Most SunEdison tranches unchanged after disappointing loss; Tesla Bs expand on stock drop

By Rebecca Melvin

New York, Aug. 6 – Quarterly earnings reports continued to drive activity in U.S. convertibles on Thursday.

SunEdison Inc.’s complex of convertible bonds slid on an outright basis in tandem with a large drop in the common shares of the company after it reported a disappointing quarterly loss. But four of the six SunEdison convertibles tranches were unchanged on swap, while the two oldest, smaller SunEdison issues improved on swap, a New York-based trader said.

Still, the 25% slide in the underlying shares for the St. Peters, Mo.-based solar technology company created some angst among convertibles traders. The fear could provoke more selling, the trader said when asked if the convertibles could outperform the equity if the slide continued through the session.

Tesla Motors Inc.’s convertibles were also weighed down on an outright basis by the company’s wider but better-than-expected quarterly loss, which dragged down shares. But the longer-dated Tesla convertible B tranche expanded about 0.5 point on a swap basis.

Looking ahead, Tesla also trimmed its 2015 delivery outlook and warned that margins could be thinner than expected. Shares ended down 9%.

Echo Global Logistics Inc.’s 2.5% convertibles, which priced in April, slid on an outright basis after the Chicago-based provider of technology-enabled logistics services reported second-quarter revenue that missed estimates. Echo shares fell nearly 20%.

Elsewhere, the biotechnology and media sectors were weaker in terms of equities, but not many convertibles in those sectors had responded as yet.

SunEdison mostly unchanged

SunEdison was the single biggest name in the convertibles space on Thursday in terms of trading volume. All six SunEdison tranches were active and lower on an outright basis.

But the most recently priced SunEdison E and F tranches, as well as the C and D tranches, were down on an “in line,” or unchanged, basis. The older A and B tranches, which are smaller following company exchange offers, actually expanded on the day by about 0.75 point, a trader said.

The SunEdison 3.375% convertibles due 2025, which is the longer dated of two tranches priced earlier this year in May, fell more than 5 points to 85 initially, and then were down to 81 with the underlying common stock of the company at $18.20, the trader said.

The shorter-dated 2.625% convertibles of the same vintage were also close to 81.

SunEdison’s older 0.25% convertibles due 2020 were last seen down more than 7 points to 94.5, but that was when shares were down by only 15%.

The SunEdison 2% convertibles due 2018, or the A tranche, were last at about 132 after falling initially to 149 from about 164. The SunEdison 2.75% convertibles due 2021, or the B tranche, was last at 135, which was down more than 30 points from about 170. Both issues were improved on swap.

Shares of the St. Peters, Mo.-based solar technology company fell $5.79, or 25%, to $17.08.

“The 2s and 2.75s are up about 0.75 point,” a trader said.

The trader was referring to the A and B convertibles. Meanwhile, the C and D tranches and the E and F tranches were unchanged.

SunEdison reported a loss of $263 million, or 93 cents per share, for its second quarter. Losses adjusted to extinguish debt and for asset impairment came to 74 cents. That missed analysts’ estimates of a loss of 45 cents per share.

Revenue came to $455 million which was up about 5% on the year-earlier period.

But looking ahead, the solar and semiconductor company expects solid performance in light of a string of acquisitions it has made to help boost its sales, which it expects will rise.

Tesla Bs expand

The Tesla B tranche was better on a dollar-neutral, or hedged, basis against shares that were down about 10% during the session, a trader said.

Tesla shares pared early losses of as much as 13% to end down $24.00, or 9%, at $246.13.

Tesla downgraded its 2015 delivery target of Model S and Model X cars to between 50,000 to 55,000 units from a previous estimate of 55,000 deliveries for the year.

The company also said that gross margins may decline in the third quarter after coming in about 1% below the company’s expectations of 23.4%.

The Tesla 1.25% convertibles due 2021, or the B tranche, traded down to about 93.5 from 98 on Tuesday.

The Tesla’s 0.25% convertibles due 2019 were seen at 95, which was down 4.5 points on the day, and the Tesla 1.5% convertibles due 2018 traded down to 196.7 from about 218.

“I continue to think that a very interesting aspect of Tesla from a convertible perspective is that its balance sheet is so strong,” a former convertibles portfolio manager notes.

Even with Thursday’s setback, “Tesla equity has a market value of more than $30 billion while the company has net debt of only about $1.5 billion. Such a strong balance sheet suggests that Tesla can easily refinance maturities,” the trader said. In other words, it doesn't need positive cash flow at the moment, and probably won't for many years.

“This is an ideal situation to play via convertibles. Big upside in the stock and little credit risk,” he said.

Echo Global slides below par

Echo Global’s 2.5% convertibles dropped below par and bounced around in the 96 to 98 range on Thursday, trading last at 96.386, according to Trace data. Previously the bonds were at 106.875.

Echo shares slid $6.46, or 19.7%, to $26.38 on Thursday, ending near session lows.

Late Wednesday the company reported a second-quarter loss that was better than expected, but the company missed revenue estimates. It also guided full-year revenue below consensus estimates.

The company reported a second-quarter loss of $682,000, or 3 cents per share, compared to a year-earlier profit.

Echo Global’s net result adjusted for costs related to mergers and acquisitions was 30 cents per share, which was better than expected.

Revenue was $371.6 million, which fell short of estimates.

Looking ahead, Echo Global expects full-year revenue in the range of $1.53 billion to $1.58 billion.

Mentioned in this article:

Echo Global Logistics Inc. Nasdaq: ECHO

SunEdison Inc. Nasdaq: SUNE

Tesla Motors Inc. Nasdaq: TSLA

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