Volatility rocks markets; balanced convertibles ‘destroyed’; Illumina notes contract

By Abigail W. Adams

Portland, Me., March 18 – Volatility continued to rock markets on Wednesday with equities erasing their gains from the previous session and triggering a limit-down circuit breaker, which temporarily halted trading for the second time in one week and the fourth time since March 9.

The Dow Jones industrial average closed the day down 6.3%, the S&P 500 index down 5.18% and the Nasdaq composite down 4.7%.

Trading activity picked up with $58 million in reported volume about one hour into Wednesday’s session and $666 million in reported volume at the market close.

Short-covering was a major driver of trading activity, a source said.

While short-sellers of some convertible notes have made out over the past two weeks, the pain continued for most of the market with balanced convertible notes “destroyed,” a source said.

Guess? Inc.’s 2% convertible notes due 2024 were holding around par when the market began to show signs of cracking in late February.

Those notes have now lost more than half of their value, a source said.

Investment-grade paper was also beginning to trade at unheard of prices.

Booking Holdings Inc.’s convertible notes remained major volume movers in the secondary space with the notes continuing to come in.

Illumina Inc.’s 0% convertible notes due 2023 were also active with the notes plunging on an outright and dollar-neutral basis.

Convertible notes that trade for their yield were hard to move with many questioning the ability of companies to cover their debt, sources said.

There have been rumors circulating the market that the government may seek to ban short-selling.

“That doesn’t bode well for convertibles,” a market source said.

Without short-selling, hedge players will be unable to practice convertible arbitrage and a large portion of the convertible market will be unable to operate.

The ban was imposed in 2008 and was partly responsible for the massive contraction of the convertibles universe, a source said.

Guess? crumbles

Guess?’s 2% convertible notes due 2024 are just one of the balanced convertible notes that have gotten destroyed over the past week.

The 2% notes were holding around par in the last week of February.

They slipped to the mid-90s in early March and moved down to the mid-80s in the market turmoil last week.

The 2% notes dropped almost 40 points outright in the past week.

They changed hands at 48.5 on Wednesday as stock plunged almost 40%, according to a market source.

Guess stock traded to a low of $3.64 and a high of $6.00 before closing the day at $3.92, a decrease of 38.07%.

Stock plummeted after the clothing designer and retailer announced it would close all stores in the U.S. and Canada until March 27.

Booking active

Booking Holdings’ convertible notes remained major volume movers in the secondary space as the travel fare aggregator’s stock continued its downward trajectory.

The 0.9% convertible notes due 2021 were changing hands at 101.5 versus a stock price of $1,209.17 in the late afternoon.

With more than $88 million in reported volume, the notes were the most actively traded in the secondary space.

The 0.35% convertible notes due 2020 were changing hands at 105 versus a stock price of $1,172.12 in the late afternoon with more than $34 million of reported volume, according to a market source.

Booking Holdings stock traded to a low of $1,165.02 and a high of $1,327.09 before closing the day at $1,233.75, a decrease of 9.83%.

The investment-grade convertible notes have been one of the usual suspects on the tape over the past few weeks with large liquid issues the focus of trading activity.

Illumina contracts

Illumina’s 0% convertible notes due 2023 were also major volume movers on Wednesday.

The notes were trading at a price that would have been “unheard of two months ago,” a market source said.

The 0% notes traded as low as 90.25 in the late afternoon.

They were contracted another 2.5 points dollar-neutral after also getting clobbered on Tuesday, a market source said.

Illumina stock traded to a low of $196.78 and a high of $224.99 before closing Wednesday at $209.20, a decrease of 7.34%.

Investment-grade paper below par used to get gobbled up, a market source said. However, that trend has changed in the current market.

Mentioned in this article:

Booking Holdings Inc. Nasdaq: BKNG

Guess Inc. NYSE: GES

Illumina Inc. Nasdaq: ILMN

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