Distressed energy debt rallies on output cut hopes, oil price boost; healthcare converts underperform

By Paul Deckelman

New York, April 12 – A continued surge in world crude oil prices – on expectations that major global producers Saudi Arabia and Russia would be able to agree on reining in their production and thus strengthening price levels – was giving a welcome boost to energy names on Tuesday.

Traders saw gains in active trading in junk bond credits such as Continental Resources, Inc., Whiting Petroleum Corp., Oasis Petroleum Inc. and California Resources Corp.

And another oil and natural gas issuer – Chesapeake Energy Corp. – was also strongly on the upside, helped both by the overall energy strengthening and by its own good news after having negotiated favorable terms with its credit facility lenders.

The rally extended to Chesapeake’s convertible debt and that of producers such as Whiting, and to the emerging markets as well, helping the bonds and credit default swaps of such energy-dependent Latin American issuers as Brazil and Venezuela, and the latter’s state oil monopoly, Petroleos de Venezuela SA.

Away from the energy arena, Horizon Pharma plc’s convertibles fell along with the underlying shares on Tuesday after the Ireland-based pharmaceutical company lowered guidance for its first- and second-quarter sales and earnings forecasts, although full-year sales and earnings guidance was confirmed.

Traders were also warily watching Clovis Oncology Inc.’s convertibles, but neither the bonds nor the shares were traded for the majority of the session as shares were halted pending news. The biotechnology company was meeting with a panel of federal regulators Tuesday to discuss its New Drug Application for lung-cancer medication rociletinib.

Chesapeake climb continues

A trader said that Chesapeake Energy “was a very active name today,” following Monday’s announcement of the company’s amendment with its credit facility lenders, “all positive news.”

He said that “the [capital] structure is up anywhere from 5 to 8 points or so.”

He said the most active Chesapeake bonds were the 8% notes due 2022, up 5 points at 61½ bid, matching Monday’s gain.

More than $18 million traded.

At another desk, those bonds were seen up by 4 3/8 points, at 60 7/8 bid.

Its 5¾% notes due 2023 climbed by 6½ points to end at 44, with over $11 million traded.

And its 6 7/8% notes due 2020 zoomed by 9 points, to 51 bid.

Chesapeake’s New York Stock Exchange-traded shares rocketed up by $1.55, or 34.44%, ending at $6.05. Volume of over 183 million shares was more than four times the norm.

Chesapeake’s bonds and shares climbed on Monday and again on Tuesday after the Oklahoma City-based natural gas and oil company announced that it had amended its $4 billion secured revolving credit facility agreement maturing in 2019 with its bank syndicate group.

Key gains for Chesapeake included having its borrowing base reaffirmed at $4 billion, in line with current availability under that facility and postponement of the next scheduled semi-annual redetermination of the borrowing base until June 2017.

The company was granted senior secured leverage ratio covenant relief until September 2017.

And its interest coverage ratio covenant was reduced to 0.65 times through March 2017.

In return, Chesapeake agreed to put up most of its assets as collateral on the facility.

Oil names up

Aside from Chesapeake, a trader said that “a lot” of the more recently challenged names in the energy sector were better on Tuesday.

“News out of Russia that the Saudis and the Russians had agreed to curb oil production sent oil up $1.85, and a lot of the distressed high yield E& P or oil related companies were up 3-to-6” points, the trader said.

Among the big gainers were Continental Resources’ 4½% notes due 2023, seen up 1¼ points at 89 bid and its 5% notes due 2022, up 1 5/8 points at 92 3/8 bid, on volume of $25 million and $21 million respectively.

Whiting’s 5¾% notes due 2021 rose more than 2¼ points, to 71 bid, with over $19 million traded, while its 5% notes due 2019 jumped 6 points, ending at 77½ bid, as over $18 million changed hands.

California Resources’ 8% notes due 2022 were 8-point winners, closing at 49 bid, on volume of over $15 million.

Oasis Petroleum’s 6 7/8% notes due 2022 closed at 81½ bid, up 3 5/8 points on the day, on volume of over $13 million.

The energy sector got a boost from higher oil prices, which hit their highest level in more than four months amid expectations that oil producers Saudi Arabia and Russia were going to be able to negotiate production freezes to alleviate the current global oil market glut.

