Chesapeake plunges, but company says it has no plans to pursue bankruptcy; tech drops

By Rebecca Melvin

New York, Feb. 8 – Chesapeake Energy Corp. was a focus of attention in U.S. convertibles on Monday after market players interpreted news that the Oklahoma City-based natural gas producer’s hiring of law firm Kirkland and Ellis LLP as a sign that bankruptcy is imminent for the company.

Chesapeake’s convertible bonds and preferred shares tumbled early, and a statement by the company at mid-morning, saying that it has no current plans to pursue bankruptcy, had little palliative effect on the convertibles.

Chesapeake’s common shares ended the session sharply lower, although off the lows, down $1.02, or 33%, at $2.04, after an early drop of more than 50% that triggered numerous circuit breakers that halted trading.

Overall, the convertibles market was “lower across the board,” a New York-based trader said, with several different dynamics all pulling the market downward.

There was the “false flag” on Chesapeake and also technology names continued to move down, with some names gapping lower, the trader said.

In addition, there was a decent amount of volume, he said. Although it looked to be a little lighter than on Friday.

Some tech names began to become unhinged on Friday after LinkedIn Corp. posted guidance for the current quarter that disappointed the market.

LinkedIn’s 0.5% convertibles due 2019 continued to trade around 91, the level to which it plunged on Friday amid a 43% plunge in the common shares. On Monday, shares of the Mountain View, Calif.-based business-oriented social networking service edged up to $109.97, which was better by $1.59, after plummeting $83.90, or 43.6%, to $108.38 on Friday.

The convertibles and shares of ServiceNow Inc., Workday Inc. and salesforce.com Inc. continued to drop on Monday.

Workday’s 0.75% convertibles due 2018 traded down another couple of points to 97 from about 99 to 100 on Friday. Those bonds had been at 105.5 previously.

Workday’s 1.5% convertibles due 2020 fell another few points to about 97 from 100.5 on Friday and from about 108 on Thursday.

Shares of Pleasanton, Calif.-based Workday, a cloud-based computing company, fell another $5.27, or 10%, to $48.97, after dropping $10.60, or 16%, on Friday.

ServiceNow’s 0% convertibles due 2018 traded down to 99.5 on Monday from 101.5 on Friday. Shares of the Santa Clara, Calif.-based cloud-based IT services company fell another 10% to $47.14 after dropping 11% on Friday.

Salesforce.com’s 0.25% convertibles due 2018 traded down to 108.5 from 111 on Friday, as shares fell another 7.5% on Monday after a 13% drop on Friday.

“People are on the different deltas, and with the stock down 10% to 11%, people’s markets’ nuke differently and spreads widened out,” a New York-based trader said.

Chesapeake tumbles

Chesapeake’s 2.5% convertibles traded down to 28.5 in the early going on Monday, which was down from 44 previously, a New York-based trader said.

There were also some trades at 28.75 and “one hit at 30,” the trader said of the Chesapeake 2.5% convertibles, but essentially it didn’t recover ground after the company denied that bankruptcy was being pursued.

The company said that it has no plans to file bankruptcy and it is “aggressively seeking to maximize value for all shareholders.”

According to its news release, Kirkland & Ellis continues to advise the company as it seeks to further strengthen its balance sheet following its recent debt exchange.

The Chesapeake 2.25% convertibles traded at 16, which was down 8 points.

The Chesapeake 5.75% convertible preferred shares traded down to 72. Last week they were closer to double par.

“Those are trading very, very low as they will be the first thing to take a hit,” a trader said of the preferred shares.

Chesapeake’s near-term, straight bond, which matures March 15, 2016, fell to 75 from 95 on Friday. That bond recovered some ground intraday, sources said.

Chesapeake’s common shares came back somewhat, but 11 or 12 circuit breakers were triggered during the session. “It’s a pretty unconventional looking chart, ending around 200 after it broke on 150,” the trader said, referring to the share price at $2.00 and $1.50.

Chesapeake is the second-largest U.S. natural gas producer after ExxonMobil. But the debt-laden company has hit hard times given the extended period of ultra-low energy prices. It has said that it will try to solve its solvency problems by selling assets. It does have some assets to sell, but whether it can do so competitively in the current environment remains to be seen.

Some think that the company will be able to tough out the current environment if there are prospects for the price of natural gas to lift to $3.50 per MMBtu. But the current price of Henry Hub natural gas futures on the New York Mercantile Exchange is closer to $2.00 per MMBtu.

In addition the company has an undrawn credit facility that may possibly allow the company to tough out the current environment.

Mentioned in this article:

Chesapeake Energy Corp. NYSE: CHK

LinkedIn Corp. Nasdaq: LNKD

Salesforce.com Inc. NYSE: CRM

ServiceNow Inc. NYSE: NOW

Workday Inc. Nasdaq: WDAY

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