High-grade convertibles in focus as Treasury yields rise; Hannon Armstrong plunges

By Abigail W. Adams

Portland, Me., Oct. 3 – The convertibles secondary space remained dormant on Tuesday on a brutal day for markets with heavy selling in equities as Treasury yields hit multi-decade highs.

Sources had expected a slowdown in primary market activity surrounding earnings but an active end to the year with refinancings continuing to drive issuers to the market.

However, the pricing available to issuers may have changed dramatically over the past two weeks.

With Treasury yields brushing up against 5%, convertible bond pricing will have to widen to attract interest, a source said.

“There’s still demand but things will need to get repriced,” a source said. “Convertibles aren’t cheap enough compared to the bond market.”

The Dow Jones industrial average closed Tuesday down 431 points, or 1.29%, the S&P 500 index closed down 1.37%, the Nasdaq Composite index closed down 1.87% and the Russell 2000 index closed off 1.69%.

The two-year Treasury yield closed Tuesday at 5.163% and the 10-year yield at 4.799% while the 30-year yield hit 4.951% before closing the day at 4.925%.

There was $62 million in reported volume about one hour into the session and $500 million on the tape about one hour before the market close.

The market was weak across the board with the space contracting about 0.25 point dollar-neutral, a source said.

However, activity was concentrated in high-grade names, which were holding up comparatively well on a brutal day for markets.

American Water Capital Corp.’s 3.625% exchangeable senior notes due 2026 (Baa1/A), Southern Co.’s 3.875% convertible notes due 2025 (Baa2/BBB) and CMS Energy Corp.’s 3.375% convertible notes due 2028 (Baa2) were the most active high-grade names of the day.

The notes were performing well in the heavy volume.

However, Hannon Armstrong Sustainable Infrastructure Capital Inc.’s 3.75% exchangeable notes due 2028 (Baa3) sank to a new outright low in heavy volume as stock cratered.

Holding up

High-grade names remained in focus on Tuesday with several issues holding up well in heavy volume.

American Water’s 3.625% exchangeable notes were slightly lower outright as stock sank more than 2%.

The 3.625% notes were changing hands at 95.875 versus a stock price of $118.54 early in the session and 95.5 versus a stock price of $116.03 in the late afternoon, sources said.

There was $21 million in reported volume.

American Water’s stock traded to a high of $119.20 and a low of $115.39 before closing at $117.02, a decrease of 2.3%.

Southern Co.’s 3.875% convertible notes due 2025 were slightly stronger outright as stock bucked the broader market and rose about 2%.

The 3.875% convertible notes were trading at 96.5 versus a stock price of $62.09 early in the session and 96.75 versus a stock price of $62.88 in the late afternoon, sources said.

There was $50 million in reported volume.

Southern Co.’s stock traded to a low of $61.56 and a high of $64.38 before closing at $64.04, up 2.1%.

CMS Energy’s 3.375% convertible notes due 2028 were also slightly stronger outright with stock up more than 2%.

The 3.375% notes were changing hands at 93.125 versus a stock price of $51.74 in the late afternoon.

There was $21 million in reported volume.

CMS’ stock traded to a high of $52.05 and a low of $49.87 before closing at $51.90, up 2.65%.

Hannon Armstrong hits low

Hannon Armstrong’s 3.75% exchangeable notes due 2028 sank to a new outright low in heavy volume as stock fell double digits.

The 3.75% exchangeable notes sank 4.5 points outright to break below a 90-handle.

The notes were trading at 89.5 versus a stock price of $17.62 in the late afternoon.

There was $16 million in reported volume.

While the notes sank outright, they were moving in line dollar-neutral, a source said.

Hannon Armstrong’s stock traded to a low of $16.19 and a high of $19.10 before closing at $16.50, a decrease of 14.44%.

The 3.75% notes have been volatile since pricing at par on Aug. 8.

The notes sank as low as 93 with heavy selling in the company’s stock in mid-August.

However, the convertible notes surged as high as 106 as stock jumped in early September.

The notes were trading in the 105 to 106 context heading into the Federal Reserve’s Sept. 20 announcement.

They have been on a steady downtrend since with selling in the name accelerating on Tuesday.

Renewable energy companies have taken a hit since NextEra forecast a dividend cut last week.

Investors may be expecting a similar fate for Hannon, a REIT focused on renewable energy.

Mentioned in this article:

American Water Works Co., Inc. NYSE: AWK

CMS Energy Corp. NYSE: CMS

Hannon Armstrong Sustainable Infrastructure Capital Inc. NYSE: HASI

Southern Co. NYSE: SO

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.