Morning Commentary: Market eyes CenterPoint Energy offering; Chesapeake Energy active

By Abigail W. Adams

Portland, Me., Sept. 25 – The primary market is preparing to price a new mandatory convertible preferred deal after the market close on Tuesday with the paper expected to be in demand, in part, due to the amount that will soon be leaving the space.

CenterPoint Energy Inc. plans to price $750 million of three-year series B mandatory convertible preferred stock after the market close on Tuesday.

The deal models out to fair value but the true valuation will largely depend on the pricing of the concurrent common stock offering, a market source said.

As market players eyed the new deal in the works, Chesapeake Energy Corp.’s 5.5% convertible notes due 2026 were active in secondary trading.

Some holders of the notes were most likely selling to participate in the oil and gas company’s new high-yield offering, a market source said.

CenterPoint Energy eyed

CenterPoint Energy plans to price $750 million of three-year series B mandatory convertible preferred stock after the market close on Tuesday.

Price talk is for a dividend of 6.75% to 7.25% and an initial conversion premium of 17.5% to 22.5%, according to a market source.

The offering consists of 15 million $50-par depositary shares representing a 1/20th interest in the series B preferreds.

With a credit spread of 100 basis points over Libor and a 18% vol., the deal models out to fair value at the midpoint of talk, a market source said.

However, the valuation of the deal will largely be driven by the pricing of the concurrent stock offering.

The mandatory convertible preferred stock is being offered concurrently with a $1.5 billion offering of common stock.

“You have to factor in how much of a discount on the stock,” a market source said. The deal is expected to do well and attract cross-over buyers involved in the equity subscription, a source said.

The new mandatory convertible paper comes with three mandatory convertible preferred issues maturing before the year’s end.

The issues that will soon be leaving the space include Kinder Morgan, Inc.’s $1.57 billion issue of 9.75% mandatory convertible preferred stock due Oct. 26, 2018 and Teva Pharmaceutical Industries Ltd.’s $3.375 billion issue of 7% mandatory convertible preferred stock due Dec. 15, 2018.

Chesapeake active

Chesapeake Energy’s 5.5% convertible notes due 2026 were active early in Tuesday’s session. The notes were seen trading around 99.5 with about $5 million of the bonds on the tape, according to a market source.

With a large premium, the notes are a yield to maturity play, a market source said. Holders may be selling the convertibles to participate in Chesapeake Energy’s high-yield bond offering.

The Oklahoma City-based petroleum and natural gas exploration and production company plans to price a $1.25 billion dual-tranche offering of senior notes on Tuesday.

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