Convertibles flat in busy, risk-off session; Tesla down outright; Southwestern Energy eyed

By Rebecca Melvin

New York, Jan. 14 – U.S. convertibles traded actively Wednesday and mostly flat, or in line with their underlying shares, as market players – who are recently back in full strength following year-end holidays – employed a variety of strategies in response to a big, risk-off session.

Equities tanked, Treasuries and gold gained, oil whipsawed and convertibles were in line for the most part, although there were exceptions, market sources said.

“Finally, all clients are in and doing things,” a New York-based sellsider said by way of explaining the busy session.

A second sellsider said, “People are flying to safety; they are selling stocks and buying Treasuries.”

“The biggest headline overnight was that commodities are dropping to all-time lows, with oil and metals, and in particular copper, getting hit,” the sellsider said.

With the risk off trade, some outright players were feeling some pain, but most things were flat as directional players put on a variety of trades associated with dimmer prospects for global economic growth, the sellsider said.

In name-specific action, Tesla Motors Inc.’s convertibles traded actively as shares of the Palo Alto, Calif.-based electric car maker were smacked down on news that the company’s fourth-quarter sales in China declined.

The Tesla convertibles were lower on an outright basis, with mixed opinions about how the paper did on hedge.

One trader said, “All tranches are better dollar neutral, especially the 1.5% convertible, on their China sales warning.”

A second trader said that the Tesla paper was weak.

There was some profit-taking in Red Hat Inc.’s $805 million of 0.25% convertibles, which priced Oct. 1, after Goldman Sachs put out a report that was negative on the Raleigh, N.C.-based open-source software company.

“Goldman put out a negative piece that sparked outright selling. They priced just a few months ago and were trading at 115, so people made a lot of money on these,” a trader said.

Goldman cut Red Hat shares to “hold” from “neutral” but maintained a $70 price target. Red Hat shares ended Wednesday down $1.06, or 1.6%, at $66.38.

Citrix Systems Inc. also saw some action with shares down 4% in the early going. “The directional community is taking the opportunity to top-up on their favorite investment-grade names,” the trader said. Citrix shares pared early losses to end down 2.3% at $57.52.

National Health Investors Inc.’s 3.25% convertibles were for sale, a market source said. They were trading at 108 to 109, and had been lower last week in the 105 area.

Primary awaits supply

In the primary market, Southwestern Energy Co.’s $1.3 billion offering of mandatory convertible preferred shares was said to be two to three times oversubscribed, and the approximately $500 million offering of common stock “is approaching deal size,” according to a syndicate source.

The mandatory’s timing and talk remained unchanged from launch, with the registered deals expected to price after the market close. Talk on the mandatory was for a dividend of 5.75% to 6.25% and an initial conversion premium of 17.5% to 22.5%.

In the broader markets, copper prices fell 5% on the day to 5.5-year lows amid dimmer global growth expectations.

Copper for March delivery ended at $2.5055 a pound on the Comex division of the New York Mercantile Exchange. But crude oil surged dramatically, ending up 5% for the day at $48.52 a barrel for West Texas Intermediate crude for February delivery.

Other areas were not much steadier. U.S. Treasury yields were down, with the 30-year bond yield seeing an all-time low, sinking to 2.396% shortly after disappointing U.S. retail sales.

In developments in Europe, a court ruled that sovereign bond buying is legal and necessary, clearing the way for the central bank to begin a bond buying program. The euro fell to 1.17 to the U.S. dollar, a level not seen since the euro was launched in 1999.

The Dow Jones industrial average ended down 186.59 points, or 1%, to 17,427,09, after falling as many as 330 points in the early going.

The S&P 500 index ended down 11.76 points, or 0.6%, to 2,011.27, and the Nasdaq stock market lost 22.18 points, or 05%, to 4,639.32.

U.S. retail sales decreased a seasonally adjusted 0.9% in December from a month earlier, the Commerce Department said Wednesday. Excluding gasoline sales, purchases fell 0.4%, while spending declined 1% when removing the volatile autos category.

Tesla active with shares down

In addition to news that Tesla’s China sales were down, chief executive Elon Musk also said Tuesday that he doesn’t anticipate the company will be profitable until about 2020.

Tesla’s 0.25% convertible due 2019, or the A tranche, lost about 2 points outright to 88 in active trade, but was up 0.25 point on hedge on a delta of 47%, a New York-based trader said.

Tesla’s 1.25% convertible due 2021, or the B tranche, was also down a couple of points at 85. But on a delta of 55%, the B’s were 0.5 point better on a hedged basis.

Tesla’s 1.5% convertibles due 2018 were at about 164, which was down from 172.625 on Tuesday. That was up a point or more on a dollar-neutral basis, assuming a delta hedge of 85% to 90%.

Tesla shares fell below $200.00 per share to $192.69, which was down $11.56, or 6%.

A second trader said he disagreed that the Tesla bonds were better, conceding that “maybe the olds were better,” but not the A and B tranches.

“The 1.5s [that] are deeper in the money are doing a little better, because it is a synthetic put play, and with the stock down the puts bid up,” a trader said.

Mentioned in this article:

Citrix Systems Inc. Nasdaq: CTXS

National Health Investors Inc. NYSE: NHI

Red Hat Inc. NYSE: RHT

Southwestern Energy Co. NYSE: SWN

Tesla Motors Inc. Nasdaq: TSLA

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