Convertibles weaken, outperform high yield; Illumina contracts 0.5 point; Whiting holds in

By Rebecca Melvin

New York, Sept. 24 – Convertibles were under pressure Thursday, trading lower along with lower stocks and weaker credit, but they outperformed some asset classes like high yield, a New York-based trader said.

The convertibles market was weaker by about 0.125 point to 0.25 point across the board, amid outright sellers, but “the real story was the relative outperformance of convertibles,” the trader said.

Weakness was broad-based, with a notable difference being that there were outright sellers in some of the investment-grade issues that had been resilient up to now, a second New York-based trader said.

“It’s weaker with the tape, across the board,” the trader said, regarding early trading.

“There is IG stuff that has come for sale, which makes a bit of a contrast to the last few weeks,” the trader added.

The weakness seemed to be “flows driven,” meaning that there seemed to be flows coming out of funds.

“That’s my feeling, given the names that we are seeing,” the trader said.

Illumina Inc. was notably weaker. The Illumina 0% convertible due 2019, or the A tranche, was trading actively and was lower by about a point at just under 113. Shares of the Diego-based developer of genetic research tools were down in the early going by $4.41, or 2.3%, at $185.51. That was on top of a 1.6% dip on Wednesday.

Priceline Group Inc. and Tesla Motors Inc. were also trading fairly actively and were seen down about 0.125 point a piece, but Whiting Petroleum Corp.’s convertibles were unchanged on Thursday, which was surprising given that the company’s straight bonds were lower.

Much of the on-the-run stuff, or the types of issues held in funds, like Priceline and Tesla, are about 0.125 point lower. They were coming in with weakness in the market, but only modestly compared to some high-yield straight bonds, which were “dramatically weaker, gapping down points,” a trader said.

The trader chalked up weakness in the high-yield market to oversupply. He said there have been some “monster deals in bellwether names” that likely forced selling in established issues to make room for the new paper.

For example, Building Materials Corp. of America priced $1.1 billion of 10-year senior notes at par to yield 6% on Tuesday, and in all for September so far, there has been $10.7 billion in new issuance in the U.S. high yield market in 12 deals.

In contrast, there has been very light issuance in convertibles recently, so tight supply is helping the market right now, a trader said. For September so far there has been $2.6 billion in five deals in U.S. convertibles.

Those deals included issuance from Extra Space Storage Inc., NextEra Energy Inc., Stericycle Inc., Dycom Industries Inc. and BroadSoft Inc.

How long convertibles can keep credit weakness from filtering into the market wasn’t known. “I don’t know whether it will continue or if it is just a lag,” the trader said.

Whiting Petroleum holds in

Whiting’s 1.75% convertibles had traded at 83.625 near the close Thursday versus shares of the Denver-based oil and gas company, which ended at $16.49, which was up 1% or 18 cents.

“Whiting was not down at all today in a weak sector,” the trader said.

Whiting is a large, liquid issue in the convertible space and is seen as a proxy for general market tone.

As for trading action, the market was generally busy in the early going and dried up by afternoon.

Mentioned in this article:

BroadSoft Inc. Nasdaq: BSFT

Dycom Industries Inc. NYSE: DY

Extra Space Storage Inc. NYSE: EXR

Illumina Inc. Nasdaq: ILMN

NextEra Energy Inc. NYSE: NEE

Priceline Group Inc. Nasdaq: PCLN

Stericycle Inc. Nasdaq; SRCL

Tesla Motors Inc. Nasdaq: TSLA

Whiting Petroleum Inc. NYSE: WLL

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