Meritor convertibles in focus, drop on swap; Southwest Airlines, RingCentral notes eyed

By Abigail W. Adams

Portland, Me., Feb. 22 – It was a quiet return from the long weekend in the convertibles secondary space with equities volatile as the United States and western countries move to sanction Russia in response to Russian forces entering separatist regions in Eastern Ukraine.

While equities showed periods of strength during Tuesday’s session with some indexes briefly positive, the Dow Jones industrial average closed the day down 482 points, or 1.42%, the S&P 500 index closed down 1.02%, the Nasdaq Composite closed down 1.23% and the Russell 2000 index closed down 1.10%.

There was $48 million of reported convertibles trading volume about one hour into the session and $428 million on the tape shortly before the market close.

Meritor Inc.’s 3.25% convertible notes due 2037 were in focus with the notes plummeting on swap following news of the company’s acquisition.

Southwest Airlines Co.’s 1.25% convertibles due 2025 (Baa1/BBB) were active although largely unchanged as airlines come under pressure from skyrocketing fuel costs.

RingCentral Inc.’s 0% convertible notes due 2025 were on the rise early in the session with stock in positive territory on the eve of the company’s earnings report.

While a Regulation S offering, Moscow-based internet company Yandex NV’s 0.75% convertible notes due 2025 continued their downward spiral as losses mounted for the company’s equity.

Meritor plummets on swap

Meritor’s 3.25% convertible notes due 2037 were in focus with the notes plummeting on swap following news of the company’s acquisition.

The 3.25% notes were trading according to their takeout matrix, which was not beneficial to hedge players, a source said.

They gained about 3 points outright as stock skyrocketed more than 40%.

The 3.25% notes were changing hands at 110.375 in the late afternoon.

They sank 9 points on swap, a source said.

“That was an ouchie,” a source said.

There was about $20 million in reported volume with the notes the second most heavily traded issue during Tuesday’s session.

Meritor’s stock traded to a low of $35.44 and a high of $36.24 before closing the day at $35.47, an increase of 43.78%.

Stock skyrocketed following news the vehicle parts manufacturer would be acquired by Cummins Inc. in an all-cash transaction.

Cummins will pay $36.50 in cash for each Meritor share and assume debt for a total enterprise value of $3.7 billion.

Southwest active

Southwest Airlines’ 1.25% convertibles due 2025 were active although little changed during Tuesday’s session.

The 1.25% notes were changing hands at 138.25 versus a stock price of $45.62 in the late afternoon.

The large, liquid issue was largely moving with stock, a source said.

There was more than $36 million in reported volume.

Southwest’s stock traded to a low of $45.06 and a high of $46.25 before closing the day at $45.62, a decrease of 0.78%.

Airlines were under pressure on Tuesday as investors eyed the impact skyrocketing fuel costs will have on their operations, a source said.

RingCentral gains

RingCentral’s 0% convertible notes due 2026 were on the rise on Tuesday as the company’s stock held onto its gains in a choppy session.

The 0% convertible notes rose about 1 point outright to an 84-handle.

The 0% convertible notes were changing hands at 84.125 versus a stock price of $146.66 early in the session, according to a market source.

There was $6 million in reported volume.

However, activity in the note petered off as stock gave back its early gains.

RingCentral’s stock traded to a high of $150.85 and a low of $144.80 before closing the day at $147.64, an increase of 0.46%.

Stock was positive leading into the company’s earnings report, which came out after the bell.

However, stock was largely flat in afterhours trading following the earnings announcement.

RingCentral reported earnings per share of 39 cents, which beat expectations for earnings of 37 cents per share. Revenue was $448 million versus analyst expectations for revenue of $436 million.

Yandex eyed

While a Regulation S offering, Moscow-based internet company Yandex’s 0.75% convertible notes due 2025 continued their downward spiral.

The notes were changing hands at 88 versus an equity price of $37.47 early in Tuesday’s session.

Prior to the escalation of tensions between the United States and Russia over the Ukraine, the notes were trading on a 106-handle, a source said.

The notes sank to 97 on Feb. 15 as tensions escalated.

Yandex’s American Depositary Shares traded to a high of $43.31 and a low of $38.80 before closing the day at $39.42, a decrease of 11.91%.

While escalating tensions between the United States and Russia have dragged down markets across the board, there is limited direct exposure to Russian companies in the domestic market, a source said.

Mentioned in this article:

Meritor Inc. NYSE: MTOR

RingCentral Inc. NYSE: RNG

Southwest Airlines Co. NYSE: LUV

Yandex NV Nasdaq: YNDX

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