Convertibles mostly softer; Brocade down with lower shares after earnings; Yandex higher

By Rebecca Melvin

New York, Feb. 20 – Convertibles remained mostly softer in thin trade on Friday as has been the case for much of the holiday-shortened week amid a lack of catalysts and little issuance.

Financial markets were closed on Monday in observance of Presidents Day.

“This is the quietest day of one of the quietest weeks,” a New York-based trader said. “Things are generally softer for no apparent reason. It’s just a general malaise in the market.”

The trader went on to say that there were no real trading themes to discuss other than that many bonds are down a little, including some of the bigger, liquid names such as NXP Semiconductors NV, Twitter Inc. and LinkedIn Corp.

These bonds are all down about 0.25 point to 0.5 point on a dollar-neutral, or hedged, basis for the week, he said.

On Friday, Brocade Communications Systems Inc. shed some weight after the San Jose, Calif.-based storage area networking company reported earnings that sent its shares lower by 4%.

The Brocade 1.375% convertible due 2020, which priced in January, traded down 1.857 points to 104.92, according to Trace data. Shares were down 5% at $11.97 at that time.

The selling came despite earnings that beat estimates.

Microchip Technology Inc.’s 1.625% convertibles due 2025, of which $1.5 billion priced earlier this month, traded at 104, which was off about 0.15 point on the day. Shares of the Chandler, Ariz., chip maker were up about 8 cents versus that level.

Yandex NV’s 1.125% convertibles due 2018 continued to look stronger after a midweek earnings report that cheered investors initially but left shares up only a little bit for the week.

Equities, which were mostly lower Friday morning, reversed course and rallied higher in the afternoon on news that the euro zone and Greek finance ministers agreed to extend a bailout for Greek debt for another four months.

Without the deal, Greece faced the risk of default if funding or an extension were not obtained before Feb. 28. The negotiating parties were at an impasse on Thursday. As part of his campaign, Greece’s new prime minister, Alexis Tsipras, had promised to scrap the bailout, but with a more than $7 billion payment due in a matter of days, the Tsipras government requested a six-month extension late Thursday.

Under the deal that was struck, Greece has a four-month reprieve on payments but has to outline fiscal reforms that it plans to undertake based on the existing bailout program by Monday.

Both the Dow Jones industrial average and the S&P 500 stock index ended the session at record highs, and the Nasdaq stock market gained for an eighth straight day.

The Dow reversed early losses to climb 154.67 points, or 0.9%, to a record 18,140.44. The S&P erased early losses for a 12.85 point, or 0.6%, gain to 2,110.30, and the Nasdaq jumped 31.27 points, or 0.6%, to 4,955.97.

Crude oil settled down, with West Texas intermediate crude ending down 82 cents, or $50.34 a barrel.

Primary primed for next week

Market players were looking ahead to next week when Actavis plc’s $4.2 billion of mandatory convertible preferred stock is expected to price.

“That will be the biggest issue in our market,” a trader said, and it is theoretically cheap and should be a positive deal for the market.

The deal was seen cheap using a credit spread of 175 basis points over Libor.

“It’s reasonably priced and should do well both for outright, yield players and for hedged players,” the trader said.

The deal is being brought by joint bookrunning managers J.P. Morgan Securities LLC, Mizuho Securities, Wells Fargo Securities LLC, Morgan Stanley & Co. LLC, Barclays, and Citigroup Global Markets Inc.

Brocade heavy after earnings

Brocade’s 1.375% convertibles due 2020 traded a little shy of 105, which was down almost 2 points on the day, with shares of the company down 52 cents, or 4%, at $12.06 at the close.

Brocade priced $575 million of the convertible notes on Jan. 8 at par to yield 1.375% with an initial conversion premium of 35%.

Brocade reported fiscal first-quarter earnings of $87.3 million, or 20 cents per share, which was up from earnings of 18 cents per share in the year-earlier period.

Adjusted for one-time items, earnings were 27 cents a share, which was better than the 24 cents per share profit analysts expected.

Revenue was $576.2 million for the period, which was also better than analysts’ expectations for quarterly revenue of $569.9 million.

Yandex up more than 2 points

Yandex’s 1.125% convertibles due 2019 traded at 82.5, which was up another 0.375 point on the day and up about 2.5 points on the week.

Earlier in the week, the bonds were near 80, and on Wednesday they were quoted at 81.625 bid, 81.75 offered, when shares were up $1.19, or 7%, at $17.84. The Yandex shares subsequently pulled back for only a 1.2% gain on the day.

At midday on Friday, shares were at $16.91, which was little changed. But they closed higher by 14 cents, or 0.8%, at $17.01.

Investors were cheered by quarterly results reported by the search engine serving Russia. The results were in line with expectations, but many had been expecting the company to underperform, a New York-based trader said.

The fourth-quarter results highlighted the good dynamic in development of key areas, although a tough environment in Russia’s media advertising market affects display advertising significantly, the trader said.

Notably, EBITDA margins came under pressure due to U.S. dollar-related costs, the trader said.

Looking ahead, the company provided forward guidance only for the first quarter as opposed to the 2015 full year, emphasizing a challenging year ahead.

Mentioned in this article:

Actavis plc NYSE: ACT

Brocade Communications Systems Inc. Nasdaq: BRCD

LinkedIn Corp. Nasdaq: LNKD

Microchip Technology Inc. Nasdaq: MCHP

NXP Semiconductors NV Nasdaq: NXPI

Twitter Inc. Nasdaq: TWTR

Yandex NV Nasdaq: YNDX

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