Chesapeake gains on asset-sale news; homebuilders, mortgage names lower on data; watching First Data

By Paul Deckelman and Paul A. Harris

New York, Sept. 5 - Chesapeake Energy Corp. bonds were seen mostly higher Wednesday - although traders disagreed upon by how much - on the news that the Oklahoma City-based independent oil and gas exploration and production company is engaging in asset sales and cutting production in line with falling energy prices.

Elsewhere, mortgage names such as Thornburg Mortgage Inc. and Residential Capital Corp. were seen trading lower, as were such homebuilder names as Technical Olympic USA Inc. and Beazer Homes USA Inc., in the wake of new data showing that fewer Americans were going to contract on existing houses than at any time since at least 2001 - a sign that the housing slump continues unabated, and the mortgage industry's problems are far from over.

A high yield syndicate official said that the broad market was lower, Wednesday morning, on very light trading.

At the end of the day all sources concurred that trading remained very light.

Two syndicate sources, each from a different investment bank, said that junk ended the day flat.

However a trader who focuses on both junk bonds and leveraged loans said that the broad high-yield market followed Treasuries up a little toward the end of the day.

Once again there was no news in the primary market.

Also once again high yield sources, strapped for anything new to say regarding the junk new issue market, focused instead on the bank loan market.

Sources on both the buy-side and the sell-side have been assuring Prospect News that for the junk new issue market to restart in the wake of the sell-off that began in July, there will have to be a some regeneration of the equally becalmed leveraged loan market, at least where the big LBO deals are concerned.

First Data: in and out

In the absence of any movement in the high yield new issue market one bank loan deal remains the focus of junk players: the First Data Corp. $14 billion term loan B which is part of an overall anticipated $24 billion bond and bank debt financing to help fund the LBO of the company by Kohlberg Kravis Roberts & Co.

A trader who focuses on both bonds and bank loans told Prospect News on Wednesday that the bank deal, in essence, is in the market.

However, the source added somewhat paradoxically, the launch of the bank deal does not seem to be imminent.

"The investment banks are still talking to KKR," the trader said, adding that what is now unfolding behind the scenes is a two-pronged gambit by the underwriters.

"First, they're not going to launch a deal until they are absolutely sure that they have a base of investors," the trader said, adding that the underwriters are keen to get "a bunch of $100 million-type orders out of a few guys before they launch.

"They also don't want to launch a deal until they are certain they have every last concession that they can get back from KKR: covenants, call protection, etc.," the source added.

Having laid out this two-pronged strategy on the part of the underwriters, with Credit Suisse leading the bank deal, the trader added that those who are watching for "traditional launches," the way they used to happen before the summer sell-off, are apt to miss out on the real action.

"In essence the bank deal is launched," the trader said.

"They're going to a targeted audience in an attempt to get big tickets.

"You are going to see a tiered pricing in a lot of these deals. People who commit early to big ticket sizes are going to get what they're asking for.

"Then the dealers will launch to the rest of the world."

Pressed to forecast whether this strategy will work, the trader replied that the underwriters are not likely to succeed in syndicating the entire $14 billion term loan, and will end up holding some of the risk.

Prospect News followed by asking if, should the underwriters succeed in syndicating some but not all of the bank loan, an expected $8 billion of junk bonds, with Citigroup in the lead, follow the loan to market.

Probably, the trader replied, adding, however, that it is unlikely the underwriters will succeed in placing the entire $8 billion of bonds, either.

Asset-sale news boost Chesapeake

A trader said Chesapeake Energy's bonds were up about 3 points across the board from where he sat, with its 7 5/8% notes due 2013 at 102.625 bid, 103.625 offered. "Those bonds were being offered at par [on Tuesday], he declared. He also saw its 6 7/8% notes due 2016 at 99 bid, 99.5 offered versus levels around 96 bid, 97 offered "a couple of days ago."

Others saw a more restrained move. A market source saw Chesapeake Energy's 6¼% notes due 2018 up ½ point to 95 bid, while another source saw a similar movement in its 6½% notes due 2017, which moved up to 97.5.

