Southwest convertibles dominate (again); Pioneer active; Splunk improves; DraftKings weakens

By Abigail W. Adams

Portland, Me., July 15 – It was another quiet day in the convertible secondary space, albeit with a stronger tone with equity markets rallying as expectations for a 100 basis points rate increase at the Federal Reserve’s July meeting cooled and retail sales came in higher than expected.

The Dow Jones industrial average closed Friday up 658 points or 2.15%, the S&P 500 index closed up 1.92%, the Nasdaq Composite index closed up 1.83% and the Russell 2000 index closed up 2.16%.

There was $68 million on the tape about one hour into the session and $358 million in reported volume about one hour before the market close with investment-grade convertible notes continuing to monopolize trading activity.

Southwest Airlines Co.’s 1.25% convertibles due 2025 (Baa1/BBB) remained the top traded issue in the secondary space with the notes nominally improved on Friday.

Pioneer Natural Resources Co.’s 0.25% convertible notes due 2025 (Baa1/BBB) were also active with the deep-in-the-money convertible notes rising alongside stock.

Splunk Inc.’s 1.125% convertible notes due 2025 were active on Friday with the notes improved on an outright and dollar-neutral basis.

While the overall market firmed on Friday, DraftKings Inc.’s 0% convertible notes due 2028 did not participate in the rally with the notes again breaking below a 60-handle while stock rose double digits.

Investment grade

Southwest’s 1.25% convertible notes due 2025 continued to see heavy volume on Friday as it has for much of the past two weeks.

The notes improved outright alongside stock during Friday’s session although they were largely moving inline dollar-neutral.

The 1.25% notes were up about 3.5 points outright with stock up 4%.

They were changing hands at 126.5 versus a stock price of $39.65 in the late afternoon.

There was $40 million in reported volume.

Southwest stock traded to a low of $38.37 and a high of $39.72 before closing the day at $39.56, an increase of 2.86%.

Southwest’s convertible notes have dominated activity for much of the past two weeks although with little movement in price.

The notes were added to Refinitiv Convertible Indices effective Thursday. However, even an index trade didn’t fully explain the heavy volume in the name, a source previously said.

Pioneer

Pioneer’s 0.25% convertible notes due 2025 were the second most heavily traded issue in the secondary space on Friday.

The notes were changing hands at 202.25 versus a stock price of $207.65 early in the session, according to a market source.

They were changing hands at 201.5 versus a stock price of $207.27 in the late afternoon.

There was $14 million in reported volume.

Pioneer stock traded to a low of $205.92 and a high of $211.15 before closing the day at $208.45, an increase of 1.47%.

Deep-in-the-money convertible notes such as Pioneer’s tend to be held by arbitrage players.

However, Pioneer’s quarterly dividend recently surged.

The company has historically offered a dividend of 55 cents.

However, the last three quarters, the company substantially increased its dividend payments with a quarterly dividend of $7.38 paid last quarter.

Pioneer’s convertible notes carry dividend protection above 55 cents a quarter.

However, the large dividend increases the cost of shorting the stock.

“It really carves into the hedges,” a source said, and may be the reason holders are dumping their position.

Splunk improves

Splunk’s 1.125% convertible notes improved in active trading on Friday.

The notes gained 1.375 points outright with stock up more than 5.5%.

They were marked at 82.25 bid, 82.75 offered in the late afternoon.

The notes expanded about 0.125 to 0.25 points dollar-neutral on the move up.

There was $9 million in reported volume.

Splunk stock traded to a low of $90.57 and a high of $95.60 before closing the day at $95.42, an increase of 6.28%.

DraftKings weakens

DraftKings’ 0% convertible notes due 2028 weakened on Friday with the already distressed notes losing more ground despite a double-digit gain in stock.

The 0% notes again broke below a 60-handle and stood poised to close the day at 59.375.

The yield on the notes was just shy of 9½%.

There was $7 million in reported volume.

While the long-busted convertible notes are not equity sensitive, DraftKings’ stock jumped in Friday’s rally to close the day at $12.86, an increase of 14.62%.

However, the premium on the notes is over 400%, a source said.

Mentioned in this article:

DraftKings Inc. Nasdaq: DKNG

Pioneer Natural Resources Co. NYSE: PXD

Southwest Airlines Co. NYSE: LUV

Splunk Inc. Nasdaq: SPLK

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