Energy names bounce; Duke trades; autos remain a focus; Jakks Pacific adds

By Rebecca Melvin

Princeton, N.J., Oct. 14 - Volatility in the energy sector spurred continued activity Friday in convertible names like Chesapeake Energy Corp., Halliburton Co. and Schlumberger Ltd., traders said.

Early session weakness gave way to a rebound that left the shares of those companies up 3% or 4%. Diamond Offshore Drilling Inc. and Nabors Industries Ltd. were also lifted, as was independent power producer and utility Calpine Corp.

A few other utilities, like Duke Energy Corp., with their hybrid nature and exposure to energy, were also attracting interest from convertibles players on "a bit of volatility expansion," a Connecticut-based sellside convertibles director said.

The auto sector Friday also continued to be a focus of convertibles trading, with General Motors Corp. seen better on optimism regarding its healthcare cost cutting plans. Lear Corp. was weak early in the session amid rumors that the auto parts supplier was drawing down bank debt, another trader said. But the company's bonds recovered by the end of the day. "It widened the credit out for awhile, but now it's back in," the trader said.

"People are just trading them around trying to avoid the knives," he said of the auto convertibles.

Toy company Jakks Pacific Inc. was also active, with its convertible bonds slightly better amid a surge in its underlying shares on no particular news. Possibly it was research that surfaced suggesting near-term upside for the Malibu, Calif.-based company, a trader said.

Community Health Systems Inc. also traded, as did biotechnology company Durect Corp., which saw its underlying shares jump 6.67% after the Cupertino, Calif.-based company said it has initiated dosing for Phase III clinical studies for its Durin-based leuprolide program aimed at the treatment of Alzheimer's disease.

Midday bounce lifts energy names

The convertibles of many oil services and other energy-related companies ticked back up, mostly in line with their shares, which bounced even though oil prices were lower again Friday after closing lower Thursday.

Crude futures closed lower Friday as more U.S. refineries announced they were coming back on line following the Rita and Katrina hurricanes that blasted the Gulf of Mexico.

"Oil has been the real interest and the volatility of late. If you're not involved in energy, then you're probably not doing much of anything," the Connecticut-based director said.

But as for Friday, another trader said, there wasn't a significant rotation. "The stocks sold off and people were chasing volatility as the stocks come back down to earth," a trader said.

Chesapeake Energy, which has several convertible preferreds and is planning another one, saw its 4.5% convertible preferred trade at $31.75, which is where the shares closed on Thursday.

But it opened up at $30.90, swung up to about $32 and then dropped back down midmorning, before climbing up steadily to a close of $32.70.

Trading in Oklahoma City-based Chesapeake paper has "picked up" amid volatility due to the spike in natural gas prices, a trader said.

The Chesapeake paper is also attracting interest as hedge fund players determine how to position themselves within individual securities ahead of an expected new issue of Chesapeake convertible preferreds, which the company will use to help finance its acquisition of Columbia Energy Natural Resources LLC for $2.2 billion. The additional capacity will make Chesapeake the third-largest natural gas producer in the U.S.

The company has two 5% convertibles preferreds, as well as a 4.125% and a 4.5% convertible preferred.

Meanwhile, Duke Energy's 1.75% convertibles were seen up about 0.25 point to trade at 110.9 as its shares closed up eight cents, or 0.31%, at $25.97.

Charlotte, N.C.-based Duke has lots of energy exposure, a trader said, and pretty decent swings are affecting utilities.

"Unless there's a catalyst, people are trying not to do anything. But energy costs are a catalyst affecting utilities," he said.

Auto sector trades mixed

GM's three $25 par convertible bonds gained as its stock settled smartly higher ahead of its earnings report expected to be posted on Monday and amid generally positive feelings that it will be able to make progress on getting its healthcare costs under control either by negotiating with its United Auto Workers union or by taking unilateral action.

But Ford Motor Co.'s convertible preferred shares slumped more than 2% and its shares were lower. Among parts suppliers, Lear Corp. felt weaker, but American Axle and Manufacturing Holdings Inc. was higher.

On Thursday, a late session rally in GM lifted the debt and credit default swaps of the automaker after they had slumped to new lows for the year.

The rally was sparked by news that the Detroit-based giant had made headway on healthcare union negotiations, as well as the fact that billionaire investor Kirk Kerkorian was continuing to buy GM equity.

On Friday, the 4.50% GM convertible bonds gained 0.18 point, or 0.78%, to close at 23.25. The 5.25s added 0.25, or 1.54%, to close at 16.46. And the 6.25% convertibles climbed by 0.26, or 1.42%, to close at 18.51.

GM shares gained 83 cents, or 3.1%, to $27.98.

Ford's 4.5% preferred shares closed down 0.71, or 2.16%, at 32.67, while its shares lost 38 cents, or 4.23%, to close at $9.61.

Lear's 0% convertibles traded at 44, versus a share price of $29.11; and American Axle's 2% convertibles traded at 81.75, compared to a recent level that showed the 2s at 77 bid, 79 offered. American Axle shares closed virtually flat, up one cent, or 0.05%, at $21.62.

Jakks gains

Jakks Pacific's 4.625% convertibles gained between 0.125 and 0.25 point dollar neutral, to trade at 107.05. It shares jumped $1.50, or nearly 10%, to $16.91 in heavy volume.

The surge came amid no particular news. "We spent a lot of time this morning trying to figure out why the stock was up $2," a trader said. "It seemed to improve after being weaker over the last week. And a Harris Nesbitt report was out that said there is near-term upside in the business."

According to Harris Nesbitt, quarterly earnings expected next week could be better than expected for the company known for Care Bears and Plug It In & Play Games.

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