Convertibles ‘mauled’ as equity sell-off intensifies; tech names lag; SunEdison contracts

By Rebecca Melvin

New York, Aug. 20 – U.S. convertibles gave way on Thursday and weakened significantly across the tech space and in other sectors as a slide in equities worsened.

“It was worse. Everything got mauled,” a New York-based trader said of the convertibles market.

Even vol. names, or paper that is set up to benefit from market volatility, didn’t hold up well in the end on Thursday, the trader said.

Initially, the selling in convertibles was described as orderly, and mostly flat, but as the day wore on and as selling intensified in equities, it likewise intensified in convertibles.

“In my infinite wisdom, I’d say there were more sellers than buyers,” a trader said. “And no one wants to be the first to step in [to buy] in a tape that is down 2%.”

Stock markets closed near their session lows as pessimism regarding global growth and oil markets took hold, and as speculation regarding the timing of a U.S. Federal Reserve rate hike shifted toward later rather than sooner for some market players.

The S&P 500 stock index fell into negative territory for the year, or down about 1% year to date.

For Thursday alone, the S&P 500 lost 43.88 points, or 2%, to 2,035.73, and the Dow Jones industrial average fell 358.04 points, or 2%, to 16,990.69. But the Nasdaq Composite stock index slumped the most, ending down 141.56 points, or 2.8%, at 4,877.49.

The steeper drop for the tech-heavy Nasdaq was also reflected in the convertibles market, where technology names fell harder than other sectors, including oil.

“A lot of the tech stuff lagged. You can see it in the Nasdaq, and that was really where most people focused their attention,” a trader said.

The Intel Corp. 2.95% convertible was one of the day’s most active traders on Thursday, as it was on Wednesday. The bonds moved lower again on an outright basis but were in line, or flat, compared to the underlying common stock – as was the case on Wednesday. The fact that it is an investment-grade name has sheltered it from the worst of the selling that pummeled lower credits.

The Intel bonds traded down to 115.5, which was off a little more than a point on an outright basis, against shares that were down 83 cents, or 2.9%, at $27.53.

Most things were not gapping down, a New York-based trader said.

NXP Semiconductors NV joined the list of volume names on Wednesday, but the NXP 1% convertibles, which traded down 3.5 points on an outright basis, held in pretty well on a swap, or dollar-neutral, basis.

The NXP bond was down by only about 0.25 point, compared to a full point of contraction seen in the bulk of the tech sector and across other sectors like solar, a trader said.

The NXP convertibles were 106.5 last versus an underlying share price of $82.02, the trader said. The shares fell 5.7%.

“They were a little bit weaker,” the trader said. “There has been a large seller pushing these, but it is starting to find a floor as they move back to par.”

Many of the same names were trading on Thursday as on Wednesday. Notable losers included Ctrip.com International Ltd. and SunEdison Inc.

“It’s tended to be the same names,” a trader said.

Intel, Micron and other tech names lagged. Solar names got trashed, the trader said.

“SunEdison and Ctrip were down about a point,” he said.

Investors will “look at valuation later, when things are looking OK,” a trader said.

Chesapeake Energy Corp. was not a big mover on Thursday, but it is a credit that has been gapping down for a while, a trader noted. On Thursday, the Chesapeake bonds were little changed relative to the shares. The reason for this was probably that crude oil prices were only off a little and natural gas prices were actually up a little. The securities have been weakening for a while.

Meanwhile the Iconix Brand Group Inc.’s 2.5% convertibles held up, a second trader said. The Iconix bonds were last at 95.25 bid, 95.75 offered.

The Iconix bonds have bounced back after the big drop earlier this month on word that founder and chief executive Neil Cole was stepping down. The Iconic 1.5% convertibles were still down 2 or 3 points, but the 2.5% convertibles recouped their losses, the trader said.

SunEdison down again

Shares of St. Peters, Mo.-based SunEdison, a solar technology company, fell another $1.37, or 10%, on Thursday, to $12.10. The loss was on top of a 7% drop on Wednesday.

Even though the shares gained on Monday after the announcement that it has formed a $1 billion acquisition fund with Goldman Sachs, the shares have dropped 60% in the last month.

Debt strapped SunEdison has been hurt along with the solar sector by the downward spiral of oil prices amid a global oil glut.

Mentioned in this article:

Chesapeake Energy Corp. NYSE: CHK

Ctrip.com International Ltd. Nasdaq: CTRP

Iconix Brand Group Inc. Nasdaq: ICON

Intel Corp. Nasdaq: INTC

NXP Semiconductors NV Nasdaq: NXPI

SunEdison Inc. Nasdaq: SUNE

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