Red Hat convertibles active on buyout, trade at double par; Jazz up; Weatherford tanks

By Abigail W. Adams

Portland, Me., Oct. 29 – The convertible secondary space was quiet on Monday with trading volume light as equity markets started the day strong but closed with losses.

Red Hat Inc.’s 0.25% convertible notes due Oct. 1, 2019 were in focus with the notes seeing high-volume trading activity after IBM announced a buyout of the company.

While the notes jumped to trade at double par, they were moving in lock-step with stock and were unchanged dollar-neutral, sources said.

Weatherford International Ltd.’s 5.875% convertible notes due 2021 tanked on Monday with the notes dropping on an outright and dollar-neutral basis after the company’s third-quarter earnings report.

Jazz Pharmaceuticals plc’s 1.5% convertible notes due 2024 saw slight improvement on an outright and dollar-neutral basis Monday after the FDA approved the expanded use of one of the company’s products.

Red Hat’s buyout

Red Hat’s 0.25% convertible notes due 2019 dominated activity in the secondary space with the notes jumping more than 70 points outright to trade at double par.

However, the notes continued to trade at parity and were moving in lock-step with stock, sources said.

The notes were seen changing hands at 235.5 early in the session with Red Hat stock up more than 48% to $173.00.

They were seen trading at 228.18 versus an equity price of $169.15 later in the afternoon.

While the rest of the secondary market was largely quiet on Monday, Red Hat’s 0.25% convertible notes saw more than $60 million bonds change hands.

They were largely cash flow trades, a market source said.

The notes were unchanged on swap, another source said.

Red Hat stock closed Monday at $169.63, an increase of 45.38%.

IBM and Red Hat announced a definitive agreement on Sunday with IBM acquiring Red Hat’s outstanding shares for $190.00 per share.

The deal is valued at $34 billion, according to a company news release.

IBM will finance the transaction through a combination of cash and debt.

The acquisition of the open source cloud software company will position IBM as the leading hybrid cloud provider, said Ginni Rometty, IBM chairman and chief executive officer, in the news release.

“The acquisition of Red Hat is a game-changer. It changes everything about the cloud market,” Rometty said in the press release.

The deal is expected to close in the second half of 2019 and is subject to Red Hat shareholder approval.

Weatherford sinks

Weatherford’s 5.875% convertible notes due 2021 tanked on Monday after the company reported third-quarter earnings prior to the market open.

The notes were contracted about 4 points dollar-neutral, a market source said.

They were changing hands at 83.3 versus an equity price of $1.63, another source said.

Weatherford stock closed Monday at $1.54, a decrease of 22.22% and a new 52-week low.

More than $13 million of the bonds were on the tape by the late afternoon, making Weatherford one of the most active names in the secondary space.

The notes have been under pressure since last week when S&P downgraded the oilfield services company. “That started the process,” a market source said.

Prior to the downgrade, the notes were trading in the 91 to 92 range, according to Trace data.

S&P lowered Weatherford’s issuer credit rating to B- from B and lowered the rating on the company’s senior unsecured debt to CCC+ from B- on Oct. 25, Prospect News reported.

The company’s third-quarter earnings helped solidify the notes’ downfall.

While Weatherford’s bottom-line results beat expectations, it missed on its top-line.

Weatherford reported a non-GAAP loss per share of 10 cents for the quarter, versus analyst expectations of a loss per share of 12 cents.

However, Weatherford reported revenue of $1.44 billion, which missed analyst expectations of revenue of $1.52 billion.

Jazz improves

Jazz Pharmaceuticals’ 1.5% convertible notes due 2024 were making gains on an outright and dollar-neutral basis after one of its products received FDA approval for expanded use.

The 1.5% convertible notes were up 1.25 points on an outright basis and were expanded about 0.25 point dollar-neutral, sources said.

They were seen trading at 98.625 versus an equity price of $155.00 in the late afternoon.

Jazz stock closed Monday at $153.27, a decrease of 0.66%.

More than $7 million of the bonds were on the tape by the late afternoon.

The Food and Drug Administration approved the expanded use of Jazz Pharmaceuticals’ Xyrem for the treatment of excessive daytime sleepiness in children with narcolepsy, the company announced prior to the market open on Monday.

Mentioned in this article:

Jazz Pharmaceuticals plc Nasdaq: JAZZ

Red Hat Inc. NYSE: RHT

Weatherford International Ltd. NYSE: WFT

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