Goodrich down again as solvency concerns mount; Spansion jumps; planned Quidel looks cheap

By Rebecca Melvin

New York, Dec. 2 – Goodrich Petroleum Corp.’s 5% convertibles due 2032 extended losses Tuesday as shares of the struggling Houston-based oil and gas exploration and development company continued to plunge amid growing expectations that the global oil market may not return to normalcy in the short term, market sources said.

The Goodrich convertibles slipped another point to 1.5 points to 54 following a 10-point slide on Monday. Goodrich shares fell another 16% on top of a 22% plunge on Monday.

“There are solvency issues with GDP and Sanchez, which is not a convert issuer,” a New York-based trader said. “There are going to be some bankruptcies among the weaker drillers and peripheral players, as oil is going to be weak for a while; it’s not going to snap back.”

Other names in focus were Energy XXI Ltd., Emerald Oil Inc., Cobalt International Energy Inc. and BPZ Resources Inc.

BofA Merrill Lynch downgraded the energy sector to “market weight” on Tuesday on the heels of last week’s OPEC decision to leave its oil production target at 30 million barrels per day.

The decision not to cut is expected to create over supply, and Bank of America said it now expects West Texas Intermediate crude oil to drop to $50 per barrel in the next month.

Elsewhere, Spansion Inc.’s 2% convertibles due 2020 jumped about 30 points to 202 after news that the Sunnyvale, Calif.-based semiconductor device company is merging with fellow memory chip maker Cypress Semiconductor Corp. in a $4 billion all-stock deal.

Also DDR Corp.’s 1.75% convertibles due 2040 traded actively at slightly over parity. An outright player bought the REIT paper from swap sellers, a trader said. The DDR bonds printed at 123.625, according to Trace data.

“It’s a pretty cheap bond,” the trader said.

Market players also eyed Quidel Corp.’s planned $150 million of six-year convertibles ahead of final terms seen being fixed after the market close.

“They should be fine. The deal should price, and they should trade OK,” a New York-based trader said of the notes being priced by the San Diego, Calif.-based maker of diagnostic tests for health care providers.

The convertibles market remained weak overall. Market players were adding to positions that they like and trimming those that they don’t like ahead of year-end.

NXP Semiconductors NV, which priced $1 billion of 1% convertibles last week, remained a beneficiary of recent year-end trades as investors look to add to holdings of these senior notes, which have expanded about 1.75 points on a dollar-neutral, or hedged, basis so far, a New York-based source said.

The NXP convertibles were “active and better,” the source said, quoting the notes at 101.125, which was a little higher with the stock of the Dutch-based semiconductor components company lower.

NXP priced its deal last Monday at the cheap end of talked terms. The notes trade on a delta of 61%, the source said.

“People are adding to the names that they like,” the source said.

Goodrich extends slide

Goodrich Petroleum’s 5% convertibles traded down to 54 and 55 and were called 55.5 to 56 late Tuesday, after trading down to 60 on Monday. The bonds also traded at 55 on Monday, a source said.

Goodrich shares fell to $3.95, which was down another 78 cents, or 16.5%, down from $4.73 on Monday, which represented a $1.32, or 22%, slide.

Expectations for a prolonged period of weakness in oil markets has rattled investors.

“Large sellside banks are changing their tune. They were caught off guard by oil. They all feel that oil is not returning to normalcy anytime soon, and that it is going to meander in the mid 60s for a while, creating more pressure on the sellside,” a New York-based trader said.

A month ago, the Goodrich Petroleum convertibles traded at 75.

Oil and gas convertibles remained under pressure and were a central focus of trade again amid oversupply fears prompted by OPEC’s decision to keep oil output steady to prevent U.S. competitors from gaining market share.

Oil prices resumed their downward trajectory on Tuesday after bouncing some on Monday. Oil company shares mostly stabilized or even increased as oil ended down some 2%.

Although shares were mostly better against lower oil, Houston-based oil and gas producer Cobalt International saw its convertibles continue to languish in the mid 60 range.

Cobalt’s 2.625% convertibles were quoted at 64.5 to 65, which was flat to lower from Monday, and the Cobalt 3.125% convertibles, which are longer dated than the 2.625% convertibles, were a little higher at 66.5 to 67.

Cobalt shares ended up a dime, or 1%, at $8.94.

Emerald Oil’s 2% convertibles due 2019 fluctuated amid wavering shares. The bonds were seen trading anywhere from 51 to 56 as shares moved up from early lows only to trade down again late Tuesday. On Monday, the Emerald Oil convertibles were offered at 57 but not trading.

Emerald Oil shares ended up 4 cents, or 2.7%, at $1.51 on Tuesday.

Emerald was “all over the place,” a Connecticut-based trader said.

Spansion jumps on merger

Spansion’s convertibles were quoted late at 202.75, which was up from about 170 to 171 on Monday. The high delta bond trades on a delta of 85% to 90% delta.

“I can’t imagine them doing much better [than shares] from a dollar-neutral perspective,” a New York-based trader said.

Spansion shares jumped $5.01, or 22%, to $27.86.

The Cypress-Spansion tie up was expected to close in the first half of next year, and if either company backs out, it will have to pay the other a termination fee of $60 million and/or reimburse the other company as much as $5 million in expenses.

Quidel looks cheap

Using a credit spread of 500 basis points over Libor and 30% vol., the Quidel convertibles deal was seen worth 103.4 at the midpoint of talk, a Connecticut-based trader said.

Another trader said the deal looked cheap using a credit spread of 500 bps and 30% vol., and that stock borrow looked good.

A third source said that given implied vol. of the recent past, he wouldn’t go over 30% on vol.

Quidel planned to price $150 million of six-year convertible senior notes after the market close on Tuesday.

Shares of the provider of diagnostic testing and virology assays solutions fell $3.64, or 13%, to $23.75 after it launched the offering late Monday.

The deal was talked at a yield of 2.75% to 3.25% and an initial conversion premium of 32.5% to 37.5%.

The notes were being sold via joint bookrunners BofA Merrill Lynch and J.P. Morgan Securities LLC.

The securities are non-callable and have contingent conversion if shares exceed 130% of the conversion price for 20 out of 30 trading days. There is takeover protection.

Proceeds will be used for working capital and other general corporate purposes, which may include acquisitions of products, technologies or businesses, and opportunistic common stock repurchases.

Mentioned in this article:

BPZ Resources Inc. NYSE: BPZ

Cobalt International Energy Inc. NYSE: CIE

DDR Corp. NYSE: DDR

Emerald Oil Inc. NYSE: EOX

Energy XXI Inc. Nasdaq: EXXI

Goodrich Petroleum Corp. NYSE: GDP

NXP Semiconductors NV Nasdaq: NXPI

Spansion Inc. Nasdaq: CODE

Quidel Corp. Nasdaq: QDEL

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