Many convertibles, including investment grade, weaker; Twitter to price $1.3 billion deal

By Rebecca Melvin

New York, Sept. 10 – Many convertibles, including investment-grade issues, were notably weaker on Wednesday as market players sold paper deemed to be expensive, while more balanced, moderately priced paper was firm, market players said.

The weakness was part of an ongoing trend in recent weeks, but seemed to be exacerbated by market players trying to lighten up ahead of new, big deals rumored to be launched imminently into the market, a New York-based trader said.

In fact, Twitter Inc. launched after the market close an offering of $1.3 billion of convertible senior notes in two tranches that was expected to price after the market close Thursday.

Intraday, Priceline Group Inc.’s 0.9% convertibles, of which $1 billion priced last month, were seen a little lower at 95.8 in the early going, which was down 0.4 point, according to Trace data. Shares were fluctuating.

AOL Inc.’s 0.75% convertibles, of which about $380 million priced last month, also dragged a little, trading at 101.78. But shares were also lower, so those bonds were flat or expanded on a hedged basis.

Yahoo! Inc.’s 0% convertibles due 2018, another large issue of $1.25 billion, was active in a continuation of Tuesday’s action, and they were down another 0.25 point to 103.875.

Qihoo 360 Technology Co. Ltd.’s 2.5% convertibles, a fairly liquid issue of $1 billion size, fell 2 points on an outright basis to 105.9. Qihoo shares were also dropping and were last down a little more than 2%.

Newmont Mining Corp.’s 1.625% convertibles lost another 0.625 point on Wednesday on top of a 1-point drop on Tuesday as higher interest rates and the U.S. dollar caused gold prices and gold miners to go lower.

“This morning the first 10 prints were bid hits in a bunch of vol. names,” a trader said.

A second New York-based trader said, “Everything is for sale.”

Nevertheless, the convertibles market was still seen as one of the best performing markets for the year to date, a trader pointed out.

“At the end of the day, a lot of supply has come into the market, but year-to-date returns are still strong. Convertibles can still come in 1% to 2% more and still be OK,” the trader said.

The selling and profit-taking seems to be related to people lightening up to reallocate assets in better places, the trader said.

An exception to Wednesday’s trend was Palo Alto Networks Inc. The company’s 0% convertibles traded up nearly 3 points on an outright basis to 110.9 as shares of the Santa Clara, Calif.-based network security company jumped 8% following better-than-expected fourth-quarter earnings.

Twitter to price

San Francisco-based social media website Twitter launched an offering of $1.3 billion of convertible senior notes in two tranches, including $650 million of five-year convertible senior notes and $650 million of seven-year convertible senior notes.

“There’s a lot of interest in this,” a syndicate source said.

Tranche A was talked with a 0% to 0.5% coupon and tranche B was talked with a 0.75% to 1.25% coupon, both with a 45% to 50% initial conversion premium.

Joint bookrunners are Morgan Stanley & Co. LLC, Goldman Sachs & Co. and J.P. Morgan Securities LLC, with BofA Merrill Lynch and Deutsche Bank Securities Inc. acting as co-managers of the Rule 144A deal, which has a $200 million greenshoe, or $100 million per tranche.

The notes are non-callable with no puts.

There is contingent conversion if shares exceed 130% of the conversion price and net share settlement.

Proceeds are earmarked for general corporate purposes and also to pay the net cost of a call spread.

Newmont extends losses

Against a stock price that was essentially unchanged the last two days, Newmont’s 1.625% convertibles came in by a point on Tuesday and an additional 0.625 point on Wednesday, a trader said.

“They came in by a large degree including today,” the trader said.

The notes ended the session at about 104.75 versus a share price of $25.37, which was Wednesday’s closing share price.

“The block of Newmont that one dealer bought yesterday at 105.25 is being sold at 104.625 for a 0.625 point loss,” the trader said.

“The person probably provided liquidity at the wrong price, and would rather take the loss before another index replicator sells,” the trader said.

An index replicator is a market player that is buying securities to replicate an index and not necessarily considering whether the paper is cheap, the trader explained.

“Newmont has re-priced, probably because an index replicator had to come out,” he said.

But issues that are well priced and balanced from a directional point of view, such as Tesla Motors Inc.’s 0.25% convertibles and 1.25% convertibles, are holding in well, the trader said.

Mentioned in this article:

AOL Inc. NYSE: AOL

Newmont Mining Corp. NYSE: NEM

Palo Alto Networks Inc. Nasdaq: PANW

Priceline Group Inc. Nasdaq: PCLN

Qihoo 360 Technology Co. Ltd. Nasdaq: QIHU

Tesla Motors Inc. Nasdaq: TSLA

Twitter Inc. Nasdaq: TWTR

Yahoo! Inc. Nasdaq: YHOO

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