Chesapeake convertibles move up on debt-for-equity news; Okta contracts; Harmonic on tap

By Rebecca Melvin

New York, Sept. 10 – Chesapeake Energy Corp.’s convertibles were active early Tuesday after the Oklahoma City-based oil and gas company announced it is swapping notes and preferreds for stock.

The Chesapeake 5.5% convertibles jumped up and were trading actively, a New York-based market source said. The bonds were last at 69.5 compared to 65 to 65.5 on Monday. Chesapeake shares were down.

Chesapeake agreed to issue 250,721,554 shares in exchange for about $40 million of its 5.75% convertible preferred stock, $112.7 million of its 4.875% senior notes due 2022, $129.3 million of its 5.75% senior notes due 2023, $155.8 million of its 5.5% convertible senior notes due 2026 and about $150 million of its 8% senior notes due 2027.

Elsewhere, convertible players noted mostly quiet trade and lower pricing on much of the newer paper that priced last week.

The Okta Inc. 0.125% notes due 2025, of which $1 billion priced on Sept. 4, “got crushed” on Monday with a stock drop of 10% to 11%. The bonds moved down outright and contracted on swap by about 0.5 point, a New York-based trader said.

They were quoted at 93.75 bid 94.25 offered in the early going with the stock around $109.11.

The new Zillow Group Inc. convertibles were also down outright, but they were said to have expanded about 0.25 point on the way down. Insulet Corp.’s 0.375% convertibles due 2026, which debuted in the market last week, slipped to a 94 handle in the early going with the stock down.

But a retired portfolio manager and strategist focused on the opportunities that such cheapening creates, said, “the new issues have gotten off to a slow start,” but “convertibles specialists will be instantly aware of such situations.”

The low coupons of the new paper were noted as part of the cause. One source said the coupons are historically low. And in the case of Okta, a second source said that with “the little coupon, they are going to move down for a while until they get to a level where they will hold.”

There was a new, smaller deal that launched late Tuesday. San Jose, Calif.-based video infrastructure products maker Harmonic Inc. was pricing $105 million of 2% five-year convertible senior with an initial conversion premium of 30%, according to market sources on Tuesday.

Final terms were expected to be set late Tuesday.

The deal has an additional $10.5 million greenshoe.

Barclays is bookrunner of the Rule 144A notes.

The notes mature Sept. 1, 2024 and will be convertibles into cash, shares of Harmonic stock or a combination of both at Harmonic’s election.

The proceeds of the offering will be used repurchase a portion of the company’s outstanding 4% convertible notes due 2020.

Harmonic expects that holders of the 2020 notes that sell their notes may enter into or unwind various derivatives with respect to Harmonic's common stock and/or purchase or sell shares of Harmonic's common stock in the market to hedge their exposure in connection with these transactions.

The holders are expected to employ a convertible arbitrage strategy with respect to the 2020 notes and have a short position with respect to Harmonic's common stock.

Mentioned in this article:

Chesapeake Energy Corp. NYSE: CHK

Insulet Inc. Nasdaq: PODD

Harmonic Inc. Nasdaq: HLIT

Okta Inc. Nasdaq: OKTA

Zillow Group Inc. Nasdaq: ZG

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