Upstart convertible notes tank on earnings warning; Jazz Pharmaceuticals in focus

By Abigail W. Adams

Portland, Me., July 8 – It was a quiet day in the convertibles secondary space as equities again wavered between gains and losses as the market digested the latest jobs report and gauged its impact on the Federal Reserve’s rate hike schedule and its significance as a recession indicator.

After a volatile day, equity indexes closed the day largely mixed although they ended the first full trading week of the second half of 2022 with a weekly gain.

The Dow Jones industrial average closed the day down 43 points, or 0.11%, the S&P 500 index closed down 0.08%, the Nasdaq Composite index closed up 0.12% and the Russell 2000 index closed down 0.05%.

There was $60 million in reported convertibles trading volume about one hour into the session and $320 million on the tape about one hour before the market close.

Large, liquid issues continued to dominate the tape with Southwest Airlines Co.’s 1.25% convertibles due 2025 (Baa1/BBB) and Western Digital Corp.’s 1.5% convertible notes due Feb. 1, 2024 (Baa3) again topping the volume charts as they have for much of the week.

Upstart Holdings Inc.’s 0.25% convertible notes due 2026 also saw heavy volume with the already beleaguered notes tanking further after the company downwardly revised its second-quarter earnings guidance.

Jazz Pharmaceuticals plc’s 2% exchangeable notes due 2026 were also active with some profit-taking in the name after the notes strengthened during the week.

Upstart sinks

Upstart’s 0.25% convertible notes due 2026 sank further into distressed territory on Friday after the company issued a dire second-quarter earnings warning.

The 0.25% notes fell 6 points outright to 53.625 early in the session.

They recouped some losses and stood poised to close the day wrapped around 54 with the yield just shy of 16%.

“The yield is 16%, but is the credit worth it?” a source said.

The notes were active with about $10 million in reported volume.

The notes have long been a yield play with the conversion premium over 400%, a source said.

While not equity sensitive, Upstart’s stock led losses in equity markets.

Stock traded to a high of $27.61 and a low of $26 before closing the day at $27.09, a decrease of 19.71%.

Upstart tanked after the lending platform warned second-quarter earnings would be worse than expected due to rising rates and funding constraints.

The company now expects a second-quarter loss of $27 million to $31 million versus previous guidance for breakeven to a loss of $4 million, the company said in a press release.

Liquid trades

Southwest Airlines’ 1.25% convertibles due 2025 and Western Digital’s 1.5% convertible notes due 2024 continued to see high-volume activity as they have for much of the week.

The large, liquid issues tend to be active on even quiet days in the secondary market, a source said.

However, the heavy volume did little to alter their price.

Southwest’s 1.25% convertible notes due 2025 saw large trades in the 119 to 120 context with stock range bound during Friday’s session.

There was $15 million in reported volume with the notes once again the most actively traded in the secondary space.

Southwest’s stock traded to a high of $37.08 and a low of $36.27 before closing the day at $36.70, a decrease of 0.11%.

Western Digital’s 1.5% convertible notes due Feb. 2, 2024 also remained active with the notes switching hands as their maturity approaches.

The 1.5% convertible notes stood poised to close Friday at 95.5 with the yield about 4.5%.

There was $10 million in reported volume.

The high-premium notes have little call optionality and trade for their yield, which remains attractive even amid rising rates, sources have said.

The two-year Treasury note settled at 3.111% on Friday.

Jazz sees profit-taking

Jazz Pharmaceuticals’ 2% exchangeable notes due 2026 saw heavy volume on Friday with some profit-taking in the name after a strong week.

The 2% notes were trading at 118.25 versus a stock price of $156.56 in the late afternoon, according to a market source.

There was $10.5 million in reported volume.

Jazz’s stock traded to a low of $153.30 and a high of $158.98 before closing the day flat at $158.30.

Jazz’s convertible notes have made gains since the pharmaceutical company announced clinical trial results for a cannabinoid-based treatment for multiple sclerosis spasticity late last week.

The convertible notes added about 4 points outright with stock up 3% over the past week.

Mentioned in this article:

Jazz Pharmaceuticals plc Nasdaq: JAZZ

Southwest Airlines Co. NYSE: LUV

Upstart Holdings Inc. Nasdaq: UPST

Western Digital Corp. Nasdaq: WDC

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