Chesapeake drops, ends off its lows; Annaly Capital steady; Chiquita finds a level at 75

By Rebecca Melvin

New York, May 14 - Chesapeake Energy Corp.'s convertibles as a group fell between 1 and 3 points early Monday but ended down by a lesser amount, or about 1.5 points to 2 points, as the underlying shares of the Oklahoma City-based natural gas driller pulled higher.

The dichotomy in Chesapeake's securities was chalked up to bond holders being rattled by the rushed, $3 billion unsecured loan from Goldman Sachs Group Inc. and Jefferies Group Inc., which came at a high price tag, but which enables the company to sell assets it needs to survive, while equity holders were cheered by the prospect that activist investor Carl Icahn may be taking a position in the natural gas company.

Cemex SAB de CV's 4.875% convertibles also came in 0.25 to 0.5 point as the underlying shares of the Mexican cement producer fell 6% amid growing concerns about the potential of Greece leaving the euro zone.

Elsewhere, Annaly Capital Management Inc., last week's largest new deal, was in trade on Monday, but little changed from the 97.75 level at which it traded previously. The $750 million of Annaly 5% convertible senior notes priced at a discount to par of 98 last week.

Chiquita Brands International Inc. was also actively traded, but the convertibles of the Cincinnati-based produce distributor were able to stabilize after taking another leg lower on Friday following a midweek drop associated with disappointing earnings, a Connecticut-based trader said.

Most of the day's volume was in investment-grade names like Symantec Corp.

Symantec shares suffered a ratings cut to "sell" from "neutral" by Goldman Sachs, which cited worsening margins and cash flows for the downgrade. But the move in Symantec's convertibles wasn't seen as particularly noteworthy as those bonds have already dropped over the last few weeks.

"They modeled in rich and have already come in 3 to 4 points," the sellsider said. "They were trading with too much premium, too close to maturity and are just one of those [types of] bonds that starts to leak."

Overall, Monday was a light volume day, traders said, with many convertible bond players sitting on the sidelines amid negative sentiment.

"Tone is pretty bad in the market," a New York-based sellsider said. "You saw people last week on the outright side selling stuff to buy into the new issues, so you ended last week better for sale, and then coming into this week, people are concerned about Europe and Greece, and then you had Chesapeake and J.P. Morgan on top of it."

J.P. Morgan's monumental trading losses, which were first disclosed last Thursday, weren't directly affecting the convertibles market, the sellsider said. But the frustration and uncertainty related to those losses contributed to poor market tone.

Chesapeake drops again

Chesapeake's group of convertibles was called down 1.5 points to 2 points at the end of the session.

The Chesapeake 2.75% convertibles due 2035 traded between 86 bid, 87 offered.

Chesapeake's 2.5% convertibles due 2037 traded last at 80.875, and Chesapeake's 2.25% convertibles due 2038 ended at 72.25 after having printed earlier at 71.5.

Meanwhile shares of the Oklahoma City-based natural gas company gained 71 cents, or 4.8%, to $15.52.

"They were weaker at the open and bounced a bit later," a Connecticut-based trader said of the convertibles.

Bondholders were concerned about Chesapeake having to rush to market with an expensive loan that came at Libor plus 700 bps, the trader said.

A second source said, "They had maxed out their credit."

Chief executive Aubrey McClendon described the new financing as a bridge loan until he can sell some of the company's $50 billion in assets in the second half of the year.

"I don't think they are going to go bankrupt, but he announced that he is going to be a seller of natural gas assets in a very poor market for natural gas assets, and that's not putting them in a very strong position," the market source said.

The company disclosed late Friday that the new loan would help the company repay borrowings from a revolving credit line that could be tightened by the effect of low natural-gas prices on the company's reserves. That tightening could restrict sales of energy assets, which lenders could require to be pledged as increased collateral amid lower natural gas prices.

But after the loan, McClendon said asset sales planned to repay the new loan are on track.

In the face of very cheap natural gas, where pricing stands at two-decade lows, Chesapeake says it plans to shift away from natural gas production and toward oil production. But in order to make that shift, the company made more spending outlays on top of an already high debt load.

Chiquita stabilizes

Chiquita's 4.25% convertibles due 2016 traded actively on Monday at about 75, which was steady on trades Friday.

But 75 represented another leg lower than where prints went up on Thursday.

"Considering the first prints after the stock came in on earnings were mid 80's, this is quite the move," a New York-based trader said.

On Monday, Chiquita shares ended down by 11 cents, or 2%, to $5.51.

Last Wednesday, Chiquita reported a first-quarter loss of $11 million, or 24 cents per share, compared to earnings of $24 million, or 52 cents per share, in the year-earlier period.

Excluding items, the company posted earnings of 4 cents per share, which was significantly below the 32 cents per share that analysts on average had expected.

Revenue fell 3% to $520 million. Lower pricing in North America and lower European exchange rates were cited for the deterioration.

Mentioned in this article:

Annaly Capital Management Inc. NYSE: NLY

Cemex SAB de CV NYSE: CX

Chesapeake Energy Corp. NYSE: CHK

Chiquita Brands Inernational Inc. NYSE: CQB

Symantec Corp. Nasdaq: SYMC

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