Convertibles mostly quiet before long weekend; Chesapeake, energy lower; GM down in active trade

By Rebecca Melvin

New York, July 3 - The convertible bond market quieted Thursday ahead of the Independence Day holiday weekend, with most market players watching things like oil prices and other economic data, if not the clock, but there was little activity, sources said.

"There are bids out there, but no offers. I was trying to buy something, and I can't," a New York-based sellside trader said.

"Everybody's just watching the clock. Maybe the Morgan Stanley guy, who predicted $150 oil by July 4, is watching oil, but everyone else is watching the clock," he added.

The trader was referring to the investment firm's prediction in early June that the price of crude oil would reach $150 per barrel by this week.

In fact, oil prices surged to nearly $146 per barrel early Thursday, but then eased after the European Central Bank signaled that it would not hike rates further and a report showed U.S. unemployment continued to climb.

The ECB's policy direction followed an expected quarter-point rate hike to 4.25%, which was aimed at curbing inflation in the 15-nation euro zone. Raising the rate was expected to put pressure on the U.S. Federal Reserve regarding its 2% benchmark rate, but most convertibles sources saw the Fed standing pat for the rest of the year.

"I don't think the Fed will raise rates before the end of the year. But I'm bearish on things. It's going to be a tough couple of months," a New York-based buyside source said.

Convertible energy names were lower Thursday, mostly in line with their underlying stocks, but a couple of Chesapeake Energy Corp. convertibles dropped by 8 points and 10 points each, outstripping a 4% fall in their underlying shares.

Transocean Inc.'s convertible bond trio all closed off by about a point as their shares shed 2.3%. Nabors Industries Ltd.'s 0.94% convertibles - the only ones left after all the 0% notes were called earlier this week - ended down 1.5 point.

Goodrich Petroleum Corp. convertible notes fell about 5 points on a 6.1 % decline in their shares.

Financials were extremely quiet, with nothing trading, sources said, although their prices were indicated steady or higher, with Lehman Brothers Holdings Inc. a notable gainer as shares of the New York investment bank enjoyed a third consecutive up day.

The convertible bonds of General Motors Corp. extended losses or were unchanged even as the shares of the ailing automaker managed to halt a multi-day rout, ending on the upside.

In the primary market, all was quiet ahead of the three-day weekend, and not much in new issuance was expected in the post-holiday week either.

"I think it will be a slow week, but you never can tell," a New York-based syndicate source said.

New issuance backlog is slow

The backlog in convertible new issuance is slow in general, a syndicate source said. The source's firm may have one new deal in the week after July 4 or it may be the following week before it's priced.

"They tend to crop up all of a sudden. People are keeping an eye on the market. There are still financials out that there that need finance, and there are non-financials out there that need the finance, but they can afford to wait," the source said.

Nevertheless upcoming events like the earnings announcement season may spur some new issuance, sources said.

A sellsider said while the current environment for convertibles is fairly strong, with high volatility expected to continue, the market does need new issuance to spur momentum.

Of trading activity in general this week, a West Coast-based sellsider commented: "It's rather quiet; but it's so bizarre, the Dow is up, the Dow is down in spite of oil going up."

Chesapeake, energy sector pulls back

The Chesapeake 2.5% convertibles due May 2037 (Cusip: 165167BZ9) closed Thursday at 178.75, versus a share price of $66.78, compared to 187.1, versus a share price of $69.40 on Wednesday.

The Chesapeake 2.75% convertibles due 2035 (Cusip: 165167BW6) closed at 178.75 Thursday, compared to 189 on Wednesday.

Names in natural gas led losses on Thursday and Chesapeake whose shares (NYSE: CHK) hit an all-time high of $74 a share in the previous session, fell back to $66.78.

The Oklahoma City based energy company had announced Wednesday a $1.7 billion sale of Haynesville Shale leases to Plains Exploration & Production Co.

Meanwhile, Goodrich Petroleum has been getting a look from convertibles players recently.

The Goodrich Petroleum 3.25% convertibles senior notes due 2026 were indicated to close at 149.8, versus a stock price of $73.30, compared to an indicated close of 145 versus a stock price of $78.02 on Wednesday.

Shares of the Houston-based independent oil and gas company (NYSE: GDP) closed down $4.72, or 6.1%.

Earlier in the week when the stock was still rising, a convertibles source said it's never too late with a convertible, and that the Goodrich stock could easily retrace a large part of its catapulting move.

"If you were in initially, and you didn't delta up as quickly as you should have, you scored. You need to lighten up on the way down. The stock has quintupled. It was in the teens and it closed over $80," the source said Tuesday.

"It can retrace back to 50. China is going to slow down," he said on Friday.

Nabor's 0.94% convertibles were seen at 122, versus a share price of $48.71, compared to 124.66 versus a share price of $49.11 on Wednesday.

Shares of the Bermuda-based Nabors (NYSE: NBR) closed down 60 vrnyd, ot 1.2%%.

Transocean's 1.625% series A convertible due 2037 was a point lower outright at 109.326 versus a stock price of $142.91 on Thursday, compared to 110 versus a share price of $146.05 on Wednesday.

The Transocean 1.5% series B convertible due 2037 was also a point lower, and also at 109, but 109.25 and the Transocean 1.5% series C convertible due 2037 was seen at 109.846, compared to nearly 111 on Wednesday.

Transocean's common stock (NYSE: RIG) closed at $142.91, lower by 2.2%, or $3.14.

Financials quiet, Lehman indicated better

Lehman Brothers' 7.25% series P convertible preferred stock, the older of two newish issues, closed at 865.7 versus $22.85 on Thursday, compared with 840.0 versus a stock price of $22.25 on Tuesday.

The Lehman Brothers' 8.75% convertible preferreds were at 886.6, compared to $841.23 on Wednesday.

Shares of the New York investment bank (NYSE: LEH) closed up 49 cents, or 2.2%.

One source reported an increase in the amount of people that are looking at the financials that are out there in convertibles and seeing a good entry point. Top tier names include Lehman as well as issuers like Bank of America Corp. and Wachovia Corp. The lower tier includes names like Huntington Bancshares Inc., KeyCorp. and Fifth Third Bancorp.

"I'm not seeing that," a Boston-based buysider disagreed, adding that all the financials are interesting, but pointing out that with financials: "It's high risk, high reward."

GM bonds mostly lower

The GM 6.25% convertibles due 2033 (NYSE: GPM) closed down 22 cents, or 1.8%, at $12.12 in heavy volume, versus a closing stock price of $10.12, compared with $12.32 versus $9.98 to close Wednesday.

In slimmer volume but tallying a slightly larger decline, the GM 5.25% convertibles due 2032 (NYSE: GBM) dropped 28 cents, or 2.13%, to $12.85, compared with $13.13 on Wednesday.

The shorter dated GM 1.5% convertibles due June 2009 (NYSE: GRM) closed unchanged at $21.00, in extremely light volume.

Shares of the Detroit-based carmaker (NYSE: GM) added 14 cents, or 1.4%, to $10.12%.

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