Convertibles end quarter on lackluster note, but quarter overall was good; Whiting strong

By Rebecca Melvin

New York, March 31 – U.S. convertibles put in a lackluster trading session to end the first quarter on Tuesday, with no discernable trends capping off the old quarter or indicative of strategies going forward in the new one, market players said.

“Everything is pretty name-specific; there’s no real theme,” a New York-based trader said.

In the past few sessions volatility has been light, but for the quarter, vol. and credit have been better and that has helped convertibles put in a pretty solid performance, a second New York-based sellsider said.

In addition, the existing space has crept up a little bit in terms of valuation this past month as there has been a lack of new issuance, a third source said.

There has been a good volume of issuance, at about $15.5 billion for the year so far, but a fewer number of deals.

The HFRX convertible arbitrage index for March is up about 0.25%, but for the year to date, it is up 1.6%.

DDR Corp. and the SanDisk Corp. convertibles were mentioned in trade early Tuesday, and Whiting Petroleum Corp. also continued to trade, with that issue continuing to gain after the Denver-based oil and gas exploration and production company priced $1 billion of the convertibles last week.

Tesla Motors Inc.’s convertibles were also trading some, and those issues were said to be in line, or flat, relative to the underlying shares, which were a bit lower on the day, a trader said.

Looking ahead to the new quarter, the strong U.S. dollar, which is up 9% for the year to date, is expected to be a headwind for corporate earnings, and questions regarding when the Federal Reserve will begin to lift rates will continue to be a theme, and should create volatility. But for the most part, traders are looking at names one by one and judging their prospects on individual characteristics.

Equities were sharply lower on Tuesday, erasing much of Monday’s rally. For the quarter, the S&P 500 index is barely in positive territory, the Nasdaq stock index is up nearly 3.5%, but the Dow Jones industrial average is in the red for the quarter.

The S&P fell 18.35 points, or 0.9%, to 2,067.89 on Tuesday; the Nasdaq lost 46.56 points, or 0.9%, to 4,900.88, and the Dow fell 200.19 points, or 1%, to 17,776.12.

DDR trades with share moves

DDR’s 1.75% convertibles due 2040 convertible traded last at 124.88 on Tuesday after changing hands early in the session at 127.46, which was up 0.21 point, according to Trace data.

That has been about the range within which the bond has traded for a week or more, as shares dipped into the end of last week and then climbed a little bit.

Shares of the Ohio-based shopping mall real estate investment trust ended Tuesday’s session down 19 cents, or 1% at $18.62.

There didn’t appear to be any news headlines that were spurring trades in this name, a New York-based trader said.

The REIT sector has been an area of focus for convertible traders of late. On Monday, American Realty Capital Properties Inc. was getting a look after the REIT released fourth-quarter and full-year results.

But while there has been some consolidation in the space, DDR is not viewed as a takeover target.

A second trader said that in recent sessions, REIT convertibles have been “kind of flat.”

“We think that they are going to be either better or worse with rates,” he said.

Whiting Petroleum edges up

Whiting Petroleum’s 1.25% convertible due 2020 were seen trading at 105.5 bid, 106 offered with the underlying share price at $31.00. That was up from 105.125 to 105.5 early in the session.

The bonds are up 3.5 points dollar neutral from issue, a trader said, and the deal was seen as one of the best this past month, if not for the quarter.

Demand for the bonds outstripped supply even though the issue is $1 billion in size. “No one seems to want to let go of it,” a trader said.

Whiting Petroleum’s shares added 18 cents, or 0.6%, to $30.90 on Tuesday.

The new 1.25% convertibles had their debut in secondary market action last Tuesday after the Denver-based oil and gas exploration and production company priced $1 billion of the five-year notes at the cheap end of talked terms.

New issues have tended to be very large deals based off of mergers and acquisitions activity, one market source said, but Whiting was an exception to that rule. Meanwhile there is likely to be more paper coming in the oil and gas patch, he said. But “there is a good appetite for well-priced deals.”

Mentioned in this article:

American Realty Capital Properties Inc. Nasdaq: ARCP

DDR Corp. NYSE: DDR

SanDisk Corp. Nasdaq: SNDK

Tesla Motors Inc. Nasdaq: TSLA

Whiting Petroleum Corp. NYSE: WLL

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