Tesla convertibles firm in wake of Model 3 rollout; mandatories eyed; summer doldrums in play

By Stephanie N. Rotondo

Seattle, July 10 – It continued to be the Tesla Inc. show in the convertible bond market on Monday, as the previous week’s trend bled into the new week.

But while Tesla remained in focus, a trader noted that volume was once again limited.

“Volume is $42 million,” the trader said at mid-morning. “The whole rest of the summer will be like this.”

As for the goings-on in Tesla’s 0.25% convertible notes due 2019 and the 1.25% convertible notes due 2021, a market source saw the former moving up to trade either side of 106.5, while the latter ticked up to the 107 area.

The stock finished the day at $316.05, a gain of $2.83, or nearly 1%.

At mid-morning, a trader said that while the underlying equity was initially softer, the bids in the convertibles were “better by 0.25 point to 0.5 point.”

With the stock at $306.05, the 0.25% convertibles were bid for at 106 and the 1.25% convertibles were at 105.5 bid.

On July 3, Tesla reported lower-than-expected deliveries for the second quarter, which resulted in investors pressuring the convertible bonds, as well as the equity.

However, there was a bit of a rebound on Friday, though the markets as a whole were trending higher.

Over the weekend, Elon Musk, the head of the electric car manufacturer, tweeted two photos of the first Model 3 off the production line. The sedan has been billed as the company’s most affordable model.

The first 30 vehicles will be handed over to customers on July 28. Another 100 are expected to be produced in August, with that number growing to over 1,500 in September and 20,000 in December.

Mandatories in vogue

Mandatory convertible preferred stock continued to be eyed on Monday.

For example, Arconic Inc.’s 5.375% series 1 class B mandatory convertible preferreds (NYSE: ARNCPrB) firmed $1.34, or 3.68%, to $37.79.

Over 934,000 shares traded during the session.

As for the company’s shares, they were also better, rising 70 cents, or 3.03%, to $23.83.

The gains came as Seth Seifman, an analyst with JPMorgan, raised his outlook on the stock to outperform from neutral.

However, he did lower his price target to $28.00 a share. Still, that represented a 21% premium over Friday’s closing share price.

Arconic has been under pressure of late, following reports that some of its products were used in the cladding system that caught fire at Grenfell Tower in London. Investors have been anxious to know what sort of liability Arconic may have in regards to the tragedy.

In his report, Seifman conceded that the associated risk was “hard to assess, but probably manageable and perhaps ultimately zero.”

Elsewhere in the mandatory realm, Becton Dickinson & Co.’s 6.125% series A mandatory convertible preferred stock (NYSE: BDXA) were active but lower on the day.

The convertible preferreds fell 6 cents to $55.30 on over 892,000 shares exchanged.

The company’ stock was also a touch lower, falling 29 cents to $197.50.

Mentioned in this article:

Arconic Inc. NYSE: ARNC

Becton Dickinson & Co. NYSE: BDX

Tesla Inc. Nasdaq: TSLA

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