Amgen adds 0.25 point on hedge; Micron C notes weaker, but catches bid; Chesapeake pressured

By Rebecca Melvin

New York, April 27 - Convertible bonds were mixed to little changed on Friday as trade quieted into the weekend after a week driven by numerous earnings reports, market sources said.

Gilead Sciences Inc. was a little better for sale after an earnings miss late Thursday and Newmont Mining Corp. wavered but ended slightly lower outright after the Denver-based gold and copper mining concern reported lower profit, but beat estimates by a penny.

Other than moves related to earnings beats or misses, volatility names were a little heavier in general and credit names were a little better, a New York-based trader said.

Amgen Inc. convertibles improved about 0.25 point on a dollar-neutral, or hedged, basis on a 5% gain for the week in the underlying shares of the Thousand Oaks, Calif.-based biotechnology company.

Micron Technology Inc.'s recently priced 2.375% convertibles, or the C notes, traded Friday and were called down about 1.25 point on a 70% delta since issue earlier this month, a New York-based sellsider said.

"Micron has been heavy since the deal. There was a seller today, but they were well bid, so it was not a disaster," the sellsider said.

Continuing to weigh on the market this past week was Chesapeake Energy Corp. as the Oklahoma City-based natural gas company remained under fire since word more than a week ago that chief executive Aubrey McClendon borrowed as much as $1.1 billion over the last three years against his stake in company wells.

Cemex SAB de CV's 4.875% convertibles traded around 90 versus an underlying share price of $7.19 on Friday, which was "in line with Thursday," a Connecticut-based trader said.

"It was quiet. There's only $334 million [of bond volume], and Amgen's the biggest trader at $57 million," a New York-based sellsider said near the market close, citing Trace data.

Rayonier Inc.'s 3.75% convertibles were actively traded Friday at about the 125 mark. The Jacksonville, Fla.-based real estate investment trust reported lower first-quarter earnings and revenue that beat analysts' expectations earlier in the week.

And there was a better bid for some coal names, and Alpha Natural Resources Inc. was at 91, while Electronic Arts Inc. was up a point dollar neutral for the week amid takeover speculation, the sellsider sad.

Primary lags

The convertibles primary market was quiet in the past week, with no new deals. Issuance for the year to date stands at about a third of where it was for the same period a year ago. Deal volume is at $5.72 billion in 19 deals for the year to date, compared to $15.3 billion in 41 deals or the same period of 2011, according to Prospect News' data.

In contrast, high-yield new issuance for the year to date is even with last year's tally for the same period. In that asset class, deal volume stands at $119.25 billion in 247 deals for the year to date, compared to $119.93 billion in 279 deals for the same period of 2011.

U.S. equities were higher for four straight days, and even managed to remain positive on Friday after a disappointing GDP figure, which showed the economy grew at an annual rate of 2.2% in the first quarter.

That was slower than the 3% growth rate notched in the last quarter of 2011, and lower than the 2.5% to 2.6% rate that many economists had expected.

But bolstering the markets this week was the Federal Reserve Open Market Committee's latest reading on the economy and Fed chairman Ben Bernanke's comments that implied quantitative easing is not off the table.

Newmont slips

Newmont's 1.625% convertibles due 2017 traded at 127.6 during the session, which was up 0.8 point outright, but ended the day lower at 126.125, which was down 1.6 point

The Newmont 1.625% convertibles have a 16% premium and trade like a stock, a Connecticut-based analyst said.

The Newmont 1.25% convertibles due 2014 weren't heard in trade, but those bonds have a 21% premium and also trade like stock.

Convertibles with premiums of under 30% lose their bond characteristics and trade more like stock.

The gold and copper mining company reported lower first-quarter net income on higher revenue. Still adjusted earnings beat Wall Street estimates.

Net income was $490 million, or 97 cents per share, compared with $514 million, or $1.03 per share in the year earlier period. Adjusted for certain items, profit was $1.15 per share, which beat the analysts' average estimate of $1.14 per share. Revenue rose 9% to $2.68 billion.

The company reiterated its full 2012 production outlook for 5 million to 5.2 million ounces of gold and 150 million pounds to 170 million pounds of copper.

Newmont faces a challenge in Peru where its significant mining operations have come under attack over environmental safety concerns. Newmont said that it will make adjustments to the operations to address environmental issues.

Chesapeake under pressure

Chesapeake's 2.5% convertibles due 2037 were trading in the mid 80s, which is down from about 95 at the end of March.

Chesapeake's 2.75% convertibles were around 91, which is down from about 99 at the end of March.

Chesapeake shares ended Friday higher by 16 cents, or 0.9%, at $17.72. But that is down from $25.58 on March 20.

"Investors are worried that Chesapeake is not going to be able to sell assets fast enough to pay off all the debt that it has," a Connecticut-based analyst said.

The company has $1 billion of debt that comes due and a $4 billion revolver that has to be rolled over in 2015. After that, the following three years also have $1 billion-plus of debt maturities coming due.

"That's a lot to roll over and if the credit has gotten worse, it's more expensive to refinance them," the analyst said.

On Thursday, Standard & Poor's lowered Chesapeake's corporate credit rating to BB from BB+ and lowered ratings on two related entities. The agency also said it placed all of these ratings on CreditWatch with negative implications.

The downgrade reflects a view that recent revelations about personal transactions undertaken by Chesapeake's McClendon relating to the company's unusual founder well participation program underscore shortcomings in Chesapeake's corporate governance practices, S&P said.

S&P said further that the turmoil resulting from these developments could hamper Chesapeake's ability to meet its "massive" external funding requirements stemming from its currently weak operating cash flow and aggressive capital spending.

In addition, natural gas prices, on which Chesapeake is dependent, are severely depressed, S&P said.

The Chesapeake 2.75% convertible is four-year paper and has something like a 100% premium. It has lost 7 or 8 points in the last four to five weeks.

The Chesapeake 2.5% convertible has a put in five years and has about a 150% premium and has lost 5 points in that period.

"It looked like one level of risk, and next thing you know, there's another level of risk," the analyst said.

"People are more nervous about the name, not just because of what he did personally, but because he's the kind of guy that would take that kind of risk," he said. "Leverage can be a killer on the way down."

A New York-based sellsider said, "The credit spread is widening because of more risk. It has been correcting, but the stock didn't really move with the credit downgrade."

Mentioned in this article:

Amgen Inc. Nasdaq: AMGN

Cemex SAB de CV NYSE: CX

Chesapeake Energy Corp. NYSE: CHK

Electronic Arts Inc. NYSE: EA

Gilead Sciences In. Nasdaq: GILD

Micron Technology Inc. NYSE: MU

Rayonier Inc. NYSE: RYN

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