Convertibles secondary market firm; Tesla notes trade up again; Sea, Lumentum active

By Abigail W. Adams

Portland, Me., Dec. 17 – While Tuesday saw decent trading volume in the convertibles market, activity in the secondary space was beginning to wind down as the end of the year approaches.

“It is getting quiet,” a market source said.

While quiet, the convertible secondary space continued to firm on another strong day for equities.

“It continues to grind better,” a market source said.

With 2019 one of the best years for convertibles since the financial crisis, accounts were taking defensive postures and protecting their returns.

There has also been a wave of outright accounts taking profits as the end of the year approaches, a market source said.

Tesla Inc.’s 1.25% convertible notes due 2021 saw another high-volume day as stock broke through a 52-week high.

Lumentum Holdings Inc.’s new 0.5% convertible notes due 2026 remained in focus although with little movement in price.

Sea Ltd.’s 1% convertible notes due 2024 were also among the volume movers of Tuesday’s session with the notes improving on an outright basis.

Convertible returns

With convertible returns among their highest since the financial crisis, accounts were taking a defensive posture heading into the end of the year and protecting their gains, sources said.

Convertibles returns outperformed all other fixed income asset classes in 2019 with returns of 20% as of Dec. 6, according to the Barclays report “Room to Run.”

It was the best year for convertibles since 2013 when returns were 24.4%.

Outright accounts once again reaped the majority of the rewards.

Hedge accounts also saw a strong performance with HFRX index returns of 5.5%, according to the report.

In addition to accounts playing defense, there has been a wave of profit-taking from outright accounts, which has driven some of the trading activity in the space, a market source said.

Tesla’s new high

Tesla’s 1.25% convertible notes due 2021 once again saw high-volume activity on Tuesday as stock broke out to a new 52-week high.

The 1.25% notes saw a minor expansion in early trading, a market source said.

The notes were up another 0.125 point on a dollar-neutral, or hedged, basis after a 0.5 point expansion during Monday’s session.

The notes traded just shy of 120 with stock up early in the session.

The notes were changing hands at 119 versus a stock price of $368.00 later in the afternoon.

Tesla stock traded as high as $385.50 early in Tuesday’s session. However, stock came in as the session progressed.

Tesla stock traded to a low of $375.90 before closing the day at $378.99, a decrease of 0.66%.

The previous 52-week high for Tesla stock was $383.61.

The activity in Tesla’s 1.25% notes was most likely a result of outright selling, a source said.

Volume movers

Lumentum’s 0.5% convertible notes due 2026 were once again among the top traded issues of Tuesday’s session.

While actively traded, there was little movement in price, a market source said.

The 0.5% convertible notes were trading on a 105 handle on Tuesday.

There was about $22 million in reported volume by the late afternoon.

Lumentum stock traded as high as $76.28 before closing Tuesday at $75.65, an increase of 0.21%.

Meanwhile, Sea’s recently priced 1% convertible notes due 2024 were also among the volume movers of Tuesday’s session with the notes posting gains on an outright basis.

The 1% notes were up almost 1 point outright.

They were changing hands at 106 in the late afternoon with almost $15 million in reported volume, according to a market source.

Sea’s American Depository Receipts traded to a high of $38.48 and a low of $37.70 before closing the day unchanged at $38.00.

Lumentum’s 0.5% convertible notes and Sea’s 1% convertible notes were the last two large deals of 2019.

Sea priced $1 billion of the 1% notes on Nov. 13. Lumentum priced $900 million of the 0.5% convertible notes on Dec. 9.

Mentioned in this article:

Lumentum Holdings Inc. Nasdaq: LITE

Sea Ltd. NYSE: SE

Tesla Inc. Nasdaq: TSLA

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