By Abigail W. Adams
Portland, Me., Dec. 19 – The secondary market will be slow in the run up to the holidays, market sources said, but congressional leaders on Capitol Hill are sprinting to pass tax reform legislation before the week is through.
The largest overhaul to the U.S. tax code in decades cleared the House this afternoon, but with the Senate removing three provisions from the bill, the House must vote again on the legislation. The vote is expected to take place Wednesday.
Many in the convertibles space are looking to the legislation as a potential catalyst for primary and secondary market activity in the new year.
Trading activity was slow during Tuesday’s session with only $262.97 million in play by late afternoon, according to a market source. However, some notes continue to be actively traded.
Navistar International Corp.’s 4.5% convertible notes due 2018 and 4.75% convertible notes due 2019 were in focus during Tuesday’s session. Both notes climbed about 4 points in active trading as their underlying equity made gains after positive fourth quarter earnings and year-end reports.
Advanced Micro Devices Inc.’s 2.125% convertible notes due 2026 were active during Tuesday’s session and have gained about 8 points since last week. The semiconductor company is drawing renewed attention after its shares plunged from concerns over the sustainability of the company’s crypto-currency mining products.
The recently issued mandatory convertible securities tied to New York Times Co. saw renewed attention and expansion in trading activity as the company’s equity marched steadily upwards.
Converts and taxes
The legislation that many market sources are hopeful will attract more companies and issuances to the convertibles space cleared the U.S. House of Representatives Tuesday afternoon in a 227-203 vote.
While the GOP believes it has enough votes in the Senate to pass the legislation, the Senate removed three provisions from the bill, which will require the legislation to go to another House vote. The second vote is expected on Wednesday.
While some corporations have called the measure devastating, several market sources said they were hopeful that the cap the legislation places on the deduction for interest paid on debt would make convertible issuances more attractive to corporations.
The House and Senate diverged on the cap with the compromise bill placing a 30% cap on EBITDA for four years then a 30% cap on just EBIT, according to the Tax Foundation.
Large cap investment-grade companies have lost interest in convertible securities due to the attractiveness of straight debt in the current low interest rate environment, several sources said.
“Everything hinges on the capital market guys,” a trader said. “Do they need to raise money and will they do it with equity-linked financing? I’m hoping for it.”
Navistar positive
Navistar’s 4.5% convertible notes due 2018 and 4.75% convertible notes due 2019 were in focus.
Both notes made gains after the company announced its fourth quarter earnings and year end results before market open Tuesday.
The 4.5% notes jumped 3 points to 104.9 in early trading activity. The notes traded in a range of 103.97 to 105.45 before ending the day at 105.115, according to Trace data.
The 4.75% notes also jumped 3 points to 110.67 in early trading and continued to make gains ending Tuesday’s session at 111.754, according to Trace data.
Navistar’s stock made large gains during trading Tuesday, closing the day at $45.30, an increase of 7.37%.
The holding company for the manufacturer of commercial trucks reported net income of $1.36 per diluted share for the fourth quarter of 2017 versus a net loss of $0.42 per diluted share in the fourth quarter 2016.
The company reported an annual net income of $0.32 per diluted share for 2017 versus a net loss of $1.19 per diluted share for 2016.
AMD doesn’t need crypto-currency
Advanced Micro’s 2.125% convertible notes due 2019 saw some action during Tuesday’s session. The notes were trading in a range of 157.9 to 160 before ending the day at 158.250, according to Trace data.
While a nominal increase from Monday’s closing price, the notes have jumped about 8 points since last week when they were trading in the 147 to 149 range.
While Advanced Micro’s convertible notes made gains, the semiconductor company’s underlying stock did not. The equity ended the day at $10.95, a decrease of 0.27%.
Options traders are expecting a large move in Advanced Micro’s stock with the Jan. 19 2018 $3.50 put carrying the highest implied volatility of equity options traded Tuesday, Zacks Equity Research reported.
Investor confidence in the company was shaken due to a leveling off of demand for the company’s graphics processing units used in crypto-currency mining.
While still recovering from Morgan Stanley’s Oct. 30 downgrade over concern related to crypto-currency mining demand, Macquarie recently upgraded Advanced Micro to neutral from underperform.
Analysts from Macquarie see sustainable growth potential in the company’s server business.
NYT-linked mandatory
The New York Times-linked 5.1875% mandatory convertible securities due 2020 made gains on Tuesday as New York Times stock marched steadily upward since last week.
The 5.1875% securities, which priced at par of $100, were at $103 bid on Tuesday, a market source said. The securities were previously trading in the $101 range. There was a flurry of activity surrounding the notes when they made their market debut, but trading has since tempered.
“They were really active the first two days but quieted down,” a market source said. “They found their home.”
With New York Times stock making gains last week, the securities expanded. New York Times stock ended the day Tuesday at $18.6, a 0% increase. New York Times stock was at $17.75 when the mandatories priced on Dec. 7.
Mentioned in this article:
| Navistar International Corp.: | NYSE: NAV
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| Advanced Micro Devices Inc.: | Nasdaq: AMD
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| New York Times Co.: | NYSE: NYT
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