Chesapeake upsizes deal amid strong gray response; EnerSys seen fair to rich; ShengdaTech lacks borrow

By Kenneth Lim

Boston, May 20 - Chesapeake Energy Corp.'s new notes were the bright spot in an otherwise slow day for the convertibles market.

Chesapeake more than doubled the original size of its deal amid strong interest in the issue, which was bid up by a point in the gray market.

By contrast, EnerSys's planned $150 million offering of 30-year convertibles was quiet in the gray market amid grumblings that the deal did not appear cheap enough.

ShengdaTech, Inc. also failed to draw any bids in the gray market with interest for the deal seen to be limited given the company's small investor following and a lack of borrow.

The convertible market in general had a sluggish session outside of Chesapeake, a sellside convertible trader said.

"Not seeing much in the rest of the market," the trader said. "It's very quiet. Most people are just delta trading it seems. That's kind of been the general trend for the last six months or a year. People are just doing something if they have to."

Oil and gas plays continued to be active as oil prices rose further, with the price of crude oil approaching a record $130 per barrel.

Nabors Industries Ltd.'s 0.94% convertible notes due 2011 rose about a point in line with its stock to trade at 111.375 against a stock price of $41.90. Nabors common stock (NYSE: NBR) closed at $42.07, up by 1.45%, or $0.60.

Nabors is a Hamilton, Bermuda-based land drilling contractor.

Transocean Inc.'s three convertibles also gained slightly with the stock. Against a stock price of $161.50, the Transocean series A 1.625% convertible due 2037 traded at 116.5, while the series B 1.5% convertible due 2037 was 117.5 and the series C 1.5% convertible due 2037 was 119.

Transocean common stock (NYSE: RIG) increased 0.01% or $0.01 to close at $161.40.

Chesapeake upsizes, interest strong

Chesapeake Energy's planned offering of 30-year convertibles was seen bid up by a point in the gray market on Tuesday amid robust demand for its latest issue.

"They're plus a point bid right now," a sellside convertible trader said ahead of the pricing. "Chesapeake is a serial convertible issuer, and I think it will be well received. Chesapeake is also in oil, and with oil going where it's going, that helps them as well."

Chesapeake priced the deal after the market closed and significantly upsized it to $1.2 billion from $500 million. The over-allotment option was increased to $180 million from $75 million.

The notes priced at the middle point of talk to yield 2.25% with an initial conversion premium of 50%. The notes were offered at par. Price talk was for a coupon of 2% to 2.5% and an initial conversion premium of 47.5% to 52.5%.

Banc of America Securities LLC, Barclays Capital, Credit Suisse, Goldman, Sachs & Co. and UBS Investment Bank are the bookrunners of the registered shelf offering.

Concurrent with the convertible deal, Chesapeake also issued $800 million of 10-year senior notes at par with a coupon of 7.25%.

Chesapeake, an Oklahoma City-based oil and natural gas producer, said it will use the proceeds to redeem its 7.75% senior notes due 2015, to temporarily repay a revolving bank loan and for general corporate purposes.

The cheapness of the deal mostly hinged on how investors perceived the volatility of the name, a convertible analyst said. The market appeared to mostly be using a volatility in the low 30% range, while the underwriter was rumored to be using something lower.

"There's so much straight paper from Chesapeake out there, and there's the CDSs, so everyone's got the spread pretty much in the same area," the analyst said. "So it really depends on the vol."

The analyst said the deal modeled fair at a volatility in the mid 20% range, so if the volatility was perceived to be in the 30s, it would look about 5% cheap for many investors.

The deal may have come cheap partly because Chesapeake is a "serial convertible issuer," the analyst speculated.

"They have a convertible for every sign of the zodiac," the analyst said. "Because the convertible universe is a small universe, if investors are holding a current paper and a better piece of paper comes out, everyone's going to want to get rid of the old one and get the new one."

The convertible likely will see strong interest from both hedge and outright investors, the analyst said.

"They've been very successful, they're just going up and up and up," the analyst said.

EnerSys seen fair to rich

EnerSys's planned $150 million offering of 30-year convertible senior notes remained quiet in the gray market on Tuesday as critics saw the deal as leaning on the rich side.

The offering, which is expected to price Wednesday, is talked to yield 3.125% to 3.625% with an initial conversion premium of 37.5% to 42.5%.

There is an over-allotment option for another $22.5 million.

Goldman, Sachs & Co. and Banc of America Securities LLC are the bookrunners.

There is a concurrent stock offering, with some stockholders planning to sell 3.4 million shares of EnerSys common stock, with a greenshoe of 340,000 additional shares.

The selling shareholders include Metalmark Capital LLC and other institutional investors. EnerSys will not receive any proceeds from the common stock offering.

Proceeds of the note offering are expected to be used to repay a portion of the $351.4 million currently outstanding under EnerSys' senior secured term loan B. Reading, Pa.-based EnerSys makes, markets and distributes reserve and motive power industrial batteries.

"Haven't heard of a thing in the gray market," a convertible trader said. "I'm not a fan of the pricing. I have it at about 97 and change to 101. I don't think that's attractive. In my book that's not attractive enough."

A sellside convertible analyst agreed that the deal did not look cheap, but said the company had attractive fundamentals.

"I think it's barely cheap at the midrange of pricing," the analyst said. "I think it's a good company, but I don't see it as cheap."

EnerSys's fortunes have been closely tied to the price of lead, which is a core raw material for the company, the analyst said.

"Lead is a major raw material for them, and it's just been so volatile," the analyst said. "Prices have moved from about $1,000 [per ton] in mid 2006 to almost $4,000 a year later, and now it's back to about $2,300. It's coming in quite a bit, so that's a positive."

The price of EnerSys common stock has increased quite a bit recently, and the convertibles could also been attractive for hedge investors, the analyst said.

"I think the stock, it just surged dramatically, and I think there's potential for the stock to come in in the near term," the analyst said. "So if you take a heavier hedge, this might be interesting."

ShengdaTech stays silent

ShengdaTech's planned $100 million offering of 10-year convertible senior notes also stayed out of sight in the gray market.

ShengdaTech plans to price the deal on Wednesday.

The notes are talked at a coupon of 4.5% to 5% with an initial conversion premium of 22.5% to 27.5%.

There is a greenshoe for an additional $15 million.

Oppenheimer & Co. is the bookrunner of the Rule 144A deal.

ShengdaTech expects to use about $56 million of the proceeds to expand its nano-precipitated calcium carbonate, or NPCC, production capacity, while the remaining proceeds will be allocated to potential coal-based chemical acquisitions, strategic investments and to fund working capital.

Based in Tai'an City, Shandong Province, China, the company makes and markets NPCC and coal-based chemicals. The products are used in various applications, including tires and polyvinyl chloride, or PVC, building materials.

The offering was difficult to assess because the company is not widely followed and information about its business and credit was not easily available, a sellsider said.

"It's tough to model," the sellsider said. "They don't have any debt right now, so they should be able to handle the issue, but their market cap is small."

The deal was likely to end up with outright investors who are familiar with the space because a lack of stock to borrow will likely keep hedge funds away, the sellsider added.

"Did I mention that's there's no borrow? So only the outrights care," the sellsider said. "It's people in the chemical industry or living in China."

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