Little movement in convertible trading; Unity unchanged outright; Southwest, Bookings dominate

By Abigail W. Adams

Portland, Me., July 13 – There was an uptick of activity in the convertible bond secondary space on Wednesday following the release of the latest Consumer Price Index report, which blew past expectations.

However, the uptick of volume did little to move the needle in the space, which was largely unchanged as equities again wavered between gains and losses.

Equity indexes fought their way back from steep declines at the open and flirted with positive territory in intraday activity before closing the day in the red.

The Dow Jones industrial average closed down 209 points or 0.67%, the S&P 500 index closed down 0.45%, the Nasdaq Composite index closed down 0.15% and the Russell 2000 index closed down 0.12%.

The Consumer Price Index report marked the largest increase in inflation since 1981 with an annual rate of 9.1% versus expectations for 8.8%.

The reading caused the 10-year bond yield to spike and equity futures to plummet after the announcement.

However, core prices excluding food and energy were 5.9%, slightly below expectations for 6%.

West Texas Intermediate crude oil futures continued to lose ground on Wednesday after plummeting below $100 on Tuesday, feeding the debate about whether inflation had peaked.

The 10-year Treasury yield hit 3.07% in early trading but widened by the market close to settle at 2.9%.

Despite wild swings in other asset classes, the convertible secondary space remained unchanged.

“There’s still no conviction,” a source said.

There was $160 million in reported convertible trading volume about two hours into the session and $500 million on the tape heading into the market close.

Unity Software Inc.’s 0% convertible notes due 2026 were active although largely unchanged outright as stock plummeted following news of Unity’s $4.4 billion acquisition of ironSource.

Southwest Airlines Co.’s 1.25% convertibles due 2025 (Baa1/BBB) and Booking Holdings Inc.’s 0.75% convertible notes due 2025 (A3/A-) continued to dominate the tape although with little movement in price.

Unity’s deal

Unity Software’s 0% convertible notes due 2026 were active following news it would acquire ironSource, an app monetization software company, in a $4.4 billion all-stock transaction.

While Unity stock plummeted more than 17%, the 0% convertible notes were largely flat outright.

They were changing hands just shy of 74 with a yield of 7.125% heading into the market close, according to a market source.

There was $22 million in reported volume.

Unity stock was crushed on Wednesday, closing the day at $32.82, a decrease of 17.39%.

Unity announced that it was acquiring ironSource in an all-stock transaction with each ironSource share exchanged for 0.1089 shares of Unity.

Unity’s convertible notes have long been busted and currently carry a conversion premium of over 500%.

Given the high premium on the notes, the hedge market players are using is difficult to determine, a source said.

Volume movers

While topical news sparked activity in some convertible notes, the tape still belonged to Southwest Airlines’ 1.25% convertible notes due 2025, which accounted for nearly one-fifth of the total reported trading volume in the space.

“They’re still trading like crazy,” a source said.

However, the notes were again largely unchanged in the high-volume activity.

The notes were changing hands at 125 versus a stock price of $38.61 in the late afternoon.

There was $95 million in reported volume.

Southwest stock traded to a high of $38.87 and a low of $37.03 before closing the day at $38.80, an increase of 0.70%.

Booking Holdings’ 0.75% convertible notes due 2025 also continued to see heavy volume although with little price movement.

The 0.75% notes were changing hands at 124.375 versus a stock price of $1,747.40 heading into the market close.

There was $38 million in reported volume.

Booking Holdings’ stock traded to a high of $1,747.53 and a low of $1,678.01 before closing the day at $1,738.03, a decrease of 0.013%.

Mentioned in this article:

Booking Holdings Inc. Nasdaq: BKNG

Southwest Airlines Co. NYSE: LUV

Unity Software Inc. NYSE: U

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