Convertibles hit as high-yield, equities sell off; new SolarCity drops out of the gate

By Rebecca Melvin

New York, Sept. 25 – Convertibles were lower on Thursday in what was described as “an orderly markdown,” as high-yield bonds sold off and equities fell sharply, a convertibles trader said.

“My sources in convertibles said the credit side was a bigger factor today than equities,” the trader said.

Both high-yield and small capitalization issues bore the brunt of weakness.

“A lot of the names that are down are small-cap names, where the stocks are selling off with no visible credit to attach to it,” the trader added.

But the convertibles market, which was described as down 0.25 point or more across the board, was getting marked down in light volume.

“Realistically, it’s just an orderly mark down on light volume, driven by continued weakness in high yield,” he said.

The Rosh Hashana holiday helped curb activity, traders said.

SolarCity Corp.’s new 1.625% convertibles traded lower on both an outright and dollar-neutral basis Thursday after the San Mateo, Calif.-based clean energy company priced $500 million of the five-year senior notes at the cheap end of talked terms.

The new SolarCity convertibles were 98 bid, 98.5 offered versus an underlying share price of $61.90 at late morning, according to a Connecticut-based trader.

Trace data also showed a print at 99.

Given a 70% theoretical delta, the new bonds were “in” by about a point, dollar neutral, traders said.

SolarCity’s older 2.75% convertibles also traded down about a point on a dollar-neutral basis. They were down 3 points at 122, according to Trace data.

In the biotech space, high-yield names came in, especially shorter-dated paper like the Volcano Corp.’s 1.75% convertibles due 2017. The high-premium name came in a point to 86.5, a trader said.

The Volcano notes had slipped further to the 85 context, but buyers stepped in to pull it back up some, the trader said.

Elsewhere in the space, Merrimack Pharmaceuticals Inc.’s shares were up again on continued enthusiasm for news that Merrimack and Baxter International Inc. have inked an exclusive ex-U.S. licensing agreement to develop and commercialize the MM-398 cancer compound.

The Merrimack 4.5% convertibles were up to 146.25 from 136.5.

Meanwhile, Pacira Pharmaceuticals Inc.’s convertibles dropped on an outright basis, but were little changed on a delta-neutral basis as shares of the Parsippany, N.J.-based specialty pharmaceutical company dropped 11%.

“They were fine,” a trader said of Pacira. The deep-in-the-money convertibles traded last at 385 versus the share price close of $94.62. Earlier the Pacira convertibles had been at more than 400.

Given their profile, the bonds weren’t going to be moved much on a hedged basis. But it was unclear if the bonds did better or were flat on hedge.

Early Thursday, Pacira announced that it has received a warning letter from the U.S. Food and Drug Administration challenging promotional materials on its bupivacaine liposome injectable suspension.

The company plans to explain its position to the FDA and will provide an update upon resolution of the issues.

Elsewhere, Molycorp Inc.’s 6% convertibles due 2017 were trading right round the level to which they had tumbled on Wednesday. The bonds were seen around 35. They dropped from about 47 after a holder sold his position in the paper.

“Someone wanted out,” a Connecticut-based trader said of the Molycorp 6% convertibles. The other Molycorp convertibles were not trading, he said.

Overall, “things are caught soft, and it was more of a function of credit than anything else,” a trader said.

“If anything, guys are hoping that valuations will pull back, and they are looking for opportunities,” he said.

But Cantor Fitzgerald expects weakness to continue and said in a note Thursday that it has turned bearish on U.S. stocks.

The firm noted a number of “divergences” that it said pointed to market losses ahead, including a decline in market breadth and recent underperformance in small-caps.

Equities tumbled Thursday amid a combination of factors, including worries about global growth and rates, geopolitical concerns and adjustments to portfolios ahead of month end, sources said.

The Dow Jones industrial average fell 264.26 points, or 1.5%, to 16,945.80; the S&P 500 stock index fell 32.31 points, or 1.6%, to 1,965.99; and the Nasdaq stock market slid 88.47 points, or nearly 2%, to 4,466.75.

New SolarCity slips

SolarCity’s new 1.625% convertibles traded lower on both an outright and hedged basis.

“They came in a point right out of the gate. It shows there is no tolerance for wrong pricing or what they were perceived to be worth. So people were willing to let them go,” a trader said.

Stock borrow in the name, which was difficult to begin with, was getting worse, a second trader said.

SolarCity shares ended down $1.08, or 1.1%, at $61.96 on Thursday.

The company priced $500 million of five-year convertible senior notes after the market close Wednesday at par to yield 1.625% with an initial conversion premium of 32.5%.

There is a $75 million greenshoe for the deal, which was sold via joint bookrunners Goldman Sachs & Co., BofA Merrill Lynch and Credit Suisse Securities (USA) LLC.

Co-managers were Barclays and Deutsche Bank Securities Inc.

The new notes are non-callable for life, with no puts. There is dividend and takeover protection, and the bonds will be physically settled.

In connection with the offering, the company entered into capped call transactions with initial purchasers of the bonds.

About $57.6 million of the proceeds will be used to pay the cost of the capped call, with remaining proceeds for general corporate purposes, which include working capital, capital expenditures and potential acquisitions.

Mentioned in this article:

Merrimack Pharmaceuticals Inc. Nasdaq: MACK

Molycorp Inc. NYSE: MCP

Pacira Pharmaceuticals Inc. Nasdaq: PCRX

SolarCity Corp. Nasdaq: SCTY

Volcano Corp. Nasdaq: VOLC

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