New issues of Vector Group, Chesapeake Energy rise; overall market wavers

By Rebecca Melvin

Princeton, N.J., June 28 - The convertible bond market on Wednesday warmly received two new issues, including a mandatory preferred convertible from serial-issuer Chesapeake Energy Corp. and a smallish, overnight deal from Vector Group Ltd.

Chesapeake's new mandatory priced at par of $250 and rose in early trade to $253.5, versus a common share price of $29.35.

Vector's 3.875% convertibles, which will include a pass-through dividend to yield no less than 5.75%, saw its first trade out of the chute jump 2 points; and by mid morning the paper was at 103. Near the end of the session, the new Vector 3.875s stood at 104, according to a syndicate source, despite a 2% drop in its share price.

"Vector did very well. It was a small deal," a New York-based buysider said. "Chesapeake did OK...it traded up as well, but I'm typically not enamored with mandatories."

The buysider said he flipped his Chesapeake allocation and also used the occasion as an opportunity to buy the older Chesapeake 5% preferreds.

"It got cheap, and we took advantage of this opportunity to get involved," the buysider said.

Otherwise, it was pretty quiet, sources said of the market.

Nevertheless, some convertibles in the technology space were active although not moving much, including Intel Corp., which traded mostly unchanged despite a 3.4% jump in its shares.

Also in trade were the convertibles of CNET Networks Inc., which were mostly unchanged even as the company's share price took a hit.

Sparking trades of CNET was the resurfacing issue of stock options investigations. The San Francisco-based internet publisher disclosed late Tuesday that it received federal subpoenas for a probe into its stock-option-granting practices for its employees.

Meanwhile, the 0% convertibles of Rambus Inc. weren't seen in trade, although its shares were torpedoed for stock option woes as well.

Rambus stock lost 11% after the Los Altos, Calif.-based chip maker warned that it may have to restate previously reported profits as a result of the findings of an internal probe of stock options practices.

Red Hat Inc. saw its convertibles trade also mostly unchanged ahead of its quarterly earnings report seen after the close.

In energy, convertible names like Diamond Offshore Drilling Inc., Transocean Inc. and oil services company Schlumberger Ltd. were mentioned in trade as crude oil prices continued to creep up, closing at $72.48 a barrel on the New York Mercantile Exchange.

Stellar month for new issuance

With just two days left in June, market players began to reflect on what's in store next month. With July 4 falling mid week, some were writing off next week's trading and new issuance activity altogether, while others said they expected a quiet period from Friday until Wednesday.

But all were ebullient about new issuance during the current month, one in which new issuance topped more than $9.5 billion.

"On an annualized basis, this is the third best year ever in convertibles," a New York-based sellside origination source said.

Sources tied the flow of new issuance to motives to beat an expected boost in interest rates and to beat the upcoming summer doldrums.

One sellside analyst suggested, "That's it until September." But perhaps the spigot isn't drying up yet, another said. "Companies want to get something in before rates get higher. And as rates rise floating-rate debt, more and more companies are selling convertibles and using proceeds to pay down that floating-rate debt," a New York-based sellside desk analyst said.

Vector entices buyers

Vector Group priced $85 million of 20-year variable interest senior convertible debentures toward the rich end of talk, but the deal was still well liked mostly due to the pass-though dividend yield added to the coupon, which put the yield right now at 11.3%, according to a syndicate source. The minimum yield was set at 5.75%.

"It was the same as the last deal they did - it is a great structure for outrights and hedgies alike because there is a full pass-through of the common dividend, plus a built-in yield advantage. Add to that the fact that hedged players will probably have about a 65 hedge on," a Connecticut-based sellside analyst said via e-mail.

In late 2004, Vector sold $65.5 million of seven-year 5% convertible variable-rate notes at par with a 17.6% initial conversion premium. The notes pay the 5% coupon plus a portion of dividends on the underlying common stock at a minimum of 6.75% through November.

That deal like the current one was sold via bookrunner Jefferies & Co.

Another factor that helped the Vector deal was that stock borrow, which was expected to be difficult, was facilitated by Jefferies.

"It's going to have positive carry. It's the first deal in a while that has had positive carry," the sellside analyst said.

Another factor in favor of the deal is positive event risk with a takeout seen as a possibility for the Miami-based tobacco holding company.

The new issue sold at par to yield 3.875% for the coupon, plus the pass-through, raising minimum interest to 5.75%, with an initial conversion premium of 32%.

Talk on the overnight deal was 3.75% to 4.25% for the coupon and 29% to 33% for the initial conversion premium. Final pricing on the minimum interest came at the midpoint of guidance of 5.5% to 6%.

The debentures are non-callable for five years, at which time the company must redeem a minimum of 10% of the total principle amount outstanding. There are puts in years six, 10 and 15.

The deal priced before the stock could react, but on Wednesday the stock (NYSE: VGR) fell 35 cents, or 2.2%, to $15.91.

A buysider suggested that selling pressure on a fairly illiquid stock due to shorting to set up positions was what drove the shares down.

Chesapeake issues trade

Oklahoma City-based natural gas company Chesapeake Energy added a mandatory to its bevy of convertible debt, and the new arrival sparked some trading of its older sisters, including its 2.75% convertible bonds, of which there is $712 million outstanding. The 2.75s changed hands at 101 versus a stock price of $29.05.

The company also has five existing issues of preferred stock, but two are just $3 million tail ends of old convertible preferreds. The larger ones include $324 million of 4.5% preferreds, $620 million of 5% preferreds and $590 million of another series of 5% preferreds.

Intel feels weak

The convertibles of Intel continued to feel weak with the 2.95% paper trading at 83.25, versus a share price of $18. But shares closed higher, up 61 cents, or 3.4%, at $18.66. This compares with trades at 87.25, versus a share price of $18.56 on June 19.

CNET holds in

The CNET 0.75% convertibles "held in pretty good," a source said, despite a lower stock price on Wednesday. The convertibles changed hands at 90, versus a stock price of $8. The stock closed down a little lower, down 60 cents, or 7.2%, at $7.77.

The company disclosed that it had received a grand jury document subpoena from the U.S. Attorney for the Northern District of California requesting records pertaining to the granting of stock options. CNET Networks said it intends to cooperate fully with the request, which follows the company's announcement May 22 that its board of directors had appointed a special committee of independent directors to conduct an internal investigation relating to past option grants, the timing of such grants and related accounting matters.

The company also disclosed on May 24 that it had received notice that the Securities and Exchange Commission is conducting an informal inquiry into its stock option grants.

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