Morning Commentary: Cleveland-Cliffs convertible notes in focus early, drop outright

By Abigail W. Adams

Portland, Me., Dec. 3 – Trading activity remained muted in the convertibles secondary space on Tuesday, as equities sold off amid renewed pessimism about a potential trade deal between the United States and China.

There was $66 million in reported volume about one hour into Tuesday’s session with few names seeing concentrated trading activity.

Cleveland-Cliffs Inc.’s 1.5% convertible notes due 2025 were in focus early in the session with the notes dropping outright as stock sold off following news the iron ore mining company would acquire AK Steel Corp. in an all-stock transaction valued at $1.1 billion.

The 1.5% convertible notes dropped about 10 points outright. They were changing hands at 108.5 with about $9 million in reported volume early in the session, according to a market source.

Cleveland-Cliffs stock dropped to $7.40, a decrease of 12.01%, shortly before 11 a.m. ET.

AK Steel previously had a convertible note issue. However, the 5% convertible notes matured on Nov. 15, according to a market source.

AK Steel shareholders will receive 0.40 of a share of Cleveland-Cliffs common stock in the buyout for each share of AK Steel stock, an amount which values AK Steel stock at $3.36 a share, a premium of 16% from AK Steel’s closing stock price on Monday, according to a company news release.

News of the buyout comes just one day after U.S. president Donald Trump threatened to raise tariffs on steel and aluminum imports from Brazil and Argentina.

While the tariffs were geared toward helping the domestic steel industry, AK Steel has struggled, reporting a 96% drop in net income in the third quarter and announcing plans to close a Kentucky plant by year-end, CNN Business reported.

The deal is expected to close in the first half of 2020 and is subject to shareholder and regulatory approval.

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