DISH convertibles ‘destroyed’ post-earnings; Freshpet soars; Southwest Airlines active

By Abigail W. Adams

Portland, Me., Nov. 6 – The convertibles primary market was dormant on Monday but sources expect the market to reactivate soon with market conditions dramatically improved since the Fed’s Nov. 1 announcement and recent issues playing to strong demand and performing well in the aftermarket.

Meanwhile, the secondary space was quiet on Monday as markets pulled back from the phenomenal post-Fed rally of the previous week.

Equity indexes were mixed on Monday with the small cap index that surged the previous session the laggard.

The Dow Jones industrial average closed Monday up 35 points, or 0.10%, the S&P 500 index closed up 0.18%, the Nasdaq Composite index closed up 0.30% and the Russell 2000 index closed down 1.29%.

There was $66 million in reported convertibles trading volume about one hour into the session and $320 million on the tape about one hour before the market.

While the secondary space saw a strong close to the previous week with the market, in general, adding 1 to 1.5 points dollar-neutral, there was some leakage during Monday’s session, a source said.

However, earnings-related news continued to spark large price movements in the space both to the upside and downside.

DISH Network Corp.’s convertible notes (Caa2/CCC-) were “destroyed,” a source said, after the company posted a large earnings miss with investors again questioning the company’s future.

Freshpet Inc.’s 3% convertible notes due 2028 made large outright and dollar-neutral gains as stock soared after a large earnings beat.

Southwest Airlines Co.’s 1.25% convertibles due 2025 (Baa1/BBB) continued to see heavy volume although with little price movement.

DISH destroyed

DISH convertible notes were “destroyed,” on Monday, a source said, with investors once again questioning the company’s viability on the heels of a large earnings miss.

DISH’s short-duration 2.375% convertible notes due March 15, 2024 traded down 1 point.

The notes were wrapped around 95 in the late afternoon with the yield now 17.375%.

The 2.375% convertible notes are the first in DISH’s monolithic maturity wall to come due.

DISH’s 3.375% convertible notes due 2026 sank 10 points outright.

They traded as low as 43 with the yield jumping to 38.625% by the late afternoon, a source said.

The 0% convertible notes due 2025 also sank about 10 points outright.

The notes traded down to 53 in the late afternoon with the yield now 32.5%.

While DISH’s convertible notes largely trade outright, the 0% convertible notes do trade on hedge with market players using a capital structure arbitrage strategy.

“They’re mostly hedged against the credit default swap,” a source said.

While not equity sensitive, DISH’s stock saw its largest single-day decline since the company went public in 1995.

Stock traded to a low of $3.41 and a high of $4.85 before closing at $3.44, a decrease of 37.43%.

DISH posted a surprise quarterly loss of 26 cents versus the earnings per share of 11 cents analysts had predicted.

Revenue was $3.7 billion versus the $3.82 billion expected.

The company’s subscriber loss also blew past expectations.

DISH chair Charlie Ergen’s comments during the earnings call exacerbated investor concern about the company’s future viability with Ergen reportedly saying the company had a narrow path to financial stability.

While investors had hoped the pending DISH/EchoStar merger would alleviate some of the financial stress on the heavily leveraged company, the company’s future post-merger is now in doubt.

Freshpet soars

Freshpet’s 3% convertible notes due 2028 soared following a large earnings beat with the notes making large gains on an outright and dollar-neutral basis.

The 3% convertible notes jumped 13 points outright with stock up 18% in intraday activity.

The notes were changing hands at 121 versus a stock price of $71 early in the session, according to a market source.

They were changing hands at 120.875 in the late afternoon.

The notes expanded several points dollar-neutral on the move up, a source said.

There was $8 million in reported volume.

Freshpet’s stock traded to a low of $66.54 and a high of $73.75 before closing at $68.10, up 16.91%.

Stock soared after a large earnings beat with the pet food company reporting losses per share of 2 cents versus analyst expectations for losses per share of 16 cents.

Revenue was $200 million versus analyst expectations for revenue of $194 million.

Southwest Airlines active

Southwest Airlines’ 1.25% convertible notes due 2025 remained the top traded issue in the secondary space although with little movement in price.

The 1.25% notes were changing hands at 96.5 in the late afternoon.

The notes were largely moving in line with stock after the weakness in the notes early last week.

There was $22 million in reported volume.

Southwest’s stock traded to a low of $23.24 and a high of $23.99 before closing at $23.53, down 0.72%.

While regional and discount airlines got slaughtered in the sloppy market conditions of the previous week, Southwest’s convertible notes held up better than its peers in large part due to its investment-grade rating.

There has been no indication that the notes are slated for a credit downgrade.

If there were a credit downgrade, sources expect the notes will crumble.

Mentioned in this article:

DISH Network Corp. Nasdaq: DISH

Freshpet Inc. Nasdaq: FRPT

Southwest Airlines Co. NYSE: LUV

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