Tesla dips below par in volatile action; Theravance eyed; AMR surges despite lower shares

By Rebecca Melvin

New York, May 20 - Tesla Motors Inc.'s new 1.5% convertibles dipped below par on Monday, a day after the upsized $600 million of five-year senior notes shot up to 106 before dropping back toward par on their debut Friday in the secondary market.

The Tesla bond traded last at 99.375, according to a trader. On a swap basis, the new Tesla convertible was called down a point or two, although one trader saw it up 0.7 point dollar neutral using a level of 99.75 bid, 100.5 offered versus a share price of $90.70.

"It's all over the place," a New York-based sellsider said of Tesla. He also said that the new issue is "doing OK," although "down small."

"It's hard to borrow the name, so it's going to be all over the place," he stressed.

Elsewhere, market players continued to watch Theravance Inc., with the Theravance 3% convertibles trading about unchanged on a dollar-neutral, or hedged, basis with the underlying shares of the San Francisco-based biotechnology company down 6.7%. The 3% convertibles are close to a soft call trigger and "could get interesting" if the stock continues to move, a New York-based sellsider said.

Also trading actively were the NetApp Inc. 1.75% convertibles, which mature June 1. They were trading around 114.5, which was down about 2 points on an outright basis from last Thursday. The stock was also lower amid a downgrade Monday by Robert W. Baird and after jumping Thursday on news that activist investor Elliot Management took a significant stake in the company.

AK Steel Holding Corp.'s 5% convertibles due 2019 were up some from Thursday. They were last seen trading at 91.875 versus an underlying share price of $3.47. On Thursday, they were at 90.25.

AMR Corp.'s convertibles continued to spurt higher on Monday, gaining another 3 points to 122, according to a Connecticut-based trader. The move was in contrast to a pullback in the underlying shares of the bankrupt airline company.

SunPower Corp. was also higher again, with the SunPower 4.75% convertibles trading up to 110.5, which was up 1.5 points on the day amid an ongoing surge in the solar sector that began last week.

Overall, traders said the convertible market was focused mainly on the new Tesla issue. It was quiet outside of that, with one sellsider citing a close of European markets on Monday as part of the reason behind a subdued U.S. market.

Stocks traded slightly above and below the flat line on Monday, taking a breather from their multi-week rally, and ending just slightly lower. The Dow Jones industrial average closed down 19.2 points at 15,335.28; the S&P 500 stock index ended down 1.18 points at 1,666.29; and the Nasdaq stock market slipped 2.53 points to 3,496.43.

New Tesla slips below par

Tesla's new 1.5% convertible bonds due 2018 traded last at 99.375. Shares of the Palo Alto, Calif.-based electric car maker dropped $1.56, or 1.7%, to $89.94.

The bonds were down a point or more on an outright basis after being basically 100.5 bid, 101 offered at the close on Friday.

Trading on a swap basis was difficult due to expensive stock borrow.

One trader said at midafternoon Monday that the bond was at 99.5 outright and that the last swap trade had been 99.375 versus an underlying share price of $91.53. He said the paper at that point was "in a couple of points."

A second trader said the paper was 99.75 bid, 100.5 offered versus a share price of $90.70 and that was 0.7 point better on a dollar-neutral basis with the stock at that level.

A third trader said using a 99.375 bond price versus a $91.53 stock price, compared to a 100.5 bond price versus a $91.50 stock Friday, left the bond lower on a hedged basis by 1.125 points.

Still it wasn't deemed to have done too badly on Monday, and the debut Friday was got mixed reviews. "It depends whether you sold or bought at the top," a sellsider said.

Most people were likely on a 55% to 65% delta, the sellsider said. But he didn't see the borrow problem resolving very soon. It would involve the company issuing more stock or investors that are short the stock, covering it.

The deal came concurrently with stock offerings for proceeds in total of about $1 billion.

Goldman Sachs & Co., Morgan Stanley & Co. LLC and J.P. Morgan Securities LLC were the joint bookrunners of the notes.

Theravance remains in focus

Theravance's 3% convertibles due 2015 traded in the low 140s on Monday with the shares down at about $37.00. Shares closed down $2.58, or 6.5%, at $37.01.

The bonds are held on about a 100% delta, a sellsider said, and they are trading at less than 0.75 point below parity, which was unchanged on the day.

"The Theravance stock is down. If it continues to trade lower, it's going to get interesting," the sellsider said, referring to the soft call trigger feature on the 3% convertibles.

AMR spurts higher

AMR's 6.25% convertibles due 2014 continued to move higher up to 122 on Monday, which was up 3 points on the day.

AMR shares pulled back 51 cents, or 7.8%, to $6.04.

The AMR shares had been on a tear until Friday, and the bonds were moving up with them, but they continued moving higher absent the shares on Monday.

"There a lot of optionality in the convert," a Connecticut-based trader said, referring to the structure of the bond as the reason behind the strong push higher.

The bond had been moving up, or grinding higher," toward its recovery value of 112, but surpassed that a week or so ago.

"It's momentum driven right now," he said.

Mentioned in this article:

AK Steel Holding Corp. NYSE: AKS

AMR Corp. Pink Sheets: AAMRQ

NetApp Inc. Nasdaq: NTAP

SunPower Corp. Nasdaq: SPWR

Tesla Motors Inc. Nasdaq: TSLA

Theravance Inc. Nasdaq: THRX

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