Transocean fluctuates; Microsoft flat on hedged basis; Chesapeake Energy a little weaker

By Rebecca Melvin

New York, June 14 - The convertible bond market saw some names trade a little stronger on Monday, but the market was called mainly sideways amid a lull that seems to be setting in after weakness in May.

"It's not very active, and I think it's just probably summer and its Monday and people are more interested in the World Cup than in trading, which is probably a good thing," the New York-based sellside analyst said.

Transocean Ltd., which has been leading the market for several weeks, was less active on Monday but higher in early trade. The oil-services company's convertibles came off later in the session along with weakness in the broader markets, as equities failed to hold on to strong early gains.

Microsoft Corp.'s new 0% convertibles due 2013, which debuted in the secondary market last week, traded about flat on a dollar-neutral basis, changing hands at 100.5 versus a share price of $25.85, compared to 100.10 versus a share price of $25.40 on Friday.

Chesapeake Energy Corp. was flat to weaker on a dollar-neutral basis, having weakened about 0.5 point starting Friday and into early Monday as some market players sold into recent strength, attributed to strength in the natural gas market.

But Charles River Laboratories International Inc. traded up toward the offer price. And Omnicare Inc. picked up some steam.

The new issue front in the United States remained quiet on Monday.

During the session, Moody's Investors Service downgraded Greece's credit rating to junk status, which diminished early enthusiasm in the equity markets. But convertibles sources said the move came as no surprise.

The debt has been trading like junk for a long time, an analyst said. "Sometimes the rating agencies are so late to respond," a New York-based sellside convertibles analyst said.

Moody's downgraded Greece's debt to Ba1 from A3.

Sources said the day was pretty quiet, with no real distinguishing features.

Transocean adds

Transocean's 1.5% series B convertibles due 2037, were actively traded on Monday and traded at 88, which was up a touch.

Transocean's 1.5% series C convertibles due 2037 traded at 82.5 on Monday, which compared to 82.25 on Friday.

Transocean's 1.625% series A convertibles due 2037, which are putable in December, traded at 96.75, which was up from 96.5 on Friday.

Shares of the Vernier, Switzerland-based company ended down $2.07, or 4.4%, at $44.78.

One source said that Transocean was better in trade following a report that was out there Friday, saying that the convertibles were a better play than the straight notes.

"During the day Friday, you saw the convert was the strong performer, but then the CDS took away some of the profit from that trade," the analyst said.

The front end of the credit default swap trade is not very liquid, and that has prevented some people from putting on the trade, and given the near-term aspect of all three of the Transocean convertibles - which are putable from six months to 2.5 years - the front end of the CDS is what needs to be looked at.

The fact that Transocean was traded less than was Chesapeake Energy on one desk was a notable change. But that wasn't expected to mark the beginning of a new trend, and market players expect that Transocean, which has been leading the market in terms of volume and sentiment for the last several weeks, will continue to trade actively.

"I think it will continue to be busy going forward, depending on the news of the day. There was no new news today. I think people are waiting on the BP plc dividend news, and there is also the overhanging $20 billion to up to $100 billion that the government wants BP to put aside that could threaten BP's solvency," a New York-based trader said.

Oil continues to flow out of the broken BP oil well in the Gulf of Mexico following a rig explosion April 20. The leak now ranks as the largest U.S. oil spill ever, and there is still no solution to stop the flow. The disaster, which is causing political as well as environmental fallout, has left investors wondering what kind of regulation the energy sector might face going forward.

Chesapeake Energy flat to lower

Of Chesapeake Energy's many convertible bond issues, the 2.5% convertibles due 2037 (Cusip 165167BZ), has been the actively traded issue of late, as well as Chesapeake's 2.75% convertibles, but they didn't trade on Monday. The Chesapeake 2.5% convertibles traded at 84.5, according to Trace data.

Shares of the Oklahoma City-based natural gas company closed down 2 cents at $24.62 on Monday.

One source said that according to his desk's trades, they looked to have come in about 0.5 point on a hedged basis from morning to late session trades.

But another trader of the name said the paper looked about flat on the day, having come in a little starting Friday.

"The stock has been rallying a lot with natural gas for the last couple of weeks. Natural gas is about $5.01 right now," the trader said, adding that he thought the paper looked "in line" with shares.

"It looks like people are taking profits into the strength," the trader said.

Charles River trades toward offer

Charles River's 2.25% convertibles due 2013 traded at 97.41 versus a share price of $36.02, which compares to a trade at 95 versus a share price of $31.90 in mid May.

Wilmington, Mass.-based Charles River develops animal and other research models for the biotech industry. Its shares moved up early in the session, but sold off later, to end down by 18 cents, or 0.5%, at $35.81.

"They traded up toward the offer [price]," a trader said.

Omnicare firmer

Omnicare's 3.25% convertibles due 2035 traded at 81.64 versus a share price of $25.91, up 0.64 point.

Shares of the Covington, Ky.-based geriatric pharmaceutical services company ended up 5 cents, or 0.2%, at $25.87 on Monday.

The Omnicare convertibles were one of the few notable trades on a day when there was not a lot going one, the trader said.

Mentioned in this article:

Charles River Laboratories International Inc. NYSE: CRL

Chesapeake Energy Corp. NYSE: CHK

Microsoft Corp. Nasdaq: MSFT

Omnicare Inc. NYSE: OCR

Transocean Ltd. NYSE: RIG

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