Hedge funds take beating on Clarus’ pulled convertible offering; Limelight plummets

By Abigail W. Adams

Portland, Me., Oct. 23 – The convertibles secondary space saw another quiet session after a week with no new paper.

The only prospective deal of the week, Clarus Corp.’s $85 million offering of six-year convertible senior notes, was cancelled due to market volatility, the company said in a press release.

Hedge funds were taking a beating on the pulled offering, a source said.

Earnings and company related news were the driving force of trading activity in the space as equity benchmarks remained volatile.

Limelight Networks Inc.’s 3.5% convertible notes due 2025 plummeted on an outright and dollar-neutral basis on the heels of its earnings report.

CNX Resources Corp.’s 2.25% convertible notes due 2026 were active on news that EQT Corp. was pursuing a takeover of the company.

Clarus’ pulled offering

Clarus announced Thursday after the market close that it was pulling its $85 million offering of six-year convertible notes due to market volatility.

The pulled deal hurt the hedge funds that were taking a position in the company.

Clarus’ stock was down as much as 20% in intraday activity on Thursday as convertible arbitrage players shorted the stock to establish their hedge, a source said.

The massive drop in the outdoor equipment and lifestyle products company’s stock resulted in the cancellation of the offering.

Following the announced cancellation, Clarus’ stock was on the upswing on Friday, trading as high as $16.82 before closing the day at $16.21, an increase of 7.21%.

The stock that was shorted the previous day had to be repurchased at a premium.

“Hedgies got burned,” a source said.

Limelight plummets

Limelight Networks’ 3.5% convertible notes due 2025 plummeted on Friday following its third-quarter earnings report.

The 3.5% notes dropped more than 15 points outright with stock down almost 30%.

The first trade of the day was around 89.

The notes were down 3 points dollar-neutral, a source said.

While they traded back up to 91 in intra-day activity, they sank down to 86.375 by the late afternoon, according to Trace data.

The small and illiquid issue was relatively active with $5 million in reported volume.

Limelight’s stock traded to a high of $4.87 and a low of $4.18 before closing the day at $4.20, a decrease of 31.98%.

The content delivery service provider reported losses per share of 1 cent. Analysts were expecting a profit of 2 cents.

While the company missed on the bottom line, it beat on the top with revenue of $59.2 million versus analyst expectations for revenue of $58.94 million.

Stock also dropped on weak guidance with the company expecting revenue of $230 million to $240 million for the fiscal year and losses per share of 2 cents to earnings of 8 cents.

CNX active

CNX Resources’ 2.25% convertible notes due 2026 were active and making gains alongside stock on news that it was a potential takeover target.

The 2.25% notes gained 6 points outright even with stock off during Friday’s session.

CNX Resources’ stock traded to a high of $11.64 and a low of $11.16 before closing the day at $11.40, a decrease of 0.87%.

EQT Resources, which is also a convertible issuer, reportedly made an offer for the company in the latest merger and acquisition activity in the energy sector.

While less active, EQT’s 1.75% convertible notes due 2026 were also gaining since news broke about the potential acquisition on Thursday.

The 1.75% notes rose to 131 on Friday.

They started the week on a 126-handle.

EQT Resources’ stock traded to a high of $16.23 and a low of $15.42 before closing the day at $16.15, an increase of 2.22%.

Whether or not EQT’s takeover will benefit CNX’s convertible notes depends on the type of transaction it is.

If the transaction is an all-stock takeover, as most takeovers in the energy space have been, CNX would most likely get a credit upgrade, a source said.

However, if the transaction is a cash takeout, the change-of-control clause would be triggered and hedge funds would get hurt.

“It would go to the grid, and the grid would not be favorable,” a source said.

Mentioned in this article:

Clarus Corp. Nasdaq: CLAR

CNX Resources Corp. NYSE: CNX

Limelight Networks Inc. Nasdaq: LLNW

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