Morning Commentary: Red Hat active on buyout, trades at double par; Jazz notes improve

By Abigail W. Adams

Portland, Me., Oct. 29 – The convertible secondary space was its typical quiet self early in Monday’s session with trading volume light as equity markets improved after a steep sell-off last week.

Red Hat Inc.’s 0.25% convertible notes due Oct. 1, 2019 were in focus with the notes seeing high-volume trading activity after IBM announced a buyout of the company.

While the notes jumped more than 72 points outright to trade at double par on an outright basis, they continued to trade at parity and were moving in lock-step with stock, sources said.

The notes were seen changing hands at 235.5 early in the session with Red Hat stock up more than 48% to $173.00.

While the rest of the secondary market was largely quiet on Monday, Red Hat’s 0.25% convertible notes saw more than $25 million bonds change hands.

They were largely cash flow trades, a market source said.

IBM and Red Hat announced a definitive agreement on Sunday with IBM acquiring Red Hat’s outstanding shares for $190.00 per share.

The deal is valued at $34 billion, according to a company news release.

IBM will finance the transaction through a combination of cash and debt.

The acquisition of the open source cloud software company will position IBM as the leading hybrid cloud provider, said Ginni Rometty, IBM chairman and chief executive officer, in the news release.

“The acquisition of Red Hat is a game-changer. It changes everything about the cloud market,” Rometty said in the press release.

There was little notable activity on the tape outside of Red Hat, a market source said.

However, Jazz Pharmaceuticals plc’s 1.5% convertible notes due 2024 were making gains on an outright and dollar-neutral basis early Monday after the FDA approved the expanded use of one of the company’s products.

The 1.5% convertible notes were up 1 point to trade at 99 with stock up about 1.5% early in the session.

They were expanded about 0.25 point dollar-neutral, a market source said.

The Food and Drug Administration approved the expanded use of Jazz Pharmaceuticals’ Xyrem for the treatment of excessive daytime sleepiness in children with narcolepsy on Friday, according to a company news release.

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