Convertibles see sharp reversal from early gains; Whiting Petroleum had added a point

Rebecca Melvin

New York, Aug. 25 – U.S. convertibles tried to bounce back in the early going on Tuesday, in tandem with a move in equities, and there were pockets of strength particularly in the technology sector and some China names. But most of those gains fizzled as the broader markets retraced gains in the final hours of trade to end lower again.

“Early on, it was better to buy,” a New York-based trader said.

Whiting Petroleum Corp.’s 1.75% convertibles were up about a point on a dollar-neutral, or hedged, basis, at 77, for example.

“That’s a good benchmark to gauge the market,” the trader said of the Denver-based oil and gas company. A few technology names also improved, including Yahoo! Inc., Intel Corp. and Nvidia Corp.

But those early moves ended up being inconsequential given what happened at the end of the day, the trader said.

“The last hour wiped everything out when the market just rolled over. And you can assume that it’s going to open weaker in the morning,” the trader said.

Still, many convertibles were quiet at the end of the day, and it was difficult to determine exactly how the market performed due to lack of volume.

“People are away or they are not inclined to trade on these moves,” the trader said.

Overall, the market was better bid, if not actually trading, and the pace of selling slowed down. “But all of that doesn’t matter, given the severe retracement at the end of the day,” the trader said.

Equity markets climbed in the morning. The S&P 500 stock index was up 53.45 points, or 2.8% at 1,946.50 near midday, reversing the bulk of a 78-point, or 3.9%, slide on Monday.

Overseas, the Shanghai composite stock index racked up another major loss, ending down 7.6% on Tuesday after an 8.5% slide on Monday. But equities in the U.S. and other international markets were seemingly steadied by accommodation moves overnight by the People’s Bank of China, which cut its benchmark lending rate to 4.6% and lowered banks’ reserve requirements.

“Everyone was feeling pretty good,” a trader said.

But after lunch, the market started to sell off again, and the S&P 500 ended down another 25.60 points, or 1.4%, at 1,867.61. The Dow Jones industrial average lost 204.91 points, or 1.3%, to 15,665.44 and the Nasdaq Composite index fell 19.76 points, or 0.4%, to 4,506.49.

“It seems like there is a lot of day trading and not a ton of institutional conviction going on,” a trader said. It seems that those who stepped in to buy on the weakness weren’t willing to stick it out through the end of the session.

The down move represented a continuation of the trend in recent sessions amid worries about China’s economy and whether its slowing activity will result in a hard landing.

On Monday, convertibles were lower by 0.25 point to a point on swap as equities plunged. Shortly after the market open, the Dow plunged 1,000 points, although it ended down only 600 points.

At the end of the session, some market players were trying to figure out what the day actually brought about.

“We are ‘going out’ pretty weak, equity wise,” one trader said.

But amid these wild swings, many convertible have remained quiet.

“Convertibles were dead yesterday and will probably be for most of the next two weeks,” a New York-based trader said early Tuesday.

E-House (China) Holdings Ltd.’s convertibles were quiet on Tuesday after the Shanghai-based real estate services company reported better-than-expected second-quarter results that pushed its American Depositary Shares up nearly 10% in the early going. Those shares ended up 8%.

E-House’s 2.75% convertibles due 2018 were quoted at 93.5 bid, 94.5 offered, according to a New York-based trader. The bond’s underlying share price was $5.50. The E-House bonds priced in December 2013 at a discount of 97.5 when shares were $12.92.

“As we expected, the overall Chinese property market started to warm up since the end of March, driven in part by the government's loosened credit policies and purchasing restrictions in certain cities,” E-House co-chairman and chief executive Xin Zhou said in a news release.

“Despite the recent Chinese stock market volatility, the real estate sector has stayed relatively stable so far. As a result, we are on track to achieve our overall revenue target set at the beginning of the year,” Zhou said.

Fellow China convertibles issuer Ctrip.com International Ltd., which has been a casualty of the recent slide, was expected to have done “slightly better on the day,” although not a lot of the paper traded.

Ctrip.com shares ended up 5% on Tuesday, not succumbing to the late slump. Given the stock’s performance, the convertibles should be better, a trader said.

Meanwhile SunEdison Inc. shares plunged again, ending down $1.93, or 18%, at $8.80.

The SunEdison 6.75% perpetual convertible preferred was seen around 83, which was down from 86.75 bid, 88.75 offered on Monday and down from 100 a week ago when the $650 million offering priced.

The SunEdison 3.375% convertible due 2025, or the F tranche, slumped to 59 from 61.75 bid, 62.25 offered on Monday.

In the energy sector, American Energy Partners LP’s 3.5% convertibles due March 1, 2021, which can convert on a contingent basis into the company’s initial public offering of common stock, fell to 10 from 15 on Monday and 20, previously.

The Oklahoma City-based energy company, involved in onshore U.S. unconventional resource plays, priced the bonds in February 2014.

But Cobalt International Energy Inc.’s convertibles extended gains on shares that were down 0.5%. The Cobalt 2.625% convertibles due 2017 ended around 70, which was up from 67.50 on Monday and from 64 previously, according to a pricing source. Shares of the Houston-based oil and gas exploration and production company ended off slightly at $7.94, which was off 4 cents after a 10% increase on Monday.

The Cobalt 3.125% convertibles due 2024 rose again to 67 from 65 on Monday and from 60 previously.

The improvement has been sparked by the company asset sales. The Angolan Sociedade Nacional de Combustiveis de Angola – Empresa Publica has agreed to buy offshore Angola assets of Cobalt for $1.75 billion.

Mentioned in this article:

Ctrip.com International Ltd. Nasdaq: CTRP

Cobalt International Energy Inc. NYSE: CIE

Intel Corp Nasdaq: INTC

Nvidia Corp. Nasdaq: NVDA

SunEdison Inc. Nasdaq: SUNE

Whiting Petroleum Corp. NYSE: WLL

Yahoo! Inc. Nasdaq: YHOO

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