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Morning Commentary: Pioneer Natural Resources convertibles active
By Abigail W. Adams
Portland, Me., July 15 – It was another quiet morning in the convertible secondary space with equity markets rallying as expectations for a 100 basis points rate increase at the Federal Reserve’s July meeting cooled and retail sales came in higher than expected.
The Dow Jones industrial average was up 583 points or 1.89%, the S&P 500 index was up 1.52%, the Nasdaq Composite index was up 1.12% and the Russell 2000 index was up 0.93% shortly before 11 a.m. ET.
There was $68 million on the tape about one hour into the session with investment-grade convertible notes continuing to monopolize trading activity.
Pioneer Natural Resources Co.’s 0.25% convertible notes due 2025 (Baa1/BBB) saw the heaviest volume early Friday with the deep-in-the-money convertible notes rising alongside stock.
The notes were changing hands at 202.25 versus a stock price of $207.65 early in the session.
There was $13.5 million in reported volume.
Pioneer stock was changing hands at $208.60, an increase of 1.54%, shortly before 11 a.m. ET.
Deep-in-the-money convertible notes such as Pioneer’s tend to be held by arbitrage players.
However, Pioneer’s quarterly dividend recently surged.
The company has historically offered a dividend of 55 cents. However, the last three quarters, the company’s dividend has surged with the company paying a dividend of $7.38 last quarter.
Pioneer’s convertible notes carry dividend protection above 55 cents a quarter.
However, the large dividend increases the cost of shorting the stock.
“It really carves into the hedges,” a source said, and may be the reason holders are dumping their position.
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