Chesapeake, Devon/Chevron trade; Chiron down; Nektar launches deal; Citi/Genworth prices

By Rebecca Melvin

Princeton, N.J., Sept. 21 - With a sizable chunk of U.S. oil refining capacity in the cross hairs of Hurricane Rita, several convertibles energy names traded higher Wednesday, including Chesapeake Energy Corp., Nabors Industries Ltd. and Devon Energy/ChevronTexaco Corp.'s exchangeables, traders said.

But activity in the sector was uneven, with little activity reported in oil services stalwarts Halliburton Co. and Schlumberger Ltd. and other names.

"Overall, the sector was up, but commodity names did a little bit better than service names," a West Coast buyside analyst said.

A Connecticut-based sellside analyst said whether prices were up or down was related, at least in part, to company's facility locations.

Moves were dependent, he said, on whether the company stood to benefit from the storm by being able to make repairs to facilities or whether it would suffer supply disruptions related to storm damage, electrical outages or flooding.

"Chesapeake Energy is a big, land-based natural gas play," the analyst said. So, for several reasons there was less potential downside for the company, including the fact that natural gas processing plants wouldn't be hurt to the same degree that oil refining plants might be, and natural gas, in general, requires less refining.

But Rita wasn't the only story in the convertible market Wednesday. The convertible issues of biotechnology company Chiron Corp. were active, with selling and swaps seen on news that Novartis AG is considering selling its 42% stake in the company unless it can have the whole thing.

Convertibles players also eyed a new convertible deal launched after the close by Nektar Therapeutics, and pricing was finalized for two other issues, including $125 million of seven-year convertibles from Cyberonics Inc. and $860.42 million three-year securities, exchangeable into shares of Genworth Financial Inc., which were issued by Citigroup Funding Inc. - although details were not immediately available on Cyberonics.

Meanwhile, it was rumored that pricing was also completed ahead of schedule on a third deal. Toreador Resources Corp.'s $75 million of 20-year convertible senior notes priced a day before expected, a source said, but final terms couldn't be released by press time.

Nektar to price $200 million of convertibles

Nektar Theraputics was expected to price $200 million of seven-year convertibles on Thursday after the close, a syndicate source said.

Joint bookrunners Lehman Brothers and Merrill Lynch & Co. were to sell the Rule 144A deal that was talked to yield 3.25% to 3.75%, with an initial conversion premium of 27.50% to 32.50%, the source said.

The convertible subordinated notes, with a $50 million greenshoe, have a call in year three and no puts, the source said.

Proceeds may be used to fund repurchases of its existing convertible subordinated notes, the company said, with remaining proceeds earmarked for general corporate purposes, including investing in or furthering various product development programs, undertaking potential acquisitions, and developing technologies.

The company has about $113 million outstanding of its 3.5% convertibles and a small amount outstanding of its 5% convertibles.

Nektar is a San Carlos, Calif.-based drug delivery company.

Citi/Genworth mandatory prices

Citigroup Funding Inc. priced 29.155 million SynDECs at $29.50 each, for a total issue amount of $860.42 million, a syndicate source said.

The coupon for the securities was 4.583%, plus the dividend pass through. The current dividend yield is 1.017%, the source said.

The initial conversion premium is 20%, as per price talk.

Price talk for the coupon was 5.35% to 5.85%, but that was an all-in price that included the dividend.

Citigroup Global Markets was the bookrunner for the deal, which was part of a move by General Electric Co. to reduce its ownership in Genworth, an insurance holding company.

For the deal, GE sold Citigroup 21 million Genworth shares. GE also planned to sell 60 million shares of Genworth's stock in a public offering.

Citigroup's exchangeables include a 15% greenshoe.

Richmond, Va.-based Genworth will not receive any proceeds from either transaction.

Devon/Chevron, Nabors gain

The convertibles of Devon/Chevron and Nabors were seen up 0.25 to 0.50 point on a spread basis, according to a Connecticut-based sellside trader, who also said Diamond Offshore Drilling Inc. was up by a similar amount.

Both Devon/Chevron's 4.9% and 4.95% exchangeables traded at 123 versus a stock price of $64.60, according to a sellside source.

Nabors 0% convertible due in 2023 traded at 114.5, versus a stock price of $72.25. The Nabors shares closed lower Wednesday at $71.72.

Apparently more so than was the case with Hurricane Katrina, Rita's impact was being felt well before she makes landfall. Nabors announced Wednesday afternoon that it would postpone its analyst meeting scheduled Sept. 28 due to the hurricane's potential impact on Houston.

It also said it would close its Houston area offices effective 3 p.m. Wednesday "to allow its employees time to prepare their homes or evacuate as they see fit."

In the Gulf, driller Transocean Inc. dragged four moveable rigs in the central Gulf out of the storm's projected path and evacuated about 500 workers from three rigs that are moored to the Gulf floor.

"Right now, the storm path is south of those (moored) rigs, but that's what happened with Katrina until it made a looping turn and went into the eastern side of New Orleans," Transocean spokesman Guy Cantwell said Wednesday. "So we're not taking any chances."

Transocean 1.50% convertibles traded at 103 on Wednesday, little changed from recent levels.

Chiron holders threatened by Novartis

Convertibles players sold or shifted between the 1.625% and 2.75% convertible issues for more downside protection after reports that Novartis may turn its back on Chiron.

Market sources told Prospect News that the Chiron converts were trading on the chatter Wednesday, with holders switching from 1.625% bonds into the 2.75% bonds, as there is more downside protection there.

The 1.625% convertibles had been trading in the low 90s and the 2.75s were in the mid 90s, one trader said.

The activity was spurred by news from Novartis saying it might sell its stake. Novartis chief executive Daniel Vasella was quoted in the Financial Times on Tuesday as saying he was not afraid to walk away from Chiron after the company rejected a $40-per-share, or $4.5 billion, buyout offer from Novartis on Sept. 1.

Novartis was aiming to buy the 58% stake in Chiron that it does not own already.

Several analysts still expect Novartis to make another bid for Chiron, however. But one sellside analyst said Wednesday that in the event that Novartis ceases takeover talks, he doesn't see another bidder stepping up. Thus, he doesn't see Novartis having the option of selling out its stake altogether and walking away, except in a secondary sale situation - and that would likely be at a loss to Novartis.

"If they decide to divest their Chiron stake in a secondary they will have to do it at a big discount," the sellsider said.

Merrill Lynch analyst Eric Ende has estimated the total break-up or acquisition value of Chiron is about $38 per share, in contrast to his estimate of the fundamental fair value for the shares at $32 to $34.

Chiron shares Wednesday were off 36 cents, or 1.64%, at $43.50.

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