Morning Commentary: Convertible bonds strengthen amid continued equity market gains

Chicago, Oct. 4 – Tuesday morning optimism was running higher as equity indexes ticked up, with the S&P 500 index up 2.75% and the Russell 2000 index and the Nasdaq Composite index over 3% higher each.

Norwegian Cruise Line Holdings Ltd., which took a hit like industry peer Royal Caribbean Cruises Ltd. from Carnival Corp.’s earnings miss on Friday, was staging a recovery on Monday, continuing into the first trades of Tuesday morning.

The company’s convertible bonds were given extra incentive for a lift as the cruise line announced it was now working in post-pandemic fashion, dropping all Covid-19 testing and vaccination rules.

The company’s 5.375% bonds due 2025 were on the board again on Tuesday morning after Monday activity. They had dropped 7.5 points on Friday, came back about 2 points better on Monday and were marked another 2 points better on Tuesday.

The notes had been staging a steady recovery from their lowest level in mid-June before falling back and erasing all of those gains last week.

Similarly, but less active, NCL’s 1.125% convertible bonds due 2027 were moving in modest activity on Tuesday morning after a busier Monday afternoon, post-Covid announcement.

The 1.125% bonds fell over 6 points on Friday to trade in the low 60s and were ticking 1 point or so higher on Monday. On Tuesday morning, a trader marked them 2 points higher, at the upper end of 65, reaching for 66. The bonds were at around 68.75 when they started the last week before confidence for cruise lines took a hit late in the week.

The company’s stock is clamoring back from a precipitous fall on Friday and was up 10.7% at midmorning, trading at $12.62. Shares had still not recovered to where they started a week ago, though.

Zendesk, Inc.’s 0.625% bonds due 2025 were on the tape on Tuesday morning.

The bonds from the issuer are reasonably liquid and have been remarkably flat since the beginning of July, inching up by almost imperceptible increments from 97 to mid-98.

The $1.15 billion issue priced in June 2020 against a stock price of $82.085 with a 32.5% conversion premium.

The San Francisco-based software-as-a-service products company’s stock has likewise flatlined since early July. It was trading at $76.75 on Tuesday morning.

The company announced stockholder approval of an acquisition of the company by Hellman & Friedman and Permira for $77.50 per share in mid-September. Closing is expected in the fourth quarter.

Also from the software realm, Palo Alto, Calif.-based MongoDB, Inc.’s 0.625% convertible bonds due 2025 were zooming higher on Tuesday morning in early trades, continuing a trajectory launched Monday.

The bonds were on the tape in the early going, clearing 120.

A busy Monday started them at 116 with a drop in the afternoon and trading later that picked them back up and nearly, but not quite, left the trading price at the end of the day where it started.

On the last day of August, the bonds took a nosedive, which they have yet to recover from. The company had an earnings beat, but forward guidance sank the stock, with a full recovery not yet in sight.

The company’s stock was higher by 6.03% over the last five days, with chutes and ladders activity bringing it up and then down; however, shares for the past five days have hit a high of $209.05 on Friday and a low of $190.42 on Monday morning – with a bounce back up to $205 around 24 hours later.

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