Morning Commentary: Akamai drops post earnings; GDS Holdings market decline in focus

By Abigail W. Adams

Portland, Me., Aug. 1 – While the prospects for new paper this week are diminishing in the convertibles market, major stock movements have spurred trading activity in the secondary space.

There was $82 million in trading volume on the tape early in Wednesday’s session with Akamai Technologies Inc.’s convertibles major movers, according to a market source.

Akamai’s 0.125% convertible notes due 2025 were the volume leaders with more than $13 million on the tape early in the session. The notes dropped more than 4 points outright to their lowest outright level since the $1.15 billion issue hit the market on May 17.

The 0.125% convertible notes were trading at 96.625 with stock down about $5. The 0% notes due 2019 were also active and were trading down about 1 point to 99.6. With the short duration of the 2019 notes, they were most likely trading on a short-yield basis, a market source said.

Akamai’s stock was down to $70.30, a decrease of about 6.56% early in the session.

The drop in Akamai’s stock came after the cloud service provider reported second-quarter earnings after the market close Tuesday. While the company beat analyst expectations for earnings per share, third-quarter guidance fell short.

Akamai reported non-GAAP earnings per share of 83 cents for the second quarter; analysts had expected 79 cents per share.

GDS Holdings Ltd.’s 2% notes due 2025 remained in focus after a disastrous Tuesday that saw the notes fall more than 22 points outright and contract 10 points on a dollar-neutral basis. After a brief rise that saw the notes as high as 78 in early trades, the notes sank back down to trade in the 73 to 74 range early Wednesday.

GDS Holdings’ stock was on the rise early Wednesday after a 37% drop on Tuesday. Stock was up to $24.63, an increase of 12.83%, early in the session.

GDS Holdings’ stock and convertible notes got crushed on Tuesday after short-seller Blue Orca Capital released a report alleging the Shanghai-based data center operator had borrowed recklessly, overvalued acquisitions to siphon money to insiders and overstated its service area, utilization rates and revenues.

GDS has since responded to the report which “reflect a fundamental misunderstanding of the company’s business,” according to a GDS press release. GDS reaffirmed its utilization rates and service areas and defended its acquisitions.

Sources were mixed on the merit of the report. While Chinese companies are a common target for short-seller reports, inflation of revenue and accounting statements is common, a source said. The allegations in the report “sound about typical,” the source said.

GDS Holdings’ balance sheets do reflect tremendous growth in cash equivalents from 2017 to 2018. However, in addition to the rise in cash equivalent was a rise in debt with the company drawing down $845 million of a $1 billion secured revolving loan on March 31, 2018 through a subsidiary.

The revolver will be paid out in the case of bankruptcy before the convertible notes. GDS priced a $250 million issue of the convertible notes on May 31 with the greenshoe later lifting the total size of the deal to $300 million.

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