to be used for general business purposes, which may include acquisitions, development or financing of properties or the repayment of debt.

The Kansas City, Mo.-based REIT also expects to use proceeds to reduce indebtedness under its unsecured revolving credit facility and to invest in interest-bearing securities.

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