Convertible bond market remains jittery; Chesapeake weakens; Brocade firms on Broadcom buyout

By Stephanie N. Rotondo

Seattle, Nov. 2 – U.S. election woes continued to weigh on the convertible bond market on Wednesday.

“This election has destroyed this market, for like weeks,” a trader said.

In addition to the U.S general election on Nov. 8, the market was also waiting to hear from the Federal Reserve. The central bank made a policy announcement later in the day, holding interest rates steady for the time being.

Given the overall soft tone of the space, Chesapeake Energy Corp.’s 5.5% convertible notes due 2026 continued to lose ground ahead of the company’s earnings release on Thursday.

A trader pegged the issue at 89.625 at mid-morning. That compared to levels around 91.75 at Tuesday’s close.

At the bell, the convertibles were pegged at 88.5 bid, 89 offered.

The company’s 4.5% cumulative convertible preferreds (NYSE: CHKPD) dropped $2.41, or 5.82%, to $39.00.

As for the underlying equity, it closed down a nickel at $5.31. The stock was off 12 cents, or 2.15%, at $5.24 in earlier trading.

Chesapeake is expected to report its sixth consecutive quarterly loss on Thursday. Analysts polled by FactSet are expecting a loss of 3 cents per share. Revenue is forecast at $1 billion, which would compare to $2.89 billion the year before.

Also weighing on the energy sector, domestic crude prices shrunk, falling over 2.5% as the U.S. Energy Information Administration reported a bigger-than-expected increase in inventories.

Crude stockpiles increased 14.4 million barrels last week – the largest weekly increase on record.

Analysts polled by The Wall Street Journal had predicted a 1 million-barrel increase.

In response, Weatherford International plc’s 5.875% exchangeable senior notes due 2021 waned as much as 7 points, according to one market source, seeing the paper at 94.5.

Brocade Communications Systems Inc.’s 1.375% convertible notes due 2020, however, were bucking the downward trend on reports that Broadcom Ltd. was buying the business in a deal valued at $5.5 billion.

Brocade up on Broadcom offer

Brocade Communications’ convertibles were trading up outright on news the San Jose, Calif.-based network gear manufacturer was being bought by Broadcom.

A market source pegged the bonds at 100.5 bid, 101 offered at the close. Earlier in the day, a trader said the bonds were trading “around 101.” Another market source called that up 1 to 2 points.

“That’s most of the volume on the tape, which isn’t a lot of volume to begin with,” a trader remarked.

The equity was similarly better, initially rising $1.12, or 9.96%, to $12.36. It finished at $12.32, up $1.08, or 9.61%.

Chipmaker Broadcom is buying the business for $5.5 billion, planning to use Brocade’s fiber channel storage networking products and sell off its IP networking business.

At $12.75 per share, the offer represents a 46.7% premium over Brocade’s Friday closing share price. Broadcom will also take on about $400 million of Brocade’s debt.

Dynegy goes down

Dynegy Inc.’s convertible preferred securities took a hit in the wake of the energy producer’s third-quarter results.

The 5.375% series A mandatory convertible cumulative preferreds (NYSE: DYNPA) declined $10.65, or 26.53%, to $29.50. The 7% tangible equity units (NYSE: DYNC) dropped $16.42, or 21.75%, to $59.08.

As big of a dive as the preferreds took, the common stock was off even more. The equity weakened $3.38, or 31.53%, to $7.34.

For the quarter, Dynegy reported a net loss of $254 million from $29 million the year before. Revenue slipped 3.9% to $1.18 billion.

The company attributed the wider loss to non-cash asset writedowns and losses on hedging contracts.

Still, management maintained that it would hit full-year adjusted EBITDA of $1 billion to $1.1 billion. For 2017, adjusted EBITDA is expected to be $1.2 billion to $1.4 billion.

Mentioned in this article:

Chesapeake Energy Corp. NYSE: CHK

Weatherford International plc NYSE: WFT

Brocade Communications Systems Inc. Nasdaq: BRCD

Dynegy Inc. NYSE: DYN

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