SunEdison gains on restructuring plans; Whiting, Chesapeake Energy extend swap gains

By Rebecca Melvin

New York, Oct. 7 – Many U.S. convertibles players were listening in on the SunEdison Inc. investor call early Wednesday, and those issues rose on an outright basis in active trade as varying opinions of the company’s new strategy plans played out, a New York-based trader said.

“The SUNE news is something that a lot of people were listening in on as it’s one of the market’s most volatile names. The call clarified things in terms of general guidance and what direction management is looking to go,” the trader said, characterizing the session overall as “decently active.”

Overall there was some indecision in the equity markets, which started out strong, slumped mid-session, but still ended the day higher.

Energy shares also swung around after weekly inventory numbers showed that U.S. stockpiles of crude oil and petroleum products rose to a new high. Nevertheless, there was still upside to the energy sector, and the convertibles of names like Whiting Petroleum Corp. and Chesapeake Energy Corp. extended swap gains.

Gains among these beaten-down names seemed to have a salutary effect on the overall convertibles market.

“It’s a pretty good snapback; everything is much better today,” a New York-based trader said.

Whiting was better on a dollar-neutral, or swap, basis by 0.5 point to 0.75 point on Wednesday and better on swap by about 1.5 points to 2 points in the last few sessions.

“That’s a 47% rise in the stock in the last six trading days, and it’s truly emblematic of the rally in the beaten-down names in our sector,” the trader said, noting that the strength was particularly evident on Wednesday.

Tesla Motors Inc. was notably absent from the updraft. Instead it sold off amid fears that the Model X forecasts are too optimistic and amid a downgrade from one of the smaller brokers. The Tesla shares traded down and the convertibles traded in line, or flat, with the underlying shares but not up on a dollar-neutral basis as many other things did.

Even with equities rising so strongly in the last few sessions, there was skepticism about how real the gains are.

“It’s tough to trade. You have people that are not convinced that it’s anything more than short covering, and they are using the strength to sell into,” a trader said.

The reasons behind this lack of conviction is that the sell-off that preceded this rally was so severe. A good deal of the sell-off was ETF-related and technical in nature, therefore the snap back is also dramatic.

The SPX index, for example, has had a 100-point, or 5%, move up in the last three days from the bottom to where the future closed Wednesday.

“It is still heavily shorted, and high yield has also been incredibly volatile,” he said. But market players “are skeptical, as am I.”

Even so, convertibles have been “better to buy” for the last three days even as some portfolio managers use the strength to sell some of the paper that they intended to get rid of, the trader said.

“It’s been impressive,” he said.

SunEdison edges up

The SunEdison series of convertibles took a good leg higher on Wednesday, with several of the bonds up about 8% on the day, but shares surged 12%.

The securities, which have been beaten down by more than 70% this year, popped after an investor call in which the company outlined changes in its business strategy including job cuts – or layoffs of about 1,000 employees representing about 15% of its workforce, and a shift in focus for its investments to countries where profits are brightest. That means turning away from countries including the U.K. and curtailing its Latin America plans.

SunEdison’s debt has mushroomed in the last two years or so as the company has funded acquisitions and spun off two yield cos.

On Wednesday, the company tried to reassure investors who have been unhappy with management and disapproving of the way that the company has developed new wind and solar farms and then sold them back to the yield co companies, TerraForm Power Inc. and TerraForm Global. SunEdison said it now plans to sell renewable energy projects to utilities and other power plant operators.

“That call was important. I had to know what direction the management was looking to go. It’s more a fundamental thing,” a New York-based trader said.

SunEdison’s newest issue, a 6.75% perpetual convertible preferred stock with a $1,000 par, that was priced last summer, was seen up to nearly 754 from 711.

The SunEdison E and F tranches, which priced in May, were also higher.

The SunEdison 3.375% convertibles due 2025, which is the longer dated of the two tranches that priced in May, was seen up at 56.5 from 53.7 previously.

Volume wise, the SunEdison 3.375% convertibles stood out, and those bonds traded up a bit, a New York-based trader said.

SunEdison’s older 0.25% convertibles due 2020 were last seen up at 64.25 to 64.50 from 59.

The SunEdison 2% convertibles due 2018, or the A tranche, were last at about 88, which was up from 82, and the SunEdison 2.75% convertibles due 2021, or the B tranche, was seen up at about 86 from 79.

Shares of the St. Peters, Mo.-based solar technology company extended gains through the session, ending up $1.03, or nearly 12%, to $9.72. At late morning the shares had been up about 7.5% to $9.34.

Whiting, Chesapeake improve

Whiting Petroleum’s 1.75% convertible has risen to 89.5 from about 81 in the last few sessions. That’s more than 8 points on an absolute basis and about 1.5 points to 2 points on a dollar-neutral basis, a trader said.

The gain on Wednesday alone was 0.5 point to 0.75 point on swap.

Shares of the Denver-based oil and gas company were up 52 cents, or 2.5%, to $21.42 on Wednesday, which compares to $14.59 a week ago.

The continued climb on Wednesday came despite negative data. Crude-oil stockpiles increased by 3.1 million barrels to 461 million barrels, the U.S. Energy Information Administration said. Total supplies of crude oil and petroleum products rose by 2.3 million barrels to 1.3 billion barrels, the EIA reported.

But Whiting was not the only gainer. Chesapeake’s longer dated bonds were better by 1 point to 1.5 points.

“Off the run bonds are better. Chesapeake is better on its longer paper,” a trader said.

The Chesapeake 2.25% convertibles, which are more volatile because of their longer duration, were up to 71.5 from 67.5 three days ago.

“That is 4 points in three days on pure credit paper with no equity sensitivity,” the trader said.

Mentioned in this article:

Chesapeake Energy Corp. NYSE: CHK

Illumina Inc. Nasdaq: ILMN

SunEdison Inc. Nasdaq: SUNE

Tesla Motors Inc. Nasdaq: TSLA

Whiting Petroleum Corp. NYSE: WLL

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