Tesla’s new bond improves; convertible market pauses after Tuesday’s stock market sell-off

By Rebecca Melvin

New York, March 22 – Tesla Inc.’s convertibles improved on Wednesday in what was otherwise a fairly quiet session, as market players took a wait-and-see approach to gauge where markets are heading following Tuesday’s pullback in equities, their first since October.

Tesla’s new 2.375% convertibles closed the session at 97.75 bid, 98 offered versus a share price of $255.01, a New York-based trader said, adding that the quote represented something of a bounce for the issue, which was now seen higher by 0.25 point on swap since issue, depending on delta. Previously the paper was seen lower on a dollar-neutral basis by 0.5 point to 0.75 point.

The new Tesla paper is now marginally up or down as it continues to remain a focus of trade in the convertibles market.

Also on Wednesday there was some trading action in the convertibles of Micron Technology Inc. and Microchip Technology Inc., which moved up in line with the common stock underlying those bonds, or flat on a dollar-neutral basis.

The Micron 3% bonds were 105.5 at midsession. They have been largely unchanged for the last several days as the stock has gone up, which one trader said signaled a top for that name.

The convertibles of Weatherford International Ltd., the Swiss-based equipment-services company, were also trading unchanged on a dollar-neutral basis, or 121.25 bid, 121.75 offered, versus an underlying share price of $6.20.

Otherwise, it was a quiet session that was light on news except for the tragic news of a terror attack that took place in London near the Parliament building that killed three people.

Market players were said to be poised to see the outcome of a Congressional vote on the Republicans’ American Health Care Act slated for late Thursday. One trader guessed that if the bill passes, then there will be a broad-based market rally because “people will start to believe” that other initiatives can pass through the legislature such as tax reform and other pro-business initiatives of the Trump Administration.

But if the bill does not pass, then there will be a knee jerk sell-off, he said. Nevertheless, he expected that underlying market dynamics will remain in place, which have meant an upside bias in the stock markets.

U.S. stocks stabilized on Wednesday with the Dow Jones industrial average closing down 6.71 points, or 0.03%, to 20,661.30; but the S&P 500 stock index added 4.43 points, or 0.2%, to 2,348.45; and the Nasdaq Composite gained 27.82 points, or 0.5%, to 5,821.64, after losing 108 points, or 1.8%, on Tuesday.

On Tuesday, the major stock indices took a 1% or more plunge as some of the positions that had been in place since the U.S. presidential election were unwound. The pullback weighed on convertibles, but in general, the asset class has held up better than high yield in the last week or so, a New York-based trader said.

“Things have been weak and continue to be weak. The slew of repeat tech issuance has hurt a few guys,” the trader said of the convertibles space. But in general, there has not been a lot of trading and valuations have been steady, he said.

Tesla improves

“There was a little bit of a bounce in Tesla’s new convertibles, but the whole Tesla cap structure is still heavy,” a New York-based trader said.

The most recent repeat tech issuance was last week’s $850 million of Tesla convertibles. The new Tesla 2.375% convertibles were seen at 97.75 to 98, which was an improvement from about 97.5.

On a dollar-neutral, or swap, basis, the bonds were now seen positive by 0.25 point depending on delta. But even in the early going on Wednesday the attitude was that the new bond’s performance had not been that bad, and the bonds were seen down 0.5 point to 0.75 point on swap since they were issued.

The convertibles primary market has been relatively strong for the year so far, but market players are looking for “unique issuance,” a New York-based trader said. New tax legislation out of Washington could help spur those kinds of unique, new deals, he said.

In the meantime, a wait-and-see approach has set in to determine if Tuesday was a real pullback or a minor blip. “That will determine the fate of valuations,” the trader said.

The Tesla bond has struggled along with the overall convertibles market because a strong level of new issuance has required some repricing in the secondary market. In addition, there had been a bit of weakness in credit markets of late and also slightly higher volatility factoring in.

In addition, the Tesla bond suffered because of the fact that the company has other convertible paper in the market and it was seen to be turning into a “serial issuer,” meaning that there are a number of convertible bond issues outstanding in the market from the same issuer.

“The whole Tesla cap structure is still heavy. It had three tranches of paper and now there is a fourth bond and all are active and balanced as well as good arbitrage names,” a trader said.

Mentioned in this article;

Microchip Technology Inc. Nasdaq: MCHP

Micron Technology Inc. NYSE: MU

Tesla Inc. Nasdaq: TSLA

Weatherford International Ltd. NYSE: WFT

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