Convertibles firm up: SunPower, Chesapeake notch gains; planned Monster deal looks cheap

By Rebecca Melvin

New York, Oct. 16 – U.S. convertibles were firmer on Thursday, as losses in equities were stanched, Treasuries were weaker and the high-yield bond market turned around, marking a shift of tone from the previous few sessions.

“There was an underlying better tone to the market as high yield snapped back and the rest of the convert market followed suit,” a New York-based trader said.

Credit convertibles mostly improved, the trader said.

MGM Resorts International convertibles traded up on an outright basis and expanded on a hedged basis as shares rose following the better-than-expected earnings report of MGM competitor Las Vegas Sands.

The MGM 4.25% convertibles closed the day at 120.75 bid, 121.25 offered versus $119.00. That was up about 0.5 point on a delta of 70% or 75%, a trader said.

SunPower Corp.'s convertibles were also better by about 0.5 point, the trader said.

Elsewhere, the Chesapeake Energy Corp. convertibles complex was active as shares in the Oklahoma City-based energy company surged 17% on news that the company is selling a portfolio of gas and oil wells to Southwestern Energy Co., a move that will put a serious dent in Chesapeake’s debt load.

Standard & Poor’s said it revised the outlook on Chesapeake to positive from stable.

In the primary market, some market players were sizing up Monster Worldwide Inc.’s planned $125 million of five-year convertible senior notes that were set to price after the market close.

The deal was looking cheap by about 2.5 points at the midpoint of 3% to 3.5% coupon talk and 37.5% to 42.5% premium talk, according to a Connecticut-based trader, who was using a credit spread of 600 basis points over Libor and 35% vol.

The trader said that the company’s online employment services business has seen revenue and EBITDA move lower every year since 2011, however. “This is a dying business,” he said.

After the market close, SanDisk Corp. reported earnings which sent its shares down 5% in after-hours trade.

As for how the convertibles market was doing overall, one trader said: “Essentially what was offered yesterday was bid and lifted today. Where guys didn’t want to show bids, bids were showing up in more off the run names.”

The improvement came after yet further weakening in the early going. But even in early trading, a New York-based sellsider said: “It’s not as bad as yesterday.”

In equities, the S&P 500 stock index pared early losses to end 0.27 point better at 1,862.76, the Nasdaq stock index edged up 2.07 points, or 0.05% to 4,217.39, and the Dow Jones industrial average pared early losses but still remained in the red by 24.50 points at 16,117.24. Earlier the Dow had been off as much as 206.52 points.

Initial jobless claims dropped by a better-than-expected 23,000 in the week ended Oct. 11 to a seasonally adjusted 264,000, the Labor Department said Thursday. Economists had forecast a higher 290,000 figure for the week.

But U.S. home builder sentiment was worse than expected in October. An index of builder confidence for new single-family homes fell five points to 54, the National Association of Home Builders said Thursday. The estimate had been for the index to remain unchanged at 59.

SunPower, Chesapeake notch gains

SunPower’s 4.5% convertibles were seen at 130.25 bid, 131 offered at the end of the session versus an underlying share price of $28.91.

The SunPower 0.75% convertibles closed up at 132.25 bid, 133 offered versus $29.20.

The SunPower convertibles were better by about 0.5 point on hedge, a trader said.

SunPower gained 52 cents, or 1.8%, to $28.91.

Meanwhile, Chesapeake Energy’s convertibles jumped on an outright basis. The Chesapeake 2.75% convertibles due 2035 traded at 100.875, which was up 1.625 point on the day, according to Trace data.

Chesapeake’s 2.25% convertibles due 2038 traded at 94.45, which was up 3.7 points, and Chesapeake’s 2.5% convertibles due 2017 traded up a point at 98.

Chesapeake shares surged $3.02, or 17%, to $20.79.

The company announced it has agreed to sell oil and gas wells in the Marcellus and Utica share formation in West Virginia and southwest Pennsylvania to Southwestern Energy Co. for $5.38 billion.

Standard & Poor’s revised its outlook on Chesapeake to positive from stable. The agency also said it affirmed the company’s BB+ corporate credit rating and BB+ rating on its senior unsecured debt. The recovery rating on the debt remains at 3, indicating 50% to 70% expected default recovery.

S&P also said it affirmed the B+ rating on its preferred stock.

The asset sales are expected to close by year-end, S&P said.

Mentioned in this article:

Chesapeake Energy Corp. NYSE: CHK

MGM Resorts International NYSE: MGM

Monster Worldwide Inc. NYSE: MWW

SanDisk Corp. Nasdaq: SNDK

SunPower Inc. Nasdaq: SPWR

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