Intel, Amgen under pressure; Inco rises; Chesapeake launches mandatories offering

By Rebecca Melvin

Princeton, N.J., June 26 - The convertible bond market felt generally weaker on stronger volume Monday, as several large, liquid issues came under pressure including Intel Corp. and Amgen Corp., market source said.

Chesapeake Energy Corp. launched a new convertible offering ahead of the open, leaving many market observers wondering how investor appetite would hold up given that the natural gas company already has six existing convertible issues, of which four are for significant amounts outstanding.

If the proposed $500 million Chesapeake Energy mandatory is successfully priced, Chesapeake will have a total of $2.746 billion of convertibles in the market, or 1.04% of the Merrill Lynch convertible bond index, according to an analyst at that investment bank.

The convertibles of Intel started to "come in" after holding up last week, a New York-based sellside trader said. He put the giant chipmaker's 2.95% convertibles lower by about 0.75 point. Its shares closed higher by 1.56%.

Amgen convertibles were also weaker, with the 0.125% and 0.375% convertibles heard in trade lower by as much as half a point. The Amgen 0.125% convertible traded early at 93.375 versus a share price of $64.93. And Best Buy Co. Inc.'s convertibles were lower by about 0.75 point, a New York-based sellside trader said.

"Bonds felt a little weaker across the board. Volatility is down, and high yield is under pressure, so the entire space is feeling it," the sellsider said.

"If there's another rate hike, it's going to hurt bonds a little; but I think that's pricing in already. More importantly is where Treasuries go from there," he said.

The trader was referring to the possibility of the Federal Reserve increasing interest rates later this week.

Meanwhile, the convertible floaters of Wyeth were seen mostly unchanged in trade after news that the company's pharmaceuticals division submitted two New Drug Applications to regulators for therapies related to women's health.

The 0% convertibles of Cephalon Corp. traded on news of positive results from its phase 2 clinical trial for a genetically based asthma treatment. And Cubist Pharmaceuticals Inc., which announced the redemption of its 5.5% convertibles earlier this month, "came out of the woodwork," a New York sellsider said.

On merger news Monday, Inco convertible issues rose after Phelps Dodge Corp. said it had agreed to buy the Canadian nickel mining company and its Canadian sister Falconbridge Ltd.

Inco's 0% convertibles due 2021 gained about 15 points outright to trade at 170.25, while the Inco 1% convertibles due 2023 jumped even higher, but settled by the session's close at a 15-point gain as well.

Chesapeake to issue mandatories

Serial-convertible issuer Chesapeake Energy has struck again: this time with a planned $500 million of mandatory convertible preferred stock.

The Oklahoma City-based natural gas company has five existing issues of preferred stock, but no mandatories at this time, market sources said. Two of the preferred issues are tiny, $3 million pieces of old convertible preferreds. But the others include $324 million of 4.5% preferreds, $620 million of 5% preferreds and $590 million of another series of 5% preferreds.

In addition, the company has $712 million of 2.75% convertible bonds outstanding, according to a Merrill Lynch analyst.

The idea of the mandatory convertible might be well received, sources said, and possibly was intended as a way to prevent "buyer fatigue."

A sellsider in New York said, "Investors might be full up on the name." Another said, "They issue a convert every few months."

But a West Coast buyside analyst said investors with a slightly different view of the stock might be persuaded by a mandatory as opposed to a perpetual preferred.

The deal comes on the heels of a better bid in the energy space on Friday when Anadarko Petroleum Corp. announced plans to takeover Kerr-McGee Corp. and Western Gas Resources Inc., a New York-based buyside analyst commented.

Chesapeake values cheap

If the Chesapeake Energy deal prices on the cheap end, there could be interest, most agreed. Although there was no gray market reported on the new deal, neither were there trades reported of the existing perpetual preferreds. But the 2.75% convertible bonds changed hands at 101.125, which was down from previous levels by about 1.25 point to 1.50 point.

Using a credit spread of Treasuries plus 300 basis points and a volatility of 33%, one New York-based analyst said the deal looked 1.5% cheap at the midpoint of talk. He said his credit spread was based on the fact that it's just three-year paper.

A sellside analyst based in Connecticut thought that Treasuries plus 350 bps was more in line. He said that even using the inputs of the initial analyst, he saw the deal coming only 0.2% cheap at the midpoint of talk.

The stock was down 2.5% to 3% early in the session; but by the close it had recovered some ground and was down by 1.9%, or 57 cents, at $29.91.

The new mandatory was talked to yield 5.875% to 6.375% with an initial conversion premium of 20% to 25%.

Concurrently with the deal, Chesapeake plans to offer 20 million shares of common stock and $500 million of seven-year senior notes. Proceeds of the three deals, which total in the neighborhood of $1.6 billion, are intended to fund its purchase of Barnett Shale for $932 million.

The package of financing could be "somewhat" bondholder friendly due to the mandatory convertible feature of the preferred stock, which could result in partial equity treatment from the rating agencies, wrote Gimme Credit, a provider of independent research on corporate bonds.

"Chesapeake, although firmly in 4B territory, has developed a portfolio of mostly gas property now generating prodigious amounts of cash flow. A pause in a fairly aggressive acquisition campaign could result in strong free cash flow and debt reduction, leading to probable ratings upgrades. Hedging program assures good margins from recent acquisitions," Gimme Credit wrote.

The three-year mandatories are expected to price Tuesday after the close. Goldman, Sachs & Co., Banc of America Securities LLC, Credit Suisse, Lehman Brothers Inc. and UBS Securities LLC will act as joint book-running managers, with Goldman having the physical books.

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