Probably the busiest issue was the company's 7 5/8s, which opened about ¾ point higher at the 103 level, gyrated around a little, and then settled back in to around its opening price.

Chesapeake's were "up a little, not a lot," another trader said, pegging the 7 5/8s at 102.625 bid, 103.375 offered, but estimated that was just about a ¾ point rise on the day.

Another trader said there was "a lot of trading today in the name, but not a huge price change." He saw the 61/2s gaining around a point to 96 bid, 97 offered.

On the other hand, at one desk, Chesapeake's 6 7/8% notes due 2016 were quoted off ½ point at 99.5.

A trader remarked that "I'm seeing sellers, even though they're doing an asset sale - maybe people want to sell because they think they'll use the money to buy something else?" He quoted the company's 6 7/8% notes due 2020 being offered at 96, their prior bid level.

He chalked up the seeming anomaly of people wanting to sell when the company is bringing in new cash to what he calls the current crazy, mixed-up market "where black is white, up is down and left is right. I can't understand this at all."

On the equity side, Chesapeake's New York Stock Exchange-traded shares moved up $1.07, or 3.26%, to $33.89. Volume of 12.5 million shares was about 1½ times the norm.

Looking to raise $2.5 billion

Chesapeake said late Tuesday that it plans to sell off stakes in five gas-producing properties for around $2.5 billion by the end of 2009, and will also spin off its midstream natural gas assets into a master limited partnership or other financial structure. The company believes that those latter assets, consisting mostly of gas-gathering and processing systems, could sell for more than $1 billion. In announcing its plans, Chesapeake said that the $3.5 billion in assets that it hopes to monetize this way "are not adequately reflected" in its market valuation.

As a first step, it is putting up for sale its minority interest in Kentucky and West Virginia properties containing the equivalent of 145 billion cubic feet of proved reserves, or about 1.5% of the company's known reserves and net production. Chesapeake expects to reap some $550 million from the sale, which should close by the end of the year. It then plans to sell four more such property packages every six months until the end of 2009, in hopes of garnering additional proceeds of about $2 billion.

While it is selling off those assets, Chesapeake has commissioned UBS Investment Bank to assist the company in forming a private MLP or an alternative financial structure, which would own a non-operating majority interest in its midstream natural gas assets. It said that those assets, which it expects to grow substantially in future years, currently generate annualized cash flow from operating activities of approximately $100 million.

Chesapeake is the latest of a number of energy companies which have set up such MLP structures, which combine the tax benefits of a limited partnership with the liquidity of publicly traded securities. Because MLPs are a partnership, they avoid both state and federal corporate income taxes; in addition, the limited partner - i.e. the investor - may also record a pro-rated share of the partnership's depreciation on his or her own tax forms to reduce liability.

Apart from its plans to monetize assets, Chesapeake also outlined a broad program of measures it plans to take to adjust to the recent fall in energy prices, including cutting its net daily production by about 125 million cubic feet per day, around 6% of current output, and cutting its drilling levels. The latter measure will let Chesapeake slash budgeted spending estimates by about 10% next year and in 2009.

Mortgage, homebuilder names off

Elsewhere, the news that the National Association of Retailers had reported that the number of people going to contract on existing homes fell to its lowest level in July since 2001 depressed the already struggling homebuilder and mortgage-provider sectors even further.

The group said that its monthly index which measures pending home sales for existing homes fell just over 16% in July, versus a 12.2% drop the previous month. The July reading, based on a scale of 100, came in at 89.9, the second-lowest read since the index's inception in 2001. It also ranked the lowest since September 2001.

Technical Olympic sinks

Not surprisingly, that pushed the bonds of the homebuilders down, with a trader calling Technical Olympic's bonds "down again," pegging the 7½% notes due 2015 at 31.5, which he called the issue's "all-time low."

Another trader agreed with that figure, adding, "That's ugly."

"We've never felt comfortable in those bonds anyway," he said, noting that the more senior issues, like the 9% notes due 2010, was what he focused on.

With that, he quoted the 9% notes at 71 bid, 73 offered.

