New Cobalt bounces from discounted price; Chinese solar shares surge, convertibles quiet

By Rebecca Melvin

New York, Dec. 12 - Cobalt International Energy Inc.'s newly priced $1.2 billion of 2.625% convertibles came at a 0.75-point discount to par and traded up Wednesday in the secondary market after the Houston-based oil exploration and development company brought the deal overnight.

The new Cobalt convertible closed at about 102 bid, 102.5 offered versus a $25.45 stock price, which was better on a dollar-neutral, or hedged, basis by 0.5 point to a point, a New York-based analyst said. Cobalt shares were down 7.3% on the day.

Cobalt was very active, and there was not a lot of notable activity in other parts of the convertible space, market sources said.

The convertibles of Goodrich Petroleum Corp., a Houston-based independent oil and natural gas company, were down about 0.75 point on the day despite higher shares, according to Trace data.

Goodrich shares as well as many shares of other commodity-based companies were better likely on the Federal Open Market Committee's announcement that it is expanding its asset purchasing accommodation policy and holding rates steady, which in turn, hurt the U.S. dollar and helped send crude oil prices higher, an analyst said.

Meanwhile, Microsoft Corp.'s 0% convertibles due 2013 were seen fairly active on one trading desk.

Elsewhere, shares of Chinese solar companies popped on news that China is carving out another $1.1 billion in subsidies for its solar power sector, more than doubling its support for the year to date. But there didn't appear to be much activity in the convertibles of Chinese solar companies.

Of solar convert issuers, Suntech Power Holdings Co. Ltd., the world's largest solar-panel maker, saw its 3% bond trade up 1.6 points to 35.957, according to Trace data. But Trina Solar Ltd., the fifth-largest solar panel supplier, based in Changzhou, China, wasn't seen to have traded. The last recorded price for the Trina 4% convertibles due 2013 was 90.75.

FOMC impact on convertibles

On a dollar-neutral basis, with vol. contracting and rates rising, it's not clear what the impact on convertibles will be from further accommodation by the Federal Reserve. The short answer is "it depends," a New York-based convertibles analyst said.

"It's really going to be case by case," he said, adding that investors were not looking at the convert space in terms of whether the FOMC policy will have a salutary effect on, for example, in-the-money, vol. names, which will tend to improve if shares go up.

"People are not trading it like that. People are more focused on company specifics, and that's not going to change with the Fed policy," the analyst said.

The FOMC announcement, following a two-day policy-setting meeting, represented more accommodation as the Fed will now purchase about $45 billion per month of Treasuries in addition to its current program of buying about $40 billion per month of mortgage-backed securities.

Previously, the Fed bought long Treasuries and sold shorter ones in an effort under Operation Twist to extend the average maturity of its holdings of Treasury securities. That program will be completed at the end of the year.

The Fed it will keep its key Federal Funds rate at near zero, and tied rates and asset purchases to 6.5% unemployment and an inflation ceiling of 2.5% as triggers for potential tightening. Previously the FOMC said rates would remain near zero until mid-2015.

In recent sessions, some of the in-the-money, vol. type convertible names did not follow in step with the equity rally.

There were several reasons for this, a New York-based trader said. Many of these names were priced to perform if stocks went lower, and in addition there has been some year-end portfolio adjustments that have resulted in sales of these issues, he said.

All in all, the FOMC policy generates conflicting ideas about where markets head from here. "Yes, you're going to have the Fed pushing people into higher risk securities. But if interest rates rise a couple of percentage points, what does that mean for equities? You can't have it both ways," the analyst said.

"It's like, we're past the stage where the Fed QE is going to push stocks higher. What is coming is a couple percentage points hitting with the fiscal cliff."

As for year-end activity in general in the past few sessions, a second trader said, "People are on the sidelines. I guess there is just too much political uncertainty, and guys are picking their spots."

The broader markets initially reacted positively to the FOMC announcement, but sold off into the close.

New Cobalt jumps

Cobalt's new 2.625% convertibles due 2019 moved up to 102 bid, 102.5 offered by the end of the session Wednesday, after early trades at 100.5 bid, 101 offered as the stock rose from its low mark.

Cobalt shares rallied from their low open but still ended the day down $2.00, or 7.3%, at $25.45 in extremely active trade.

The notes opened up about 0.5 point to a point on a dollar-neutral, or hedged, basis.

The $1.2 billion issue of seven-year convertible senior notes priced at a discount to par of 99.25 early Wednesday.

Picking a credit spread for the company's securities "is almost impossible," an analyst said, given that the company has not developed any oil fields yet and remains in the exploration phase. He called the company cash flow negative, with no real comps in order to establish a credit spread.

The company also has a huge $10 billion plus market cap with many assets, and no other debt, he said, but it is prospective and highly speculative.

"Real credit work on it is all over the map," he said.

A trading source concurred with the analyst, saying that stock carries significant risk with no revenues or proven reserves.

A syndicate source said that the company has a "great outright story and is using proceeds for general corporate purposes including cap ex."

"For the right story, there is demand to get deals this size done," the syndicate source said.

He said the allocation book for the issue was well-balanced among outright and hedged investors with a chunk of allocations going to non-traditional outright participants.

The registered, off-the-shelf deal came overnight and at the talked price points for the coupon and premium and at the midpoint of price talk, which was 99 to 99.5.

The deal has a $180 million greenshoe and was sold via bookrunners Morgan Stanley & Co. LLC and Goldman Sachs & Co.

The notes are non-callable for life, with no puts. There is takeover protection and net share settlement.

Proceeds from the offering will be used to fund Cobalt's capital expenditures and for general corporate purposes.

Houston-based Cobalt is an independent oil exploration and development company focused on deepwater U.S. Gulf of Mexico and offshore Angola and Gabon in West Africa.

Goodrich in focus

Goodrich Petroleum's 5% convertibles due 2029 traded between 91 and 92 on Wednesday and looked down 0.75 point late in the session at 91.

On Tuesday there was a sale at 92.125, according to a New York-based trader.

Last week the convertibles traded at 92.75.

Goodrich shares Wednesday were up 22 cents, or 2.7%, at $8.42.

Shares were up with higher crude oil prices, most likely, an analyst said. And oil was up with the FOMC announcement and weaker dollar.

Endeavour International Corp., another independent oil and gas exploration and development company, saw its shares surge 42 cents, or 6.7%, to $6.67.

The Endeavour 5.5% convertibles traded Tuesday at 85.93 to 86.15 versus a $6.40 share price on a 50% delta, according to a New York-based trader.

Mentioned in this article:

Cobalt International Energy Inc. NYSE: CIE

Endeavour International Corp. NYSE: END

Goodrich Petroleum Corp. NYSE: GDP

Microsoft Corp. Nasdaq: MSFT

Suntech Power Holdings Co. Ltd. NYSE: STP

Trina Solar Ltd. NYSE: TSL

© 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.