Busy convertible market firms slightly; Vipshop flat; Ctrip mixed to better after earnings

By Rebecca Melvin

New York, Feb. 23 – Earnings news pulled a few convertible names higher on a hedged basis on Thursday – but the gains were small – as a dip in the level of paper for sale seemed to support the market.

“There was less for sale,” a New York-based sellsider said of Thursday’s session.

The convertibles secondary market has been slushy for the last couple of weeks amid strong flows and more sellers than buyers.

It is difficult to pinpoint the exact causes behind the weakness, but it is likely that there was some profit-taking ahead of a pullback in stock markets that pundits anticipate by midyear following a long rally since November, a New York-based sellsider said. The S&P 500 stock index has marched upward since the U.S. presidential election and now stands 13% higher at 2,364 compared to 2,085 on Nov. 4.

In addition, market players expect that there will be continuing strength in the convertibles new issue market, and portfolio managers may have been freeing up space to take on new paper, the sellsider said. Finally, the ongoing political wrangling in Washington, D.C., has created uncertainty, he said.

Among active names on Thursday was Vipshop Holdings Ltd., which was busy not because of earnings but because of an upcoming put in the Vipshop 1.5% convertible due 2019.

Outright yield players have been selling the paper ahead of the put, notching several points of gain, and hedged players have been buying the issue in the face of very little downside.

The multiple issues of Ctrip.com International Ltd.’s were active after the China travel services company reported a 76% increase in net revenue for its last quarter. The company said it has been expanding with China’s growing outbound travel demand. The Ctrip convertibles were mostly better by about 0.25 point better, although one of the issues, the B tranche, was about 0.25 point lower, a sellsider said.

Tesla Inc.’s convertibles were also in focus, with its A and B tranches slightly better on swap against lower shares after the Palo Alto, Calif.-based electric car maker reported mixed earnings including a disappointing loss but better-than-expected revenue.

The Tesla 0.25% convertibles due 2019, or A tranche, were lower on an outright basis at 98.625, which was down from about par previously. But on a dollar-neutral, or swap, basis, they were up about 0.25 point, a New York-based trader said.

The Tesla 1.25% convertible due 2021, or the B tranche, was also seen up about 0.25 point on swap, but the issue was not trading that much.

Tesla shares were down $17.52, or 6.4%, at $255.99.

The company lost 69 cents per share for the fourth quarter excluding items, which was a wider loss than the 43 cents per share loss anticipated by analysts’ consensus forecast. Revenue was $2.28 billion compared to $2.19 billion expected.

By the end of the day, the Tesla convertibles hadn’t traded very actively compared to other issues trading like those of Ctrip.com.

Blackhawk Network Holdings Inc.’s convertibles were active on an outright basis on earnings. The Blackhawk issue was up about 0.125 point to 0.25 point as shares rose 45 cents, or 1.2%, to $37.90.

GNC Holdings Inc.’s 1.5% convertible notes due 2020 were up on an outright basis, trading as high as 58.5, which was higher by a couple of points, as shares continued to rally on the heels of the health and nutrition products company’s loyalty program news and purchases of shares by the company’s chief executive officer.

GNC shares were up 90 cents, or 11%, at $8.89.

GNC has inked a multiyear deal with data company Epsilon to run a loyalty program that will allow customers to earn points and collect rewards.

On the downside, InterDigital Inc.’s convertibles dropped. The InterDigital 1.5% convertibles due 2020 dropped about 15 points to 132 from 147 previously as the underlying shares of the mobile technology research and development company fell $13.30, or 13%, to $87.80 on disappointing earnings.

There were no new issues launched or priced on Thursday. There hasn’t been a significant new issue in the convertibles market for about two weeks since Microchip Technology Inc. priced more than $2 billion in two tranches.

It was a lot of paper, market players said, and the Microchip issues have been weaker since that new issuance joined about $2 billion of existing convertible paper.

Vipshop active, flat

Vipshop’s 1.5% convertible due 2019 traded actively at 100.75 to 101, topping the Finra Trace volume chart for the day.

The bond has been very liquid as convertible players eye an upcoming put in the issue on March 15 and as the underlying shares have rallied.

“Hedge funds are buying and yield people are selling it,” a sellsider said, explaining that for the most part the yield players had bought the paper in the mid to upper 90s and were now selling at 100 to 100.5, while the hedged players are buying it in the face of limited downside in the paper.

The pricing was little changed to maybe 0.125 point better on Thursday.

“It’s definitely liquid,” the sellsider said.

Ctrip mixed to better

After the company reported earnings, the Ctrip.com 1.25% convertible due 2018 traded up to as high as 132 early Thursday, which was up from about 128 previously.

The uptick was against gains in the underlying shares of Ctrip, which were up 3.5% after the China travel company reported earnings, a trader said at late morning. The American Depositary Shares weakened slightly into the close, ending the session up only 69 cents, or 1.5%, at $48.28.

“We saw buyers of the C, D and E [tranches],” a sellsider said.

The 1.25% paper was “better to buy” amid hedge fund demand. The C and D tranches were also a little better on Thursday, but the B tranche was lower.

“Everything moved around about 0.25 point,” a sellsider said.

Mentioned in this article:

Blackhawk Network Holdings Inc. Nasdaq: HAWK

Ctrip.com International Ltd. Nasdaq: CTRP

GNC Holdings Inc. NYSE: GNC

InterDigital Inc. Nasdaq: IDCC

Tesla Inc. Nasdaq: TSLA

Vipshop Ltd. Nasdaq: VIPS

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