Chesapeake Energy preferreds, bonds mixed after dividend suspended to buy back debt

By Rebecca Melvin

New York, Jan. 22 – Chesapeake Energy Corp.’s convertibles were mixed on Friday after the Oklahoma City-based natural gas producer said it suspended dividend payments on each series of its convertible preferred stock to save money to buy back debt.

Chesapeake will use the savings of about $170 million per year “to purchase debt at significant discounts in the near term,” according to a company news release.

Traders anticipated the company would take measures in the near term to address its debt, so the convertibles were not actively traded nor were they indicated sharply lower or higher.

The stock borrow behind Tesla Motors Inc.’s convertibles eased, and those bonds improved by about a point on swap after being constrained on Thursday, a New York-based trader said.

Cobalt International Energy Inc.’s 3.125% convertibles due 2024 traded up to 39 bid, 40 offered from about 48 against higher shares for the Houston-based energy exploration & production company on Friday as oil prices surged.

West Texas Intermediate crude oil for March delivery jumped $2.61, or 9%, to $32.14 per barrel.

Equities also gained ground in Friday’s session, which was the strongest one of the year to date.

The S&P 500 stock index, which fell to 2014 lows earlier in the week, surged more than 2% on Friday to end the week up 1.4% at 1,906.90. The Dow Jones industrial average climbed 210.83 points, or 1.3%, to 16,093.51 and the Nasdaq stock market added 119.12 points, or 2.7%, to 4,591.18.

Barclays composite index down

Although markets improved on Friday, overall it was “another negative week” for convertibles, Barclays convertibles analysts said in their weekly convertibles report published on Friday.

According to the report, Barclays’ U.S. convertibles index was down another 2.5% this past week against underlying equities that lost 3.9% from Jan. 15 to Jan. 21.

By way of comparison, the Russell 2000 index of small cap stocks was down 2.75% for the same period while the S&P 500 stock index lost 2.73%, high-yield spreads widened 53 basis points to 776 bps, and the Barclays high-yield index was down 1.98%, while investment-grade index widened 15 bps to 192 bps and five-year and seven-year Treasuries rallied about 0.5%, all as of late Thursday.

There were improvements as of Friday, and the CBOE Volatility Index, for example, came down a few points to about 22 from more than 26 on Thursday.

For the year to date, the Barclays convertible composite index is down 6.8%, compared to the convertibles’ underlying shares that are down 13.6%, Barclays said.

The Barclays report noted that there was no new issuance for the year to date but there have been $2.9 billion in redemptions already.

According to the report. Whiting Petroleum Corp. was among those bonds that were notably weak. The Whiting 1.25% convertibles due 2020 are languishing in the mid to upper 40s and lost 13.9 points of valuation against the underlying shares that traded down only 2% over the same period.

Horsehead Holding Corp.’s 3.8% convertibles due 2017, for which the company missed an interest payment this past week, also sank, losing 17 points in valuation against a 26% drop in the underlying shares, according to Barclays. The bonds traded at 10 and 11.

On the upside, Xilinx Inc.’s equity-sensitive 2.625% convertibles gained 0.8 point in valuation against shares that rose 11.6%. Sequenom Inc., Electronic Arts Inc., Microchip Technology Inc. and Pacira Pharmaceuticals Inc. were also movers to the upside.

Chesapeake mixed

Chesapeake’s two series of 5.75% convertible preferreds were quoted lower at 0.5 point to 2.5 points over parity from more than 2 points to 4 points over parity previously, a New York-based trader said.

The preferreds were only trading in very small amounts and seen printing at $185, $165 and $180, a New York-based trader said.

The Chesapeake shorter-dated 2.5% convertible bonds, which have a put/call in 1.5 years, were quoted higher and closed Thursday at 52.5 bid, 53 offered from about 50 previously.

Chesapeake shares were up in the early going but closed off 4 cents, or 1%, at $3.51.

“I would say that the news was received as a positive but there was less of a reaction because it was kind of expected,” the trader said.

There had been a lot of speculation at the end of last year regarding how Chesapeake would handle upcoming maturities, and some thought the energy company might do a pre-packaged bankruptcy filing.

The dividend suspension is effective immediately and does not constitute an event of default under the company’s revolving credit facility or bond indenture.

One trader said the dividend suspension and debt buyback takes care of a portion of Chesapeake’s trouble, but how much it still needs to do will depend on the oil situation.

Mentioned in this article:

Chesapeake Energy Corp. NYSE: CHK

Cobalt International Energy Inc. NYSE: CIE

Electronic Arts Inc. NYSE: EA

Horsehead Holding Inc. Nasdaq: ZINC

Microchip Technology Inc. Nasdaq: MCHP

Pacira Pharmaceuticals Inc. Nasdaq: PCRX

Sequenom Inc. Nasdaq: SQNM

Tesla Motors Inc. Nasdaq: TSLA

Whiting Petroleum Corp. NYSE: WLL

Xilinx Inc. Nasdaq: XLNX

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