Convertibles weak as oil roils markets; Chesapeake down again; Harmonic looks cheap

By Rebecca Melvin

New York, Dec. 8 – U.S. convertibles remained weak on Tuesday, with prices on many names drifting lower on low volume as volatility continued to rock the crude-oil and other commodity markets, dragging equities lower.

“Everybody was looking at their energy loss, and bids were drifting lower, but no one was ready to buy,” a New York-based trader said of the convertibles market.

For the most part, paper was offered just above Monday’s bid levels, and bids eased about 0.25 point to 0.5 point, he said.

Chesapeake Energy Corp. was weaker again, although not as actively traded as on Monday. The Chesapeake convertible preferreds slipped into the teens from the 20s as speculation about potential debt restructuring plans began to grow.

Whiting Petroleum Corp.’s convertible bonds also extended losses after a jolt lower on Monday, and Cheniere Energy Inc. began to trade down even as shares of the LNG company traded better.

Elsewhere, Teva Pharmaceutical Industries Ltd.’s 7% mandatory convertibles, which debuted last week, were still a little heavy but holding their own after contracting on a swap basis by about 1.5 points on their first day of trading.

The Petach Tikva, Israel-based pharmaceutical company priced $3.375 billion of the preferred shares and that much again of American Depositary Shares.

The Teva 7% mandatories were quoted at 102 bid, 102.375 offered with the shares at about $66.00 on Tuesday. That was better on an outright basis, but about even with where they had been as of Thursday when they were quoted 100.125 bid, 100.375 offered versus a share price of $64.00, or down 1.5 points.

Market players were also watching Navistar International Corp., which “took it on the chin” after running higher in recent weeks.

The Navistar 4.5% convertibles due 2018 were seen trading in the mid 60s. The bonds had gotten back up to 73 bid, 75 offered in previous action.

“They had a decent run, but now they are back down,” a trader said of the Navistar convertibles.

Overall, the market was drifting lower, but “there was not a ton [of trading] to be honest,” a trader said.

In the primary market, Harmonic Inc.’s planned offering of $125 million of five-year convertible senior notes was seen as cheap based on valuation, a market source said early Tuesday, but he raised some red flags that could spell some rough sledding for the deal.

In the broader markets, equities were down after a jumpy open in which the Dow Jones industrial average dropped more than 200 points right off the bat. The index closed down 162.51 points, or 0.9%.

Crude oil was volatile, with West Texas Intermediate crude for January delivery dropping another 2% in the early going to below $37.00 per barrel. But WTI settled down only 0.2% at $37.51 per barrel at the close.

The S&P 500 stock index was down 13.48 points, or 0.7%, at 2,063.59, and the Nasdaq Composite was down only 3.6 points, or 0.07%, at 5,098.24 at the close.

The yield on the 10-year U.S. Treasury note was up about 0.2% at 2.229% at late morning Tuesday.

Chesapeake down again

Chesapeake’s shorter-dated 2.5% convertibles, with a 1.5-year put/call, fell to about 49 on Tuesday from 55 on Monday, and from 61 to 62 on Friday.

The Chesapeake convertible preferreds were in the teens after having dropped into the 20s on Monday.

Chesapeake shares closed higher by 13 cents, or 3%, to $4.40.

“Everyone is chomping at the bit on the bonds and preferreds,” a New York-based trader said of Chesapeake convertibles.

There was not a ton of volume, but the paper is contracting, he said, as speculation about when a pre-packaged bankruptcy filing might materialize.

“They need to raise money, and they tried to do a second lien and they couldn’t, so they will probably do a pre-pack, which should be pretty easy,” a trader said.

Harmonic looks cheap

Harmonic’s $125 million of five-year convertible senior notes expected to price after the market close were seen about 1.375 points cheap at the midpoint of price talk, using a credit spread of 500 basis points over Libor and 28% vol.

But the company has a “small market cap and the stock doesn’t trade that much,” the market source said, adding “that premium seems too high to me also.”

Harmonic’s market capitalization stood at about $391 million after shares of the San Jose, Calif.-based video infrastructure products maker had fallen 76 cents, or 14.5%, to $4.49 on Tuesday.

Another source said that given the tough overall market he thought selling on swap was the only viable plan for market players.

The Harmonic bonds were not seen quoted or trading in the gray market ahead of pricing.

The deal was talked to yield 2.75% to 3.25% with an initial conversion premium of 37.5% to 42.5%.

BofA Merrill Lynch is the bookrunner for the Rule 144A deal that has an $18.75 million greenshoe.

The notes are non-callable and will be convertible into cash, shares of Harmonic’s common stock, or a combination thereof, at Harmonic's election.

About $70 million of the net proceeds are expected to be used to pay a portion of the costs associated with its previously announced acquisition of Thomson Video Networks SAS. Harmonic also intends to use up to $25 million of the net proceeds to repurchase shares of its common stock from purchasers of the notes in privately negotiated transactions effected through the initial purchaser or its affiliate as Harmonic's agent concurrently with the offering.

Harmonic may use a portion of the proceeds from the greenshoe to repurchase additional shares of its common stock under its existing share repurchase program. Any remaining proceeds will be used for working capital and general corporate purposes.

Mentioned in this article:

Cheniere Energy Inc. NYSE: LNG

Chesapeake Energy Corp. NYSE: CHK

Harmonic Inc. Nasdaq: HLIT

Navistar International Corp. NYSE: NAV

Teva Pharmaceutical Industries Ltd. NYSE: ADS: TEVA

Whiting Petroleum Corp. NYSE: WLL

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