Morning Commentary: Snap $1 billion convertible notes on tap; Chesapeake Energy active

By Abigail W. Adams

Portland, Me., Aug. 6 – After a period of inactivity, the primary market returned to action on Tuesday, launching the first deal of the month and the largest of the third quarter.

Snap Inc. plans to price $1 billion of seven-year convertible notes after the market close on Tuesday with price talk for a coupon of 0.75% to 1.25% and an initial conversion premium of 37.5% to 42.5%, according to a market source.

The deal is being marketed with assumptions of 350 basis points over Libor and a 42% vol., according to a market source.

Using those assumptions, the deal modeled about 2.38 points cheap at the midpoint of talk, a source said.

While stock has traded down with the overall market the past few sessions, Snap stock recently broke out to a new 52-week high in late July after a strong second-quarter earnings report.

With pent up demand for new paper and money in the convertible space that is ready to be put to work, the deal is expected to do well, sources said.

While earnings and the recent bout of volatility in the market has sidelined new issue activity, there is an active pipeline of new deals waiting to come forward, a market source said.

Meanwhile, the secondary space was quiet early in Tuesday’s session with most focused on the new offering from Snap, a market source said.

Chesapeake Energy Corp.’s 5.5% convertible notes due 2026 were among the most actively traded issues in the secondary space with the notes trading down as stock dropped after the oil and gas exploration company’s earnings report.

The 5.5% convertible notes dropped about 4 points outright to 65 with the yield now above 13%, a market source said.

Chesapeake stock dropped to $1.44, a decrease of 8.01%, shortly before 11 a.m. ET. While down significantly percentagewise, the stock was only down 12 cents in terms of dollar amount.

However, the 5.5% convertible notes have long been busted and are not equity sensitive.

The notes were trading down after Chesapeake reported mixed second-quarter earnings.

The company missed on the bottom line with a loss per share of 10 cents versus earnings per share of 7 cents.

However, Chesapeake beat on the top line with revenue of $2.39 billion versus analyst expectations for revenue of $2.37 billion.

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