Chesapeake Energy, Whiting notes drift lower as crude declines; new Knowles issue improves

By Stephanie N. Rotondo

Seattle, May 3 – Oil and gas-linked convertible bonds were getting hit on Tuesday as renewed concerns about a supply glut weighed on crude oil prices.

Chesapeake Energy Corp.’s 2.5% convertible notes due 2037 were seen trading just south of 83 by a market source. That was off 6 to 7 points from Friday trades.

The stock underlying the security meantime dropped 79 cents, or 11.99%, to $5.80.

Whiting Petroleum Corp. was another loser, as its 1.25% convertible notes due 2020 dipped a point to a 72 to 72.5 context.

The equity lost 50 cents, or 4.63%, ending at $10.29.

Domestic crude prices were down 2.46% on Tuesday, falling to 43.68 a barrel. That was in addition to the nearly 3% loss seen on Monday.

Investors are once again growing more concerned about oversupply, especially as Iraq reported that its shipments from its southern assets averaged 3.364 million barrels per day in April. That was up from an average of 3.286 million bpd seen in March.

Saudi Arabia said that its average production for the month was 10.15 million bpd. Chatter is that production could soon grow to near-record highs around 10.5 million bpd.

And, following through on its promise, Iran has ramped up its exports to almost 2 million bpd from just over 1 million bpd at the beginning of the year. The nation saw its oil sanctions lifted in January and has vowed to work its way back up to pre-production levels.

Knowles gains ground

Knowles Corp.’s $150 million of 3.25% convertible senior notes due 2021 – a deal priced Thursday – were ticking higher in trading.

The notes were pegged at 101.875 bid, 102.375 offered versus 101.25 bid, 101.5 offered previously.

The stock was also trending higher, closing up 16 cents, or 1.21%, to $13.42.

The notes came at the rich end of coupon talk, which had been set at 3.25% to 3.75%, and richer than premium talk of 27.5% to 32.5%.

Knowles increased the size from a planned $125 million.

The greenshoe was increased to $22.5 million from $18.75 million, according to a news release.

J.P. Morgan Securities LLC was the bookrunner, and BofA Merrill Lynch was joint lead manager.

The notes are non-callable for life with no puts, and they have takeover protection.

In connection with the pricing of the notes, Knowles entered into privately negotiated convertible note hedge and warrant transactions with initial purchasers of the bonds, or a call spread. These transactions will raise the effective conversion premium from the issuer’s perspective to 57.5%.

Proceeds will be used to reduce borrowings outstanding under Knowles’ term loan facility, with a portion earmarked to pay the cost of the call spread.

Itasca, Ill.-based Knowles is a supplier of advanced micro-acoustic, specialty components and human interface services.

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