Convertibles weaken further amid market turmoil; Lukoil drops; technology names lower

By Rebecca Melvin

New York, Dec. 16 – U.S. convertibles were palpably weaker Tuesday, hurt by seemingly indiscriminate selling as investors attempted to reduce absolute risk heading into year-end and to shore up capital.

Market players were “trying to sell anything,” a New York-based trader said, but bids were scarce and low liquidity characterized the session.

Given the light volume, it was difficult to gauge how hard hit convertibles were,” a second New York-based trader said.

Credit markets were weak overall amid an ongoing slide in oil prices and Russia’s tumbling ruble and sudden interest rate hike, which sent reverberations through the markets.

Convertible “bonds are down 1 point delta neutral. It’s finally seeped into all sectors instead of being contained in oil and E&P companies,” a trader said.

Red Hat Inc.’s 0.25% convertibles due 2019 fell to 106.75 versus a share price of $58.23 at the close, which was down about a point on a dollar-neutral basis.

Priceline Group Inc.’s newer 0.9% convertibles were quoted at 92.75 bid, 93.125 offered at the close, which was down 0.5 point on swap.

Twitter Inc. was also very “heavy.”

The weakness was attributed to “a combination of a lot of things,” as macroeconomic concerns met with technical factors.

There was also a continuation of trades in Monday’s headline names, including American Realty Capital Properties Inc. and Isis Pharmaceuticals Inc.

On Monday, American Realty Capital’s 3% and 3.75% convertibles fell on surprising news that three of the New York-based real estate investment trust’s top executives have resigned from the firm.

Isis was lower outright and came in in on a hedged basis as shares of the Carlsbad, Calif.-based developer of gene-based therapeutic drugs moved sharply lower.

The Isis bonds on Tuesday were one of the few names that were not lower as traders stepped in to buy a bond that is considered pretty cheap. The Isis convertibles were quoted at 104.41 versus an underlying share price of $55.75.

Elsewhere, OAO Lukoil’s 2.625% convertibles have fallen sharply in the past week, and early Tuesday, the convertibles of the Moscow-based oil and energy company were seen at 93.5, which represented a 17% yield to maturity.

“This is a sub-year piece of paper, maturing in June 2015, so you see how dislocated we are,” a New York-based trader said.

A second trader said he hadn’t seen the Lukoil bond because it didn’t trade off of his desk.

Convertibles head lower

The convertibles market was lower in tandem with high yield, oil and the rest of the asset classes. There was a bit of a rally in the S&P intraday, but credit remained weak.

The markets moved further into disarray, a trader said, and convertibles were understandably weak.

“They raised interest rates trying to save the ruble, and there is fear that a continued slide in oil creates havoc among the nations that rely on oil as a main revenue producer,” a trader said.

Equities slipped back into negative territory before the end of the session. The S&P 500 stock index shed 16.89 points, or 0.9%, to 1,972.74, the Dow Jones industrial average fell 111.97 points, or 0.7%, to 17,068.87, and the Nasdaq stock index dropped 57.32 points, or 1.2%, to 4,547.83.

Mentioned in this article:

American Realty Capital Properties Inc. Nasdaq: ARCP

Red Hat Inc. NYSE: RHT

Isis Pharmaceuticals Inc. Nasdaq: ISIS

Priceline Group Inc. Nasdaq: PCLN

Twitter Inc. Nasdaq: TWTR

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