Convertibles secondary soft as equities rally; Redwood Trust on downtrend; Airbnb active

By Abigail W. Adams

Portland, Me., June 15 – It was an active day in the convertibles secondary space as equity markets firmed surrounding the Federal Reserve’s closely watched rate hike announcement.

The market has undergone a dramatic repricing over the past three sessions as the dovish forecasts that drove the late May rally were suddenly replaced with expectations for a 75 basis point rate increase.

And 75 bps it was with the Federal Reserve prepared to again raise interest rates 50 bps to 75 bps at the next meeting.

Equities were volatile surrounding the Federal Reserve’s announcement but closed the day with strong gains.

The Dow Jones industrial average closed up 303 points, or 1%, the S&P 500 index closed up 1.46%, the Nasdaq Composite index closed up 2.5% and the Russell 2000 index closed up 1.36%.

There was $50 million in reported convertibles trading volume about one hour into the session but activity picked up as the session progressed with $637 million on the tape about one hour before the market close.

While equity markets were strong, the convertibles secondary space did not participate in the rally with the market still feeling heavy, a source said.

The convertibles market has attracted a great number of cross-over investors. However, for hedge players, the secondary space still trades rich.

“They think it’s too expensive based on implied credit spreads,” a source said. “For them to get excited, paper is going to have to come in even more.”

Southwest Airlines Co.’s 1.25% convertibles due 2025 (Baa1/BBB) dominated the tape although with little movement in price.

Airbnb Inc.’s 0% convertible notes due 2026 also continued to see active trading with the notes continuing to hover near an all-time low.

While volume in the name was light, Redwood Trust Inc.’s recently priced 7.75% convertible notes due 2027 continued its strong downtrend with the notes now trading on an 86-handle.

Southwest dominates

Southwest’s 1.25% convertible notes due 2025 dominated the tape on Wednesday although the notes were little moved in the high-volume activity.

The 1.25% notes were changing hands at 122.25 versus a stock price of $37.51 early in the session, according to a market source.

However, the notes came in alongside stock as the session progressed and were trading at 120.25 versus a stock price of $37.35 in the late afternoon.

There was $63 million in reported volume.

Southwest’s stock traded to a high of $38.13 and a low of $36.71 before closing the day at $37.23, an increase of 0.027%.

The travel sector has been under pressure as the market revised its forecast for the Federal Reserve’s rate hike schedule over the past three sessions.

However, Southwest’s investment-grade rated convertible notes held up better than its industry peers.

Airbnb active

Airbnb’s 0% convertible notes due 2026 continued to see heavy volume on Wednesday although the notes remained near their all-time lows.

While there were scattered prints in the name up to 83, the majority of prints for the 0% notes remained on an 82-handle, a source said.

The notes were changing hands at 82.125 heading into the market close with the yield 5.313%.

There was $20 million in reported volume.

Airbnb’s stock traded to a high of $103.65 and a low of $98.92 before closing the day at $101.47, an increase of 2.63%.

Redwood’s downtrend

Redwood Trust’s 7.75% convertible notes due 2027 continued to hemorrhage on Wednesday with the notes down almost 14 points outright one week after pricing.

The 7.75% notes were seen at 86.75 early in Wednesday’s session with the yield now 11.291%.

Redwood Trust’s stock traded to a high of $7.58 and a low of $7.01 before closing the day at $7.43, an increase of 1.50%.

The notes, which priced at par on June 6, have been on a downward spiral since breaking for trade.

While the notes were able to hold par on their aftermarket debut, they drifted lower to close the previous week at 96.

The notes were demolished in Monday’s sell-off and dropped to an 88-handle as the 30-year mortgage rate surged.

“That’s how bad it is, especially in the REIT world,” a source said.

Mortgage rates continued to surge on Wednesday with the average 30-year fixed rate rising to 6.10%.

Mentioned in this article:

Airbnb Inc. Nasdaq: ABNB

Redwood Trust Inc. NYSE: RWT

Southwest Airlines Co. NYSE: LUV

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