"They are off maybe a point or so, but still holding in there." He also saw the 7½% notes due 2011 down a couple points to 34 bid, 36 offered.

Yet another trader marked the problem-plagued Hollywood, Fla.-based homebuilder's bonds down 1 point across the board, seeing its 8¼% notes due 2011 at 69.5 bid, 71.5 offered and also seeing its 9% notes due 2010 at 71 bid, 73 offered.

Another trader also saw Technical Olympic's 9s at that same 71 bid, 73 offered, "the same they've been for a long time." He said "all the houses [i.e. homebuilders] were hanging in," even in the face of the negative news from, the realtors. Another trader said Technical Olympic's 10 3/8% notes due 2012 were down 1½ points at 41-43.

Beazer, WCI down too

The first trader said Beazer Homes' 8 5/8% notes due 2011 were down a point at 80 bid, left offered. The second trader called that paper unchanged at 79.5 bid, 80.5 offered. He also placed Beazer's 8 3/8% notes due 2012 at 78.5 bid, 80.5 offered.

Another trader saw Atlanta-based Beazer's 8 5/8s half a point lower at 79.5 bid, 80 offered.

Among WCI Communities Inc.'s various issues, a trader called the 7 7/8% notes due 2013 and the 9 1/8% notes due 2012 off a point at 74 bid, 76 offered and 82 bid, 83 offered, respectively. At another desk, a trader said he had not seen a bid in the Bonita Springs, Fla.-based builder's bonds in them in several weeks," before seeing them bid at lower levels Wednesday.

Bankruptcy binge not seen likely

But while the latest news points to continued softness in homesales - and a reluctance to go to contract on existing homes will likely point to a similar buyer wariness when it comes to the brand new houses that are sitting unsold in developments all across America - at least one observer says that unless the bottom completely falls out of the tub, none of the major homebuilders are at this juncture likely to slide into default and bankruptcy.

"Fortunately for [the homebuilders], they've built up a fair amount of cash reserves over the past few years," says Bill Featherston, a managing director at JGiordano Securities in Stamford, Conn., "and they didn't necessarily spend it all on buying land options or the raw land itself - so I think the big ones have the staying power to weather the storm. They have been through it before, though perhaps not to the same degree, because we're coming from such a high level."

He noted the rumors about a month ago about Beazer Homes being in trouble, "when their bonds traded down to 70 cents on the dollar, or close to it [from prior levels at or close to par], though they have now somewhat stabilized."

Giordano said junk players might even be able to turn the current troubles of the sector to their advantage, by selectively buying homebuilder paper.

"I'd pick my spots very carefully and establish partial positions in some of the better homebuilders when they trade down to something close to distressed levels, as Beazer Homes did," he counsels.

As to whether any of the well-known names in the sector are on the verge of going belly up, the Giordano managing director cautiously observes that "I'd never say 'never', but I think that at the present time, they're well enough capitalized."

However, he added the caveat that "if this thing goes on for an extremely long period of time, they have put a fair amount of debt on their balance sheet. That could create some negative cash flows."

Thornburg falls

While the homebuilder names were struggling with the impact of the new data, so were the mortgage lenders.

A trader saw Thornburg's 8% notes due 2013, which have been growing stronger over the last few sessions, having dipped a point to 87.5. At another shop, Thornburg's bonds were quoted at 86.5 bid, 88.5 offered, down 1½ points, while yet another source had the bonds at 89.25, down nearly 2 points.

ResCap's 7½% notes due 2013 were quoted at 77.5-78, while another trader called Res Cap's 6% notes due 2011 at 77.5-79, down 2 points on the day.

Overall, a trader said that "the day was pretty quiet. The market was a little lower, and gave back its gains from yesterday, and then ¼ point more."

He saw the widely followed CDX junk bond index off ¼ point at 943/4-95. However, among other indexes, The Banc of America Securities High Yield Broad Market Index was up 0.16%, for a year to date return of 1.05%. The KDP High Yield Daily Index rose 0.08 to 78.5, as its average yield fell 2 bps to 8.28%.

Stephanie N. Rotondo contributed to this report.

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