Convertibles firm; Palo Alto expands after earnings; Restoration Hardware recoups a point

By Rebecca Melvin

New York, Feb. 26 – Convertibles firmed up in generally quiet trade on Friday as the market continued to regain its footing following a tough couple of weeks amid weakness in the energy sector and other areas.

“I’d say it’s been the last two or three days that things have gotten better,” a New York-based trader said.

“It’s been a tough month for convertibles for February,” the trader said, adding that it was difficult to pinpoint which areas were better or worse or how they compared to the broader markets.

“It really depends on what sector exposure you had. Some energy was good, some bad. No one really outperformed one way or the other,” he said.

Palo Alto Networks Inc. rose on an outright basis and bumped up about 0.25 point on a dollar-neutral, or swap, basis on Friday following positive earnings that the California-based cybersecurity company announced Thursday.

Restoration Hardware Holdings Inc.’s two series of 0% convertibles were better bid and recouped about half of the dollar-neutral loss that they had suffered on Thursday when the Corte Madera, Calif.-based specialty retailer pre-announced quarterly results that fell short of expectations.

Restoration Hardware “was down two-ish points and richened up a point today,” a trader said.

Chesapeake Energy Corp.’s convertibles were ending the week on a strong note. The Chesapeake 2.5% convertibles and 2.25% convertibles were both up a point or more, extending gains notched Wednesday after the bonds jumped on news that the Oklahoma City-based natural gas company is buying back debt and taking other measures to conserve cash and improve its balance sheet.

The Chesapeake 2.5% convertibles due 2037 traded up to 44.625 on Friday after ending the session on Thursday at 42.75. That was up from 35 before earnings news was announced on Wednesday.

Elsewhere Colony Financial Inc.’s 3.875% convertibles traded at 88 early Friday, which was up about 0.5 point from the previous level after the Santa Monica, Calif.-based real estate investment and finance company posted results that were better than expected.

The REIT sector has been beaten down, and there didn’t yet appear to be a revival of interest as shares in the space were on the rise amid mostly positive earnings.

Despite the lack of new paper, which likely would boost secondary market trading action rather than sap pricing because of higher supply, the secondary was “feeling better” Friday with more evidence of market players willing to step in and buy some of the lower credit and beaten-down names in the space, a New York-based trader said.

“Market tone feels better. There is a bit of a bid under some of the speculative credits,” the trader said. Earlier in the week, the market was weaker, but in general that feeling that converts are teetering on the edge of a cliff has passed, the trader said.

“It’s slowly richening back up,” a second trader said.

The convertibles primary market was mute this past week with total new issuance for the year so far standing at a mere $1 billion in four deals. The European convertible primary market, with several more deals and of larger size per deal, has surpassed the U.S. primary.

This year’s $1.04 billion in U.S. primary issuance, compares to last year’s $12.59 billion for the same period, according to Prospect News’ data.

Palo Alto richens a bit

Palo Alto’s 0% convertibles due 2019 traded more than 10 points on an outright basis to about 144. Previously the bonds had been at 132, a New York-based trader said.

Shares were up $5.88, or 4%, to $146.17. But they had gotten a boost in the last hour of trading on Thursday after the company’s report was released early on its investor relations site.

Some of the pop in the shares materialized on Thursday after the earnings were released ahead of schedule, a trader said.

Palo Alto reported a wider quarterly loss on higher revenue, but excluding items results were better than expected. The company reported a loss of $62.5 million, or 72 cents per share, for the most recently concluded quarter. That compared to a loss of $43 million, or 53 cents per share, in the year-earlier quarter.

Excluding items, earnings were 40 cents per share, compared to 19 cents per share in the year-earlier period, and penny over the 39 cent estimate.

Revenue was $334.7 million, which was better than a forecast of $318.3 million.

Looking ahead, guidance was mixed, with revenue guidance above consensus estimates and earnings guidance lower than estimates.

Revenue guidance was in the range of between $335 million and $339 million compared to the consensus estimate of $334.64 million. Earnings per share guidance was between 41 cents and 42 cents, versus the 45-cent-per-share estimate.

“The earnings hit early. Shares had been $130.00 before and were up $15.00,” a trader said. “It was a bit of a relief rally on that.”

Mentioned in this article:

Chesapeake Energy Corp. NYSE: CHK

Colony Financial Inc. Nasdaq: CLNY

Palo Alto Networks Inc. Nasdaq; PANW

Restoration Hardware Holdings Inc. NYSE: RH

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