Convertibles steady as equities sell off; volumes still low; Isis adds with stock on J&J deal

By Rebecca Melvin

New York, Jan. 5 – Convertibles were mostly unscathed on Monday despite sharp selling in equities; and several, larger convertible bond issues, which were beaten down late last year, were notably improved amid stronger buying interest, market sources said.

Volumes were still relatively light, however, and that made it difficult to determine exactly what the trends in convertibles currently are, a New York-based trader said.

“I would say things were stable given the equity selloff, and they ‘held in’ a little better than expected,” the trader said.

Twitter Inc.’s dual tranches of $1.9 billion convertibles, which priced Sept. 11, were said to have improved about 0.25 point on a dollar-neutral basis to about 87 to 87.25.

Red Hat Inc.’s $805 million of 0.25% convertibles, which priced Oct. 1, were better by 0.375 point, the trader said.

The same was true of other quasi-investment-grade names and cross-over names that were supported by outright interest, including Citrix Systems Inc. and Priceline Group Inc.

Isis Pharmaceuticals Inc.’s 1% convertible bonds traded up in line to slightly better on a dollar-neutral basis, with the company’s stock higher on Monday after news that the Carlsbad, Calif.-based developer of gene-based therapeutic drugs had entered into a deal with a unit of Johnson & Johnson to develop antisense drugs to treat autoimmune disorders of the gastrointestinal tract. Isis will receive $35 million in upfront payments.

Elsewhere, energy and oil-related convertibles were notably quiet despite a renewed slide in oil prices on Monday that left West Texas intermediate crude for February delivery down more than 5% to $49.84 a barrel.

“No one was bottom fishing [in energy names], a New York-based trader said. “Had oil stabilized at, say, $55 people may have stepped back in. But since oil has taken another leg lower, people are reevaluating what is cheap. What was cheap before may not be cheap anymore,” he said.

The latest 5% hit to oil prices took the commodity down more than 50% from the highs it hit in the middle of 2014.

But the ongoing decline in oil prices wasn’t the only situation unnerving investors on Monday, convertibles traders said. Also in focus were the ramifications of the now strong U.S. dollar, the impact that a possible exit of Greece from the Eurozone would have on that region, the geopolitical situation in the Ukraine, a sudden move in bond prices, and real estate problems in China, a New York-based trader said.

“The U.S. currency at all-time highs will put a little dent in GDP growth,” the trader said, as companies that deal internationally lose business to companies that deal in euro and sterling.

“The focus is not just oil, but the whole macro perspective” and the fact that the 10-year Treasury bond yield dropped to 2.04% on Monday, the trader said.

A recovery in stocks and bonds in the second half of December from the first half of the month wasn’t indicative of where the market really is, he said.

“A lot of that was year-end and month-end window dressing, and it was on lower volumes. It didn’t take much to move prices,” he said.

Treasuries at 2.04% will affect utilities and REITs.

Meanwhile the elections in Greece at the end of the month may precipitate pressure on the country to leave the Eurozone. That fear is putting a damper on the region, he said.

On Monday, there were more buyers than sellers in convertibles and that buoyed the space, but one trader wasn’t complacent about the stability, noting that there was not a lot of volume, and liquidity is an issue, even though things “seemed better to buy on Monday.”

He said, “We’ll know a little better later in the week when volumes pick up.”

On Monday about $295 million of bonds traded hands and while that was better than the $100 million or so that traded during recent sessions, muted by the holidays, it was still 50% less than most days, the trader said.

The S&P 500 stock index fell 37.62 points, or 1.8%, to 2,020.58 on Monday; the Dow Jones industrial average fell 331.346 points, or 1.9%, to 17,501.65; and the Nasdaq stock index dropped 74.24 points, or 1.6%, to 4,652.57.

Twitter, Red Hat improve

Both Twitter tranches were seen up 0.25 point to 87 to 87.25. There was good volume in those two bonds.

Twitter shares ended down 18 cents, or 0.5% at $36.38 in lighter-than-average volume.

“Twitter is more interesting, between the two issues. They are better to buy,” a trader said.

He attributed the strength to market players taking advantage of low stock prices to top up on the convertibles of companies that they like.

“People are generally reallocating their portfolios, topping up on some of their favorite names like Twitter and Red Hat,” the trader said.

Isis flat to better

The Isis 1% convertible bonds traded up in line to a little better on a dollar-neutral basis, with shares higher on Monday on the deal with Johnson & Johnson unit Janssen Biotech Inc.

The agreement will cover three programs. Isis is eligible to receive nearly $800 million in development, regulatory and sales milestone payments and license fees, and to receive royalties, while Janssen has the option to license a drug from each of the programs once a development candidate is identified, Isis’ release stated.

Isis’ 1% convertibles due 2021 traded at 116.125 versus an underlying share price of $64.00, a New York-based trader said. Earlier, the bond was bid at 115.5 versus the same $64.00 stock price, a second New York-based trader said.

Isis shares jumped on the news and ended up $6.60, or 11%, at $68.17.

“The bonds were a little better, but in general the Isis stock trades up or down $3.00,” a trader said, adding that he didn’t think the J&J news was significant.

“They are a little better on swap than where they went out at the end of the year,” a trader said, and he thought they were about fair value.

Mentioned in this article:

Citrix Systems Inc. Nasdaq: CTRX

Isis Pharmaceuticals Inc. Nasdaq: ISIS

Priceline Group Inc. Nasdaq: PCLN

Red Hat Inc. NYSE: RHT

Twitter Inc. Nasdaq: TWTR

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