Primary pauses following market jolt; Illumina trades mixed after earnings; Red Hat gains

By Rebecca Melvin

New York, Oct. 21 – Trading action in the U.S. convertibles secondary market picked up on Tuesday, but the primary market was silent, as equities continued to surge following last week’s blast of volatility that jolted markets.

A pause on behalf of issuers to launch convertibles deals in this market was to be expected, a New York-based syndicate source said. But he thought issuance would resume in another week or so.

At that point, a decent rate of issuance should continue for the rest of the year, albeit not at the supercharged clip of last year’s fourth quarter.

For the year to date, 2014 new issuance has handily surpassed 2013’s year-to-date tally. But for the fourth quarter so far, the 2014 tally is well behind last year’s.

Fifty-one deals occurred in the fourth quarter of 2013, which equated to about 40% of the total volume for the year, according to Prospect News’ data.

“That’s a tough compare,” the syndicate source said of last year’s fourth quarter. Even 50% of that volume would be decent, the source said.

For October so far, issuance has been thin, with one deal priced last week in a very ugly market and a couple in the previous week.

Part of the reason for the October lag was the blackout period that corporations are subject to prior to reporting earnings, the syndicate source said. Then there was the supersized market drop last week and subsequent recovery. But now issuers will resume prepping deals and will need to pick the right day to launch.

Recovery in the secondary market will support recovery in the primary market, the syndicate source said.

Back in established issues, Illumina Inc.’s convertibles were active and traded mixed after the San Diego-based developer of genetic research tools reported quarterly earnings that beat estimates.

Illumina’s longer-dated, 0.5% convertibles due 2012 were better on hedge. The shorter-dated tranche of 0% five-year bonds were better by a lesser amount, and the older 0.25% convertibles were down.

Red Hat Inc.’s 0.25% convertibles due 2019 traded up on both an outright and a dollar-neutral, or hedged, basis amid no particular news. Red Hat shares edged up 1.4%.

Ford Motor Co.’s 4.25% convertibles due 2016 traded actively and slightly higher after the Dearborn, Mich.-based automaker announced a call of those bonds on Tuesday.

The recovery of the convertible market extended from Friday through to Tuesday, helped by surging equities. On Tuesday alone, the Nasdaq stock market jumped 103.40 points, or 2.4%, to 4,419.48; the S&P 500 stock index pushed higher by 37.27 points, or nearly 2% to 1,941.28; and the Dow Jones industrial average gained 215.14 points, or 1.3%, to 16,614.81.

One source said that news Tuesday that the European Central Bank has signaled it is open to buying corporate debt to shore up the European financial system was behind a lion’s share of Tuesday’s optimism.

Convertibles players will be watching some of the earnings reports of companies that are bellwethers in their sectors even if they aren’t convert issuers, and will get a read on cloud computing and enterprise software, which are big in the convertibles space, a trader said.

Meanwhile, convertibles issuers NetApp Inc. and EMC Corp. will be reporting on Wednesday, and that’s on the radar of many market players.

Illumina mixed after earnings

Illumina’s 0.5% convertibles due 2021, or the B tranche, were very active and traded up to about 111, which was seen better by about a point on a dollar-neutral, or hedged, basis, a New York-based trader said.

The Illumina 0% convertibles due 2019, or the A tranche, were up less than a point at about 106.

The older Illumina 0.25% convertibles were down a little bit, the trader said.

Illumina shares surged $15.08, or 9%, to $179.55.

Strong earnings in which the company beat estimates was behind the moves.

The company reported net income excluding one-time items of $114 million, or 77 cents per diluted share, compared to $63 million, or 45 cents per diluted share, for the third quarter of 2013.

Revenue rose to $481 million, which was above the $357 million reported in the year-earlier quarter and better than the $451.2 million that was estimated.

The company also raised full-year guidance for revenue growth of about 30% for 2014 and earnings per share of $2.63 to $2.65.

Illumina said that it experienced “tremendous momentum” in the third quarter with strong shipments of HiSeq X and other sequencing products and is well positioned for continued long term growth.

Mentioned in this article:

EMC Corp. NYSE: EMC

Ford Motor Co. NYSE: F

Illumina Inc. Nasdaq: ILMN

NetApp Inc. Nasdaq: NTAP

Red Hat Inc. NYSE: RHT

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