Convertibles secondary losses mount; investment-grade notes in focus; Lucid tanks

By Abigail W. Adams

Portland, Me., June 16 – It was another brutal day in the convertibles secondary space as equity and credit markets plunged after further digesting Wednesday’s 75 basis point rate increase and comments from Federal Reserve chair Jerome Powell.

The Dow Jones industrial average closed down 741 points, or 2.42%, the S&P 500 index closed down 3.25%, the Nasdaq Composite index closed down 4.08% and the Russell 2000 index closed down 4.7%.

There was $44 million in reported volume about one hour into the session and $615 million in reported volume about one hour before the market close with sellers outnumbering buyers.

Market conditions were “horrendous,” a source said, with losses continuing to mount for outright and hedge accounts.

Hedge players had held up comparatively well in the first quarter with some hedge accounts seeing returns of only negative 1% as losses for the Bloomberg Barclays Convertible Securities ETF topped negative 6%.

Returns for the Bloomberg Barclays Convertible Securities ETF were negative 16.63% at the market close on June 16.

Losses for hedge players were also accelerating with credit spreads blowing out.

“Just when you think it can’t get worse, it gets worse,” a source said.

Investment-grade convertible notes dominated trading activity in the secondary space.

Pioneer Natural Resources Co.’s deep-in-the-money 0.25% convertible notes due 2025 (Baa1/BBB) dominated the tape with holders taking profits on one of the best performing issues of the year.

Southwest Airlines Co.’s 1.25% convertibles due 2025 (Baa1/BBB) also continued to see heavy volume with the notes dropping outright but holding dollar-neutral.

Illumina Inc.’s 0% convertible notes due Aug. 18, 2023 (BBB) continued their downward trend with the yield on the short-duration notes topping 5%.

Small cap companies were particularly hard hit on the souring economic outlook.

While some names were being eyed as recovery candidates, investors were taking a close look at company fundamentals.

“Refinancing is going to be a huge problem for some of these companies,” a source said.

Lucid Group Inc.’s 1.25% convertible notes due 2026 tanked after the start-up electric vehicle manufacturer announced a new $1 billion revolving credit facility.

Investment grade in focus

Investment-grade convertible notes dominated the tape on Thursday with the notes still attracting buyers as sellers dominated the market.

Pioneer Natural Resources’ 0.25% convertible notes due 2025 were in focus with the notes coming in alongside stock.

The notes, which trade at double par, were down 18 points outright as stock fell more than 6%.

The 0.25% notes were changing hands at 232 versus a stock price of $239.74 in the late afternoon.

There was $48 million in reported volume.

The notes are an equity surrogate that largely trade in line with stock, a source said.

Pioneer’s stock traded to a high of $253.99 and a low of $237.97 before closing the day at $241.50, a decrease of 6.45%.

Pioneer’s 0.25% notes have been one of the most successful issues in the secondary space with the energy company’s convertible notes on a tear since Russia’s invasion of Ukraine sent energy prices soaring.

There has been heavy profit-taking in the name.

Southwest’s 1.25% convertible notes due 2025 also continued to see heavy volume with the notes holding on hedge as they moved lower outright, a source said.

The 1.25% notes were down 5.5 points outright with stock off 6% on Thursday.

The notes were seen at 118 versus a stock price of $35.63 early in the session.

They fell to a 116 handle heading into the market close.

There was $25 million in reported volume.

Southwest’s stock traded to a high of $36.30 and a low of $34.71 before closing the day at $34.98, a decrease of 6.04%.

The 1.25% convertible notes have seen heavy volume as Southwest’s stock has fallen almost 14% in the last five sessions.

The notes are investment-grade and balanced convertibles, which will attract buyers. However, with the move in stock “people are probably just puking them out,” a source said.

However, while the notes continued to move lower outright, they remained largely flat on hedge.

Illumina’s short-duration 0% convertible notes due 2023 were lower in heavy volume on Thursday.

The 0% convertible notes were changing hands on a 94-handle.

They were seen at 94.375 with a yield of 5.09% heading into the market close.

There was $15.5 million in reported volume.

Illumina’s 0% notes have little to no call optionality left and have been trading for their yield.

Lucid tanks

Small cap companies were pummeled on Thursday as investors dig deep into companies’ fundamentals to determine if they will survive the recession that many sources say is inevitable.

Lucid’s 1.25% convertible notes due 2026 were among the notes hard hit in the sell-off.

The 1.25% notes dropped 5 points.

They were changing hands at 56.25 in the late afternoon with a yield of 15%.

There was $8 million in reported volume.

Lucid’s stock traded to a high of $17 and a low of $15.30 before closing the day at $15.55, a decrease of 11.24%.

Lucid’s convertible notes were particularly hard hit after announcing a new $1 billion secured asset-based revolving credit facility.

“Yikes,” a source said.

Mentioned in this article:

Illumina Inc. Nasdaq: ILMN

Lucid Group Inc. Nasdaq: LCID

Pioneer Natural Resources Co. NYSE: PXD

Southwest Airlines Co. NYSE: LUV

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