Morning commentary: Convert sector hopes to benefit from tax plan, Navistar in focus

By Abigail W. Adams

Portland, Me., Dec. 19 – The secondary market will be slow in the run up to the holidays, market sources said, while congressional leaders on Capitol Hill dash to make changes to the U.S. tax code before the new year.

Many in the convertibles space are looking to the legislation as a potential catalyst for primary and secondary market activity.

While some corporations have called the measure devastating, several market sources said they were hopeful the cap the legislation places on the deduction for interest paid on debt would make convertible issuances more attractive to corporations.

The House and Senate diverged on the cap with the compromise bill placing a 30% cap on EBITDA for four years then a 30% cap on just EBIT, according to the Tax Foundation.

Large cap investment grade companies have lost interest in convertible securities due to the attractiveness of straight debt in the current low interest rate environment, several sources said.

Some sources were hopeful that rising benchmark lending rates and the cap on deductions of corporate debt would draw these companies back to the convertible securities market.

The U.S. House of Representatives is expected to vote on the tax bill this afternoon. The GOP believes it has enough votes in the Senate to pass the legislation.

While trading activity was slow early in Tuesday’s session, Navistar International Corp.’s 4.5% convertible notes due 2018 and 4.75% convertible notes due 2019 were in focus.

Both notes made gains after the company announced its fourth quarter earnings and year end results before market open Tuesday.

The 4.5% notes jumped 3 points to 104.9 in early trading activity. The 4.75% notes also jumped 3 points to 110.67, according to Trace data. Navistar’s stock was up 6.76% at $45.04 in early trading.

The holding company for the manufacturer of commercial trucks reported net income of $1.36 per diluted share for the fourth quarter of 2017 versus a net loss of $0.42 per diluted share in the fourth quarter 2016.

The company reported an annual net income of $0.32 per diluted share for 2017 versus a net loss of $1.19 per diluted share for 2016.

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