The benchmark U.S. crude grade, West Texas Intermediate, for May delivery, rose $1.81, or 4%, to $42.17 per barrel, in trading on the New York Mercantile Exchange.

Oil news aids emerging markets

In the emerging markets space, Latin America put in a “stellar session” on the strength of the oil rally, a New York-based trader said.

And even as Brazil’s political turmoil continued, five-year credit default swaps spreads for its sovereign debt tightened to 355 basis points from 373 bps, while Mexico’s moved to 162 bps from 172 bps.

“Cash prices take spread-tightening in stride and grind higher as United States Treasury weakness does little to deter the overall bid,” he said.

“Lat-Am high yield also finishes higher on the day, with Venezuela getting a solid boost from the oil rally.”

Indeed, the Caracas sovereign’s 2027 bonds traded at 38.25 from 37.50, and while PDVSA’s 2017 notes were up to 53.50 from 52.75.

“It was a bit surprising that Venezuela and PDVSA didn’t see more of a jump today, which may be a reflection of the credit risks, despite some stability in crude market,” he said.

Chesapeake converts extend gains

In the convertibles market, Chesapeake’s 2.5% converts due 2037 traded up about 8 points to 78.5 at the end of the session Tuesday. On Monday, the 2.5% bonds had gained 10 points from about 60 to 70.

Chesapeake’s 2.25% convertibles due 2038 rose to about 52 on Tuesday, which was up from 46 on Monday and 41 on Friday. Chesapeake shares surged $1.55, or 34%, to $6.05, which extended a 74-cent, or 20%, gain on Monday.

“It will be interesting to see how that goes,” a New York-based trader said of Chesapeake.

CHK’s energy sector peer Whiting’s 1.25% convertibles also jumped to more than 68 from 63.75.

Horizon Pharma converts drop

Away from the energy names, Horizon Pharma’s 2.5% convertibles due 2022 dropped to 80 and ended higher at 81.6, which was down from about 93, according to Trace data, but the convertibles were not trading actively, a New York-based trader said.

Horizon shares dropped $4.80, or 26%, to settle at $13.42.

Horizon’s new sales guidance for the first and second quarters was well below estimates. But full-year 2016 net sales and earnings guidance was confirmed. The 2016 full-year net sales guidance was $1.025 billion to $1.05 billion, and full-year 2016 adjusted EBITDA guidance was $505 million to $520 million, representing 37% and 41% growth at the midpoints, respectively, the company said.

At late morning, a trader said, “Today is quiet. It feels like there is a little bit of profit-taking in the health care space, but not a lot,” a trader said.

Eye on Clovis panel decision

Meanwhile, Clovis Oncology’s 2.5% convertibles due 2021 traded last at 61, which was down from a little more than 63, according to Trace data. But the Clovis convertibles didn’t trade until after 2 p.m. ET, which was shortly after the company released news about a negative regulatory panel decision about the Boulder, Colo.-based biotechnology company’s New Drug Application for its lung cancer drug, rociletinib.

Clovis closed down 82 cents, or 5.4%, to $14.24. But that level was well above inter session lows.

While the shares were halted, one trader had expected that the shares would drop below $10.00 per share.

After a meeting on rociletinib, the U.S. Food and Drug Administration’s Oncologic Drugs Advisory Committee recommended that the FDA wait and see results from Clovis’ ongoing phase 3 trial before making a decision on approval of the treatment, according to the Clovis news release.

“We are disappointed with today’s outcome, as we believe in the strength of the data we presented for rociletinib,” Clovis president and chief executive Patrick Mahaffy said in the release.

The company pledged to work with the FDA to evaluate the best path forward as it continues to review its application.

The FDA set a target action date of June 28. The phase 3 trial is expected to be complete in late 2018.

Elsewhere in the convertibles sphere, Violin Memory Inc.’s 4.25% converts fell to below 30 from about 43 as shares of the Santa Clara, Calif.-based computer data storage company fell 1.7 cents, or 3.8%, to $0.42. A year ago, the Violin Memory stock was at $4.00.

Rebecca Melvin and Christine Van Dusen contributed to this review.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.