Tesla better in active trade despite lower shares; School Specialty improves; market quiet

By Rebecca Melvin

New York, May 31 - Tesla Motors Inc. was actively traded in the convertibles market on Friday, with the notes looking better on the day despite lower shares for the Palo Alto, Calif.-based electric car maker.

The Tesla bonds, which had been active for several days this past week, appeared to be taking on a life of their own amid strong interest from various segments of the market, including the equity side as well as bonds, a Connecticut-based trader said.

Elsewhere, School Specialty Inc.'s distressed convertibles also traded a little higher as sellers looked to unload bonds ahead of the company's imminently expected emergence from bankruptcy when the paper will be exchanged for shares.

During the holiday-shortened week, in which markets were closed on Monday in observance of Memorial Day, the primary market was surprisingly strong. Four new deals launched and priced for a total of $1,845,000,000 in new issuance.

Of those deals, Priceline.com Inc.'s $1 billion of 0.35% convertibles didn't trade well, but it spurred activity in the existing bonds of the Norwalk, Conn.-based online travel company.

On Friday, Priceline's 1% convertibles due 2018 continued to trade around 115.25 and Priceline's 1.25% convertibles due 2015 traded at 268.

"They were very aggressively priced," a New York-based trader said of the new Priceline convertible. "I guess they were betting on the common to rise; but it's a high-dollar-price stock, it would have required a big move in the common to bail them out."

The move up in interest rates this past week was said to have spurred some issuers to action, and more issuance is expected, convertibles players said. Treasuries traded off, with the 10-year note yield up more than 10 basis points following a spike on Tuesday on the heels of improved economic data and renewal of risk-on trade.

But high demand for new paper in the convertibles market has fueled aggressive pricing in the niche market, and issuers seem eager to get in on more of it before anything changes.

"I guess if companies can get these kinds of prices, they are going to go for it," a trader said when asked if he was surprised about this week's volume of issuance.

Recent weakness in the secondary market and some indigestion with the new Priceline deal Thursday were not interpreted as signs that the market is reaching saturation.

"There's still a lot of paper going away in the next 12 months, and with new issuance at about $18 billion [year to date], it hasn't any way satiated the demand. There is way more absorption capacity before you start seeing existing issues come in," a New York-based trader said.

Selling pressure in the last week or so was not about portfolio managers having trouble making room for new paper but because the volatility component of convertibles associated with stock price fluctuations contracted.

"Vol. oriented names have come in and a number of things that have had unchecked, meteoric rises have come in, but that's normal. It went up in a vacuum, and now it has started to come for sale. It's not cheapening because of new issues," the trader said.

He said the market is more than able to absorb the current annualized pace of new issuance, which is about $40 billion. This is especially true given that redemptions for the last four or five years have outpaced new issuance. Bearing out his point is the maturity of NetApp Inc.'s $1.27 billion of 1.75% convertibles on Saturday. That maturity alone comes close to canceling out the four new issues that priced this week.

Tesla improves, shares lower

Tesla's new 1.5% convertible bonds traded up to 110 on Friday, which was up about a point, in strong volume.

Tesla shares fell $7.19, or 6.9%, to $97.76 in heavy volume.

"They've been active today and look a little better if anything," a Connecticut-based trader said of the convertible bonds, citing a CNBC interview of chief executive officer Elon Musk Friday earlier in the day as fodder for interest.

When the paper was issued in mid-May it was trading primarily on an outright basis as lack of stock borrow curtailed hedged participation in the deal.

"It's a cult name, getting interest from all sides," the trader said.

School Specialty improves

School Specialty's 3.75% convertibles due 2026 traded at 23.5 bid, 23 offered on Friday, which was better than where those bonds had been recently, although there hadn't been a tight market in some time.

School Specialty shares, which trade over the counter, changed hands at $0.0175, or up 22%, on the day.

"They are close to coming out of bankruptcy," a trader said, suggesting that some holders were selling to get rid of bonds before they get common stock instead.

Mentioned in this article:

NetApp Inc. Nasdaq: NTAP

Priceline.com Inc. Nasdaq: PCLN

School Specialty Inc. Pink sheets: SCHSQ

Tesla Motors Inc. Nasdaq: TSLA

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