Yahoo! extends hedged gains; Performant Financial nixes convertibles, stock; Illumina busy

By Rebecca Melvin

New York, Jan. 30 – Convertibles were quiet on the last trading day of the month on Friday as market players mostly marked their portfolios and watched the resoundingly strong initial public offering of Shake Shack Inc., sources said.

Yahoo! Inc. was a market focus for much of the week, trading lower on both an outright and dollar-neutral, or hedged, basis on Wednesday after the internet company reported earnings and unveiled a plan to spin off its Alibaba Group Holding Ltd. stake.

Then the Yahoo! bond put in two days of gains for hedged players following disappointing earnings from Alibaba on Thursday and a ratings upgrade for Yahoo! from Evercore ISI on Friday.

Initially, Yahoo! investors appeared cheered by the Alibaba spinoff, but shares sank from initial gains for a 3% decline on Wednesday. They were lower again on Thursday but recovered a bit on Friday.

Performant Financial Corp. withdrew an $80 million offering of convertible senior notes and $50 million of common shares on Friday after the deals went up on the calendar on Wednesday. Performant shares had plunged 28% in the interim.

Illumina Inc.’s 0% convertible due 2019, or the A tranche, was active again in a carryover of trade related to positive earnings the San Diego, Calif.-based genetic sequencing equipment company posted late Tuesday.

Illumina’s 0% convertibles were quoted at 113.5 bid, 114.25 offered versus an underlying share price of $198.00.

But Illumina shares ended lower of the day, down $4.81, or 2.4%, at $195.19. Eyes were on the White House Friday afternoon as the Obama administration unveiled its precision medicine initiative, which will aim to direct $215 million to fund research at centers such as the National Institutes of Health, the National Cancer Institute and U.S. Food and Drug Administration.

The initiative also includes establishing a database of more than 1 million Americans to compile genetic and lifestyle data.

Meanwhile, market players still referenced FXCM Inc., which traded actively for the last two weeks, but not very busy on Friday. The bond was quoted 71.5 last, and market players expressed relief that it wasn’t “the blow up” that it could have been.

“We didn’t have any real blow ups this month,” a New York-based trader said.

“FXCM wasn’t terrible because the bonds are now over 70. That could have been a disaster, but thankfully Leucadia stepped in and saved them,” the trader said.

Otherwise, it was “weirdly quiet,” another New York-based trader said.

When asked about the convertibles market, one trader quoted the Shake Shack IPO, which saw shares more than double on their first day trading to $45.90. It is an encouraging sign, the trader said.

A third trader said that many market players were marking their books and going over their portfolios for the next round – February.

Anecdotally, results for convertible arbitrage for January were mixed.

“There is a noticeable split between those who are worried and those who are not worried,” a New York-based trader said of the buyside.

“Some guys are concerned, and some are under water, given what has happened the last couple of weeks – and the last couple of months – but others are doing fine,” the trader said.

“I am surprised [convertible debt] is hanging in as well as it is,” he said.

Outright demand seemed to be pushing things higher despite the broader markets in which stock prices are trending lower and with bond yields under pressure.

“There is not a lot of inventory on dealer books and there is continued demand,” a trader said.

“It was not a blow-out month, “and some are struggling – but things are definitely better, it’s been a positive month,” another market source said.

Yahoo! expands on hedge

Yahoo!’s 0% convertibles traded at 108 with the underlying shares at $43.73 on Friday. That was up on an outright basis from 106.5 versus an underlying share price of $42.50 on Thursday, and better by another 0.25 point on a dollar-neutral basis. The issue gained 1.25 points on a dollar-neutral basis on Thursday.

A trader said there was outright/directional buying in the name.

Initially, the Yahoo! convertibles were boosted by news that the Sunnyvale, Calif.-based internet company is spinning off its remaining stake in Alibaba Group into a separate company.

On Wednesday, the Yahoo! convertibles were quoted at 114 versus an underlying share price of $50.00 when shares were up by about 1% to 2%, but that price action represented a contraction of valuation on a relative basis by 0.375 point, a New York-based trader said.

On Friday, the Yahoo! bonds were “active again today and higher both outright and on swap,” a trader said, noting the Everscore ISI upgrade.

Yahoo! shares were up 26 cents, or 0.6%, at $43.99.

The market delta on the Yahoo! convertibles is roughly around 60%, and it didn’t change this past week.

The bond has richened up essentially on outright demand.

“Outrights are coming in and lifting offers,” a trader said.

They had traded as high as 116 in October and then sunk below par.

“Now they went from par to 116,” a trader noted. They are back to 109 now, but they have had a nice outright move.”

Performant pulls deal

Performant pulled its planned convertibles and stock deals, noting that it wanted to do what was in the best interest of shareholders.

“I’m not surprised [the convert deal] was pulled, given the percentage of common it was going to convert into,” a trader said.

The notes deal would have converted into about 30% of the shares.

“Right from the start, this didn’t look good. They thought that it modeled so cheaply that guys would buy it, but investors are very cautious after getting burned [a couple of times] last year,” the trader said.

Proceeds of the Performant offerings were to have been used to fund the company’s acquisition of Premier Healthcare Exchange Inc., or if the acquisition is not completed, to repay debt under the company’s senior secured credit facility.

Performant chief executive officer Lisa Im said in a release, “We continue to believe that Premiere Healthcare Exchange is an exceptional company, the acquisition has very compelling merits, and fits within our strategy of growing in health care technology. However, we are not going forward with the previously announced capital raise at levels that are not in the best interests of our stockholders.”

Shares of Performant Financial recovered 75 cents, or 18%, to $4.96 on Friday, after plunging $1.65, or 28%, to $4.21 on the heels of the deal launches.

The company is a provider of technology to help identify and recover delinquent or defaulted assets and improper payments.

Mentioned in this article:

FXCM Inc. Nasdaq: FXCM

Illumina Inc. Nasdaq: ILMN

Performant Financial Corp. Nasdaq: PFMT

Yahoo! Inc. Nasdaq: YHOO

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