Herbalife lower on overstated member metric; Ctrip.com mixed on swap; Ciena drops

By Rebecca Melvin

New York, March 3 – Herbalife Ltd.’s convertibles pared an early 2-point loss – although the bond was not overly active in trade – as shares fell after the Cayman islands-based weight management and nutrition company said that it had overstated growth of active new members in its last three conference calls.

Convertibles overall continued to be better bid, with Intel Corp., Ctrip.com International Ltd. and Teva Pharmaceutical Industries Ltd. trading mixed in good volume.

One trader described the tone of the market as positive.

A second source said that trading was better with little theme other than that tone has improved. “This rally does have legs.”

“There have been different moves across the board and some stocks have outperformed,” the first trader, based in New York, said.

Ctrip’s complex of convertible bonds were mixed in active trade. The most actively traded of its four bonds was the Ctrip 1.99% convertibles, or the D tranche, and those were better on swap by about 0.5 point to 0.75 point.

The shorter-dated Ctrip 1.25% convertibles, or the B tranche, were lower by about 0.5 point on swap.

Energy convertibles extended their string of gains this week as the price of oil remained flat to higher, closing within striking distance of $35.00 per barrel for April delivery of West Texas intermediate crude.

Whiting Petroleum Corp.’s 1.25% convertibles jumped another 2.5 points to trade at 45.375 near the end of the session. The bonds had gone out at 43 on Wednesday and at 40 on Tuesday. Shares of the Denver-based energy exploration and production company surged again, closing up $1.11, or 21%, to $6.31, after gaining 19.5%, on Wednesday.

Cobalt International Energy Inc.’s 3.125% convertibles due 2024 traded up another 0.5 point to 41.37 as shares of the Houston-based energy exploration and production company gained 6.7% to $3.20.

Chesapeake Energy Corp.’s 2.5% convertibles due 2037 jumped another 3 points to 53.75 last after gaining about 3 points on Wednesday. Shares of the Oklahoma City-based natural gas company gained another 26% to $4.27 on Thursday, after jumping 23% on Wednesday and 24% on Tuesday.

Two of the three days of gains came amid the news that its founder and former chief executive Aubrey McClendon died in a car crash the day after he was indicted by the Department of Justice on antitrust charges related to land lease bids.

There were a number of earnings reports released and not all of them were positive. Ciena Corp. tumbled after releasing mixed first-quarter results and a disappointing outlook. The Ciena 3.75% convertibles due 2018 traded down 10.5 points to 112 while shares of the Hanover, Md.-based telecom networking equipment maker fell $3.72, or 18%, to $16.99, notching a 52-week low intraday.

Looking ahead to Friday, all eyes will be on the U.S. nonfarm payrolls report, which is estimated to show that about 195,000 new jobs were added last month, with a slight rise in salaries and a steady unemployment rate of 4.9%. The news will be used to help gauge overall economic health and what the Federal Reserve might do next in terms of rate policy.

Herbalife lower

Herbalife’s 2% convertibles due 2019 traded last at 91 and earlier at 90.5 on Thursday, which was down from about 92.375 previously, according to Trace data. Herbalife shares fell $3.96, or 7%, to $52.42.

The bond was not trading as actively as might be expected due to stock borrow limitations, a New York-based trader said.

“Even with the stock action, there were only 12 trades on the tape,” the trader said.

Herbalife corrected its active new member metric provided in previous 2015 earnings calls but said that the errors do not impact the company’s financial statements in any way.

The company said the errors were caused by “database scripting errors,” that led to both errant inclusion of additional categories of data not included in 2014 or prior period calculations and quarterly aggregation issues which created variances from period-to-period depending on when the greatest level of activity occurred during the period.

Herbalife corrected each instance of misstated membership levels. For example, active new members were up only 0.8% in the third quarter of 2015 compared to the third quarter of 2014, not up 33% in that period as the company initially reported.

The company did not discover these errors earlier because it had limited visibility into the likely rate of change in this metric upon its first use. The company said it has taken corrective action regarding these issues. No information regarding this non-financial metric has been included in any of the company's periodic reports filed with the Securities and Exchange Commission, and the errors do not impact the company’s historical consolidated financial statements, the company said.

Ctrip.com mixed

Ctrip’s 1.99% convertibles, or the D tranche, traded down about a point to 103.5 on Thursday. But it was better on a hedged basis against the underlying shares that ended down 3% on the day.

The bond was up by 0.5 point, or 0.625 point to 0.75 point on a hedged basis, a trader said.

Ctrip’s 1.25% convertibles, or the B tranche, traded down 2.625 points to 120.16, according to Trace data, and those bonds were said to have contracted about 0.5 point on swap.

The shorter-dated B tranche matures in 2018 and moved negatively as might be expected given lower revenue guidance, which is more of an immediate concern, a trader said.

The shorter-dated issue is also more sensitive to equity moves than the D tranche.

Ctrip shares closed down $1.26, or 3%, at $39.24. But intraday, they had traded down to as low as $38.40.

Ctrip is expected to report its fourth-quarter earnings on March 16. Analysts are expecting Ctrip revenue to grow but at a slower rate than in the last three quarters.

Mentioned in this article:

Chesapeake Energy Corp. NYSE: CHK

Ciena Corp. Nasdaq: CIEN

Cobalt International Energy Inc. NYSE: CIE

Ctrip.com International Ltd. Nasdaq: CTRP

Herbalife Inc. NYSE: HLF

Intel Corp. Nasdaq: INTC

Teva Pharmaceutical Industries Ltd. Nasdaq: TEVA

Whiting Petroleum Corp. NYSE: WLL

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