Convertibles valuations holding in despite equity sell-off; Ctrip.com up; China names eyed

By Rebecca Melvin

New York, Jan. 6 – Convertibles mostly outperformed their underlying shares on Wednesday as growth and geopolitical worries and North Korea’s claim that it successfully tested a hydrogen bomb sunk global stocks. Oil prices also dragged lower.

“Converts are holding in there. In terms of valuation, they are holding, and, if anything, people are topping up, ex-energy,” a New York-based trader said, referring to the fact that he was “excluding energy” from his summation of the market.

“There was not a lot of U.S.-specific news pushing us down, and it doesn’t feel that bad in convertibles,” the trader said.

There has been a lot of activity centered on China-related convertibles, given the news flow coming out of China, he said.

Volumes remained below average, however, as the downdraft in equities has hit at the same time that market activity should be ramping up from the slower holiday period.

Ctrip.com International Ltd. has been strengthening this week, and the trend remained intact on Wednesday. For the week, the Ctrip.com bonds are up about 0.75 point on a dollar-neutral, or swap, basis, the trader said.

Qihoo 360 Technology Co. Ltd., which is now an M&A name, saw its three convertible bonds also holding in pretty well. The China PC and mobile internet security company said in December that holders of the bonds can put them at par plus interest if the company goes private, as planned.

In June the company entered into a definitive merger agreement to be acquired by a consortium of investors for $9.3 billion in cash, including the redemption of debt.

The Qihoo 1.75% convertibles due 2021 changed hands at 96 in the early going on Wednesday, which was little changed, according to Trace data. The Qihoo 0.5% convertibles due 2020 were little changed at 96.38 and the Qihoo 2.5% convertibles due 2018 were little changed at 98.5.

Qihoo shares were down 0.1% at $72.10.

Vipshop Holdings Ltd. was also holding in despite equity weakness, as was TAL Education Group.

Convertibles players seem to be “paying for vol. rather than worrying about the credit,” a trader said. That may be because they expect the current slump will be short-lived just as the new year activity was in 2014 and 2015.

Equities have slumped 2% to 3% within a week of the new year for the last two years, and it may be that market players are using it as a buying opportunity, the trader said. “We have had long only accounts buying the dips.”

2016 started on a downbeat on Monday as weak data from China caused a sell-off in equities. On Wednesday, the People’s Bank of China intervened again to weaken the yuan, stoking fears again that China’s economic growth prospects may be worse than expected.

Stock selling accelerated Wednesday afternoon after the Federal Reserve minutes from the last policy meeting were released, revealing that last month’s lift off on rates was taken despite lingering worries about low inflation among some of the policy makers.

Earlier equity markets, already jittery about China’s economic growth prospects and Middle Eastern tensions, were slammed by North Korea’s claim that it successfully tested its first hydrogen bomb. The U.N. Security Council denounced the activity, and there were international experts who doubted the shocking development. But there was consensus that the small communist nation’s intension is to continue to pursue a nuclear arms program regardless of international opinion.

Among energy names, Cobalt International Energy Inc. was weak again. The Cobalt 2.625% convertibles ended the day around 55 and the Cobalt 3.125% convertibles ended at about 48. Shares of the Houston-based oil and gas exploration and production company fell 40 cents, or 8%, to $4.71.

Whiting Petroleum Corp.’s 1.25% convertibles traded down more than a point to 67 when shares of the Denver-based energy E&P company were down by 83 cents, or 9%, at $8.21. But Whiting shares fell further after that trade, ending the day down $1.13, or 12.5%, to $7.91.

West Texas Intermediate crude oil for February delivery fell $1.91, or 5%, to $34.06 on the New York Mercantile Exchange on Wednesday.

Iconix Brand Group Inc.’s 2.5% convertibles due 2016 were active again, a Connecticut-based trader said, and that issue was acting like investors may view it as the next shoe to drop. The Iconix bonds traded at 82.75 bid, 83 offered early Wednesday. This paper had been in the lower 90s in December.

Shares of the New-York-based brand management company were at $6.41, which was little changed on the day but still up after jumping more than 20% last week.

The Iconix bond is extremely shorted dated, with a maturity date in June.

Ctrip grinding higher

Ctrip.com’s 1.25% convertibles due 2018, or the B tranche, were quoted at 136.25 at the close. The issue has been getting a little better each day and was up about 0.75 point this week so far, a trader said.

The B tranche was actively traded, but others of the Ctrip.com series were also active.

Ctrip.com’s 1% convertibles due 2020, or the C tranche, traded at 113, which was up about 0.25 point, according to Trace data.

“There has been a substantial amount of news flow out of China, and these stocks have been active,” the trader said.

Mentioned in this article:

Ctrip.com International Ltd. Nasdaq: CTRP

Cobalt International Energy Corp. NYSE: CIE

Iconix Brand Group Inc. Nasdaq: ICON

Qihoo 360 Technology Co. Ltd. Nasdaq: QIHU

TAL Education Group NYSE: XRS

Vipshop Holding Ltd. Nasdaq: VIPS

Whiting Petroleum Corp. NYSE: WLL

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.