Tesla Motors, LinkedIn holding in amid volatility; Illumina 0% convertibles slip below par

By Rebecca Melvin

New York, Feb. 3 – Some U.S. convertibles outperformed their underlying shares on Wednesday as volatility continued to mark the broader markets, leaving the U.S. dollar down, crude oil prices sharply higher and equity indices better after intraday losses.

The day’s action was “a continuation of the last six weeks. It’s a nervous market, and there is no conviction,” a New York-based convertibles buysider said.

But there was some positive trading in certain convertibles, which performed as they are meant to perform when stocks move lower.

Tesla Motors Inc.’s convertibles traded lower on an outright basis along with the underlying shares of the Palo Alto, Calif.-based electric car maker, but the convertible bonds hung in well, with the Tesla 1.25% down by less than half of the stock move, the buysider said.

LinkedIn Corp. was another outperformer. Shares of the Mountain View, Calif.-based business-oriented social networking service dropped 6% on Wednesday, after dropping 12% in January. LinkedIn was expected to post earnings on Thursday.

Illumina Inc.’s 0% convertibles were in trade after the San Diego-based developer of genetic research tools reported lower quarterly earnings that missed estimates but higher revenue.

Illumina 0% convertibles due 2019 slipped below par in the early going, changing hands at 99.625, which was down from 102 to 103 on Tuesday.

Illumina’s 0.5% convertibles due 2021 were quiet, having traded last at 108.5, and Illumina’s 0.25% convertibles, which mature next month, were last seen at about double par.

Illumina shares fell $13.85, or 9%, to $140.81.

There was also some trading of Nvidia Corp.’s 1% convertible due 2018, which traded at 143.25 at late morning when shares of the Santa Clara, Calif.-based graphics processor company were down 35 cents, or 1.3%, at $27.71.

On a not-so-nice note, Novavax Inc.’s 3.75% convertibles due 2023, which was the only U.S. convertible to price in January, fell sharply to 89 after pricing only early last week. The upsized $300 million issue has dropped 11% compared to the stock being down 16%.

“It picked up 70% of the downside,” a market source said. “Anytime you get involved in stock below $5.00 to $10.00, the bonds become more volatile,” the source said. Novavax shares closed down 2.4% at $4.59 on Wednesday.

Generally, volatility is positive for convertibles, which are essentially bonds with a call option, and the value of the option increases as volatility increases. This allows investors to benefit from gains in the stock, but limit downside when shares move lower.

In the broader markets, oil prices increased despite a jump in U.S. crude inventories by 7.8 million barrels to 502.7 million barrels in the week ended Jan. 29. The stockpiles are at their highest levels in terms of weekly data since 1982, the Energy Information Administration said Wednesday. In terms of monthly data, the stockpiles exceeded the 500 million barrels recorded in 1930.

The EIA also reported that gasoline supplies rose more than expected and distillates, including heating oil and diesel fuel, fell less than expected. Refinery utilization also declined. Nevertheless West Texas intermediate crude for March delivery gained 8% to $32.28 a barrel on the New York Mercantile Exchange. And Brent crude was up 7.2% to $35.05 a barrel.

Also of interest to markets and traders on Wednesday was positive Chinese economic data. The Caixin China services purchasing managers index rose to 52.4 in January, from 50.2 in December, Caisin Media Co. and Markit said Wednesday.

In equities, the S&P 500 stock index reversed intraday losses to close higher by 9.50 points, or 0.5%, to 1,912.53. The Dow Jones industrial average rose 183.12 points, or 1.1%, to 16,336.66. The Nasdaq stock market remained in negative territory but closed down only 12.71 points, or 0.3%, to 4,504.24.

Tesla bonds outperform

Tesla’s 1.25% convertibles due 2021 traded down about 2 points to 77. They had traded around 78.5 on Tuesday. That drop was less than half of the drop in the underlying shares, however, a buysider pointed out.

The Tesla 0.25% convertibles due 2019 traded down about 2 points to 83.3, and the Tesla 1.5% convertibles due 2018 were seen changing hands at about 147, which was off nearly 4 points, according to Trace data.

Tesla shares fell $9.30, or 5.1%, to $173.48, hitting a two-year low on Wednesday, the day after it hit a 52-week low on Tuesday.

On Tuesday, Pacific Crest analyst said demand may be waning for the electric carmaker’s vehicles.

The firm lowered its 2016 earnings estimate to 27 cents per share from 76 cents per share.

LinkedIn holds in

LinkedIn’s 0.5% convertibles due 2019 traded down a point or so to around par.

LinkedIn fell $12.40, or 6%, to $191.06.

LinkedIn is a large issue, and the bonds are holding in around par. People are willing to hold onto this issue and people are looking at volatility in the stock. But it adds to the call option and “this company is a pretty good credit,” a market source said.

The convertible bond is the only debt that the company has. It has more cash on the balance sheet and they generate cash, and it’s a $22 billion market cap company, so they could always issue more stock. The chances of bankruptcy are very low, the market source said.

Mentioned in this article:

Illumina Inc. Nasdaq: ILMN

LinkedIn Corp. Nasdaq: LNKD

Nvidia Corp. Nasdaq: NVDA

Novavax Inc. Nasdaq: NVAX

Tesla Motors Inc. Nasdaq: TSLA

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