Yahoo better on swap ahead of earnings; DDR edges up dollar neutral; KEYW notes on tap

By Rebecca Melvin

New York, July 15 – Yahoo! Inc.’s 0% convertibles traded slightly better on a dollar-neutral, or hedged, basis on Wednesday ahead of the company’s second-quarter earnings report posted after the market close.

Yahoo missed estimates amid lower advertising revenue, but the internet company also said it has amended its agreement with Alibaba Group Holding Ltd. and will have to sell fewer Alibaba shares than previously expected when the Chinese e-commerce company goes public. Yahoo owns about 23% of Alibaba shares, and the ability to hold on to more shares means it stands to benefit as Alibaba grows.

Intel Corp.’s sister convertibles traded actively ahead of its earnings report, which was also released after the market close.

Intel’s convertibles have been trading very actively on a regular basis.

DDR Corp. traded actively and added on a hedged basis amid better buyers. But Cobalt International Energy Inc. was under pressure amid big sellers in the older issue. Meanwhile, the newer Cobalt issue contracted about 0.5 point on a hedged basis, market sources said.

In the primary market, KEYW Holding Corp. launched an overnight deal of $125 million of five-year convertible senior notes after the market close.

Overall, market players said there was not much of a theme to Tuesday’s trading and that so far this week, the news that has pushed names into trade has not been of sufficient magnitude “to move the needle.”

This sentiment pertained also to earnings reports due out this week. One source said that for companies reporting this week, this quarter is not “a make or break” one. But further along in earnings season, this is not the case, he said.

The source was referring to such companies as Cemex SAB de CV and Electronic Arts Inc.

Yahoo better on swap

Yahoo’s 0% convertibles due 2018 traded at 99.955, which was down 0.335 point from the previous level, according to Trace data.

That level was better by 0.25 point on swap, a New York-based trader said.

Shares ended down 9 cents, or 0.25%, to $35.61 on Tuesday.

On Monday, the Yahoo notes were quoted at 99.75 bid, 100.25 offered with the underlying shares at $35.60.

“Ninety percent of their market cap is their ownership stake in Alibaba. Options imply a 4% move today,” the trader said of Yahoo.

Prior to the market close, a second source said, “I don’t think earnings are going to move things a lot. At this point, it’s a call on the Alibaba IPO: it’s a Chinese IPO valuation.”

“Sometimes quarters matter, and sometimes they don’t,” the source continued.

Yahoo reported second-quarter earnings of $272.6 million, or 26 cents a share, which was down from $335 million, or 30 cents a share, in the year-earlier period. Excluding one-time items, earnings were up 2 cents to 37 cents. Revenue was down 4% to $1.08 billion.

Analysts were expecting earnings of 38 cents a share.

Yahoo also said in its earnings release that Alibaba and Yahoo have agreed to reduce the number of shares that Yahoo is required to sell at the IPO to 140 million shares from 208 million shares.

DDR edges up

DDR’s 1.75% convertibles due 2040 traded at 121.25 versus an underlying share price of $17.83. It was also said to have traded late in the day at 121.347 versus a share price of $17.86.

Shares of the Ohio-based shopping mall real estate investment trust added 9 cents, or 0.5%, to $17.92.

The bonds were said to have expanded about 0.25 point. “They have been moving up for a while. In that space, they are the most attractive one. Dollar wise it’s attractive, and it’s catching a bid with a little vol. in the market,” a New York-based trader said.

A second source said there was a big buyer in the market for this issue.

KEYW to price

KEYW, the Hanover, Md.-based cyber-security services company, launched an overnight convertibles deal, which is expected to price ahead of the market open on Wednesday.

The registered, off-the-shelf deal was talked at $125 million in size with its five-year convertible senior notes yielding 2% to 2.5% with an initial conversion premium of 22.5% to 27.5%.

RBC Capital Markets LLC and BofA Merrill Lynch are joint bookrunners, and SunTrust Robinson Humphrey Inc. is acting as co-manager.

The notes are non-callable for life.

In connection with the pricing of the notes, KEYW is planning to enter into privately negotiated capped call transactions with one or more of the underwriters.

A portion of the proceeds will be used to pay the net cost of the capped call. The majority of proceeds will be used to repay the company’s outstanding balances under an existing credit facility, with remaining proceeds to be used for working capital, capital expenditures and other general corporate purposes, including potential acquisitions.

Mentioned in this article:

Cobalt International Energy Inc. NYSE: CIE

DDR Corp. NYSE: DDR

Intel Corp. Nasdaq: INTC

KEYW Holding Corp. Nasdaq: KEYW

Yahoo! Inc. Nasdaq: YHOO

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