Chesapeake Energy, Freeport both below par in gray market; Sunterra rises to 105, then slips

By Ronda Fears

Nashville, March 24 - Convertible players tended to sit on the sidelines Wednesday and even the pending new deals did not see a lot of action. Gray market bids on the Chesapeake Energy Corp. and Freeport McMoRan Copper & Gold Inc. deals were underwater, buyside traders said, with no offers on the table.

Avatar Holdings Inc. also was at bat after the close, but it was not seen in the when-issued market.

With indicative terms running expensive for the most part, buyside sources said they just aren't very enthusiastic about the deals. Yet orders appear to be running high, syndicate sources are saying, as new paper demand is still very healthy.

Meanwhile, Sunterra Corp. priced its small $75 million deal around the midpoint of guidance, at 3.75%, up 30.5%, and it zoomed to 105 before softening with the broader market to close out the day at 104.125 bid, 104.625 offered.

Elsewhere in the secondary market, dealers said most of the action was in high-yield names where spreads have widened. That space grew to include Toys 'R' Us Inc. as Moody's downgraded it to junk, but traders said there were buyers on the weakness.

A couple of high-yield gaming names like Wynn Resorts Ltd. and WMS Industries Inc. were finding bids, along with high-grade names like International Game Technology Inc. and GTech Holdings Corp. on several positive headlines on the tape. But traders said there weren't many holders willing to sell.

Chesapeake bid at $995

Chesapeake Energy's $255 million of perpetual convertible preferreds, with a par of $1,000, were bid at $995, or 5 points below issue price, at the close, a buyside trader said. Another buyside trader noted, though, that he did not see any trades on the paper in the gray market.

"We have an order in on this and we like the name, it's just too expensive even at par," one of the traders said.

The new Chesapeake Energy convert is talked to yield 3.625% to 4.125% with a 37.5% to 42.5% initial conversion premium.

Merrill Lynch analysts put the new Chesapeake convertible 2.75% rich at the middle of price talk, using a credit spread of 385 basis points and a 30% stock volatility. Accounting for the tight borrow on the stock, the analysts anticipate the issue will be priced at the cheap end of guidance.

On Wednesday, Chesapeake Energy shares closed down 42 cents, or 3.35%, to $12.11. The Oklahoma City-based independent oil and gas producer's other two converts each lost 1 to 2 points on the day.

Freeport bid at $998.75

Freeport McMoRan's $1 billion of perpetual convertible preferreds, also with a par of $1,000, around noon were bid at 0.75 point below issue price and that weakened as the session wore on. At around the market close, a buyside trader said the issue was bid at $998.75, or 1.25 points below issue price.

The new Freeport McMoRan convertible is talked to yield 5.0% to 5.5% with a 40% to 45% initial conversion premium.

When the new Freeport McMoRan convert emerged Monday it was seen bid 0.5 point over issue price with an offer at 2.5 points over, but by Monday's close it settled at issue and hovered there.

A holder of Freeport McMoRan's existing convertibles - its 7% senior notes due 2011 - suggested there was little motivation to buy into the new issue. He noted that after the convertible preferred offering, with Rio Tinto plc shares gone, Freeport McMoRan fundamentals improve, so there could be some improvement in credit, but added that the boost seems priced in already.

"It seems like the existing 7s look better - better credit as senior notes, less premium, less rho and more vega," the buyside source said.

"I do not know why you want to go out so far in maturity in a credit - I think [the new convertible preferred] will be rated CCC - when any credit below BB has been widening. The bonds are a B-, but trade like a BB.

The new issue "models rich out of the chute," he said. "Panning for gold myself could be better. At least I would be outside."

Sellside analysts put the new Freeport McMoRan convert from about 1% cheap to as much as 2% rich, at the midpoint of price talk.

Lehman Brother analysts put it 1.2% cheap, using a credit spread of 500 basis points over Treasuries and 40% volatility. Deutsche Bank Securities analysts put it 1% rich, using a credit spread of 450 bps over Libor and 38% volatility. Another sellside market source put it about 2% rich, using a credit spread of 400 bps over Libor and 37% volatility.

Akamai drops as tender flops

Akamai Technologies Inc. plunged again Wednesday, after the company announced that the tender offer for its 5.5% convertible only received about a third of the participation sought - even after boosting the price range for the modified dutch auction and extending the deadline.

The Akamai 1% convertible, sold in early December, dropped another 2 points outright to 106 bid, 107 offered, which the underlying stock lost 38 cents, or 3%, to close at $12.30.

Akamai's securities had fallen Tuesday on the resignation of its chief operating officer.

Earlier this month, the Cambridge, Ma.-based e-business software firm revealed that the tender for up to $101 million of its old 5.5% converts was not going well. So, the offer price ranges were bumped up to pay between 100 to 101.25 from the original offer of 100.5 and the deadline was extended.

The offer expired at 9 a.m. ET Wednesday, and Akamai said only $39.88 million was tendered, for a purchase price of 101.25 per note.

Merrill Lynch convertible analyst Tatyana Hube had recommended holders tender in the modified dutch auction at par to slightly higher, as the value of the bonds is significantly less aside from the offer - more like 87.25, using a credit spread of 800 bps, to 89.25, using a 900 bps spread, without any improvement in the credit.

Several sellside convert traders were stumped as to why the tender flopped, but noted there was little flow in the 5.5s on Wednesday. Hube also was at a loss to understand why no more of the issue was tendered.

"We still hold that our recommendation was sound in light of our analysis, and anyone who followed it would have had all their bonds accepted at 101.25, which is above where [the 5.5% convert] has been trading lately," Hube said.

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