Chesapeake Energy jumps; energy names gain; Albertson's higher, but Yellow drops

By Rebecca Melvin

Princeton, N.J., Sept. 9 - Chesapeake Energy Corp.'s new convertibles were well received Friday particularly by outright buyers, and the paper jumped in trade. But the one-day old issue from Dobson Communications Corp. lost a little of its enticement, slipping back to about par and a half after a higher debut Thursday.

Yellow Roadway Corp. convertibles fell after the trucking company reduced its third-quarter outlook, citing the affects of Hurricane Katrina as well as some operational changes.

Meanwhile it became apparent that the effects of Katrina are likely to be as far reaching as many initially feared, and its impact felt not only in likely spaces like energy and insurance, but in many not-so-expected places.

The convertibles of Cypress Semiconductor Corp., for example, extended a downturn Friday possibly due to an overdone positive run when investors eyed its solar operations as a play after Katrina's rout of the Gulf coast energy hub.

Convertible energy names like Halliburton Corp. and Amerada Hess Corp. were higher Friday even amid a lack of conviction on oil prices, which rose early but headed south for the rest of the session.

Also in play Friday, Albertson's Inc. saw its mandatories trade up as its stock gained amid continuing speculation about prospects for the retail food chain, which said it was for sale last week.

Warm reception boosts Chesapeake

Chesapeake's new convertible preferreds traded up more than 3 points to 103.25 bid, 103.50 offered early and remained steady at that level until the close, a syndicate source said.

The first trade out of the gate after pricing at par was at roughly 102, the source said.

Chesapeake, an Oklahoma City-based oil and natural gas company, saw its common stock gain as well, to close up 63 cents, or 1.9%, at $33.38.

"The new convertible had a lot of buyside interest from the outright community who are bullish on the commodity and natural gas and oil play," the syndicate source said. "The new paper is preferred to Chesapeake's older preferred even though it has roughly the same coupon because the new issue is priced closer to par and acts more like a convertible bond," the source said.

Chesapeake priced late Thursday an upsized $300 million of convertible preferreds to yield 4.5% with a 35% initial conversion premium. There was an over-allotment option for up to $45 million of additional shares.

The deal was originally expected to total $250 million of convertible preferreds, with an over-allotment of up to $37.5 million additional shares.

The cumulative convertible preferred stock, with a liquidation preference of $100 per share, was priced concurrently with a public offering of 8 million shares of its common stock, which priced at $32.72.

Joint bookrunners for the issue were Lehman Brothers, Banc of America Securities LLC, Credit Suisse First Boston, Morgan Stanley and Wachovia Securities.

The offering was made under the company's existing shelf registration.

The existing preferreds firmed on Friday in tandem with the new issue. The older $5 perpetual preferreds traded at 149.25 bid, 150 offered, up from 146.6 bid, 147.1 offered on Thursday, while the 4.125 perpetual preferreds were at 207.50 bid, 208.50 offered, but little of that issue trades, however.

Also on Friday, Fitch Ratings matched the new cumulative convertible preferred stock with its convertible preferred issues outstanding, assigning a B+ rating on the new offering.

As for Chesapeake's other debt, Fitch rates Chesapeake's senior unsecured debt at BB and its senior secured revolving credit facility and hedge facility at BBB-.

S&P's and Moody's rate the unsecured debt at BB-/Ba3, and the older convertible preferred at B-/B3.

The pricing of the two deals follows the company's announcement in early August that it had acquired or agreed to acquire $410 million of natural gas assets in transactions with four private companies.

The transactions were initially financed with borrowings under the company's bank credit facility with permanent financing to come from a combination of equity and/or long-term senior unsecured notes. In mid-August, the company issued $600 million in new 6.5% senior notes due 2017 to refinance borrowings under the bank credit facility.

The five-year Chesapeake CDS was recently quoted at about 124 basis points and its 10-year CDS at about 148 bps, Merrill Lynch analyst Tatyana Hube said in a research note on the new issue.

Katrina stymies Yellow Roadway

The convertibles of Yellow Roadway tumbled about 10 points as its stock dropped 7% after the trucking concern late Thursday cut its forecast for third-quarter profit to a range of $1.40 to $1.45 a share from a prior $1.60 to $1.65 a share.

The Overland Park, Kan.-based company said the devastation caused by Katrina accounted for about five cents a share of the reduced forecast. The remaining shortfall was due to implementation of new processes that hurt the company's productivity.

In response to one buyside source who said the Yellow convertible issues are small and aren't frequently traded, a second buysider said, "Well, they traded today."

The Yellow 5% convertibles traded at 138.5 and at 139.4, down from indications Thursday at 149.5. The Yellow 3.375% convertible traded at 124.50, compared to an indicated 132.1 on Thursday. Shares of Yellow closed down $3.20, or 7%, at $42.81.

Cypress extends move lower

The 1.25% convertibles of Cypress Semiconductor traded lower on Friday to about 121.5, as the equity sensitive bonds followed the lead of their underlying stock, which moved 1% lower. Earlier in the session, the shares had been higher and likewise the Cypress convertibles traded at 123. On Thursday, the 1.25s traded flat to lower at 122.75.

"It might be a little bit of profit taking," a Connecticut-based convertibles analyst said, adding that the bonds had moved up with its stock last week when investors looked at its Sun Power operations as a good play in the event of a prolonged spike in oil caused by Katrina.

Energy names higher despite oil

The 3.125% convertibles of Halliburton traded up Friday to 177 from 175 on Wednesday, as the "deep in the money" convertibles continue a steady upward move that began about mid August, a New York-based sellside trader said.

Other energy names were also stronger despite uncertainty in oil. Other convertible names including Schlumberger and Transocean were higher as were their underlying shares even though halfway through the session news on the tape had to reverse course to "stocks advance on oil price decline" from earlier reports that oil prices were rising.

Silicon Graphics moves on filing delay

The convertibles of Silicon Graphics traded after the distressed imaging technology company said late Thursday that it would delay filing its form 10-K for the fiscal year ended June 24.

Its 6.125% convertibles due 2011 traded at 76 on Friday, compared to a previous level of 73 bid, 83 offered, indicated by one New York-based sellside shop.

In July, Silicon Graphics received a notice of technical default on its 6.125% convertibles, but the company said at that time that it disagrees with the holder's claims and plans to challenge them if the holder accelerates maturity on the issue's $57 million outstanding principal amount.

The Mountain View, Calif.-based company said a holder alleges that the issue's indenture was breached in 2000 when Silicon Graphics sold assets relating to certain former Cray Research product lines to Tera Computer Co. without causing Tera to assume the indenture.

Tera Computer is now known as Cray Inc.

"The company is a mess financially. It's trying to restructure its credit lines to keep the lights on," said an analyst, who took another look at the convertibles on Friday after the company announced that it was delaying its 10-K filing.

The company also said its auditor, Ernst & Young, has advised it that its audit report is likely to contain a paragraph about Silicon Graphic's ability to continue as a going concern.

"They are going to get a qualified opinion about whether they can continue as a going concern," the analyst said.

Shares of Silicon Graphics dropped seven cents, or 8.4%, to $0.76.

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