Tesla Motors up in active trade; Chesapeake mostly quiet with shares down; primary stays hushed

By Rebecca Melvin

New York, March 19 – Tesla Motors Inc.’s B convertibles, or the 1.25% convertibles due 2021, traded actively Thursday, slipping back on an outright basis in tandem with a midday reversal in the underlying shares, but still eking out a dollar-neutral, or hedged, gain, a trader said.

Tesla’s other convertible bonds also traded Thursday, but the B tranche was the most active, although all of the bonds quieted in afternoon trading when shares turned lower following a conference call regarding technology developments and car battery life.

The Tesla paper will probably open weaker on Friday, a New York-based trader predicted.

Meanwhile the energy sector was weaker on Thursday as oil prices resumed their downward trajectory following a bump up with the broader markets late Wednesday in response to the Federal Reserve’s latest monetary policy update.

West Texas Intermediate crude oil for April delivery fell $1.04, or 2.2%, to $45.61.

But energy convertibles were mostly quiet. Chesapeake Energy Corp.’s convertibles saw little action even as the company’s stock fell after Sterne Agee downgraded the Oklahoma City-based energy company to underperform and lowered the share price target to $9, citing what it called questionable capital allocation and a free cash flow deficit.

Chesapeake’s 2.5% convertibles due 2037 traded at 95.5 after having gone out Wednesday at 96, according to Trace data. The Chesapeake 2.25% convertibles due 2038 were not seen to have traded and were last around 91.

Chesapeake’s shares fell 63 cents, or 4.5%, to $13.50.

The convertibles primary market remained quiet Thursday as has been the case for the whole week, although Wheeler Real Estate Investment Trust Inc. priced a $90 million issue of mandatory convertible preferred stock via placement agent Compass Point Research & Trading LLC. Wheeler shares fell 57 cents, or 17%, to $2.71 on Thursday on the heels of the deal.

One theory for why the primary has been quiet it that issuers didn’t want to price ahead of the Federal Reserve’s latest monetary policy statement on Wednesday.

The Federal Reserve Open Market Committee kept its fed fund rates near zero, and said that there is no rush to raise rates, which have been near zero for six years, until the data including unemployment and inflation merit an increase.

A New York-based syndicate source said however that he didn’t think issuers would have waited for the Fed announcement, but instead would have tried to get out in front of it.

He said the real reason there has been no issuance to speak of for two weeks is that many companies remain in blackout periods associated with earnings season.

“Most companies go into black out starting the second week of March. It is rare for them to issue anything except for the companies that report off-cycle,” the syndicate source said.

He thought that the pipeline was good however and that there would be plenty of issuance starting around mid-April.

For the year to date, issuance numbers look strong, but the market doesn’t feel that strong.

There has been $14.11 billion in new issuance so far this year in 24 deals, up compared to $10.81 billion in 29 deals for the same period of 2014, according to Prospect News data.

While it looks like new issuance for 2015 is way ahead of 2014, the fact is that a couple of very large mandatory deals, including the $4.6 billion from Actavis plc, have inflated this year’s new issuance tally.

Also included in the total is the $1.25 billion American Tower Corp. mandatory deal.

“Both were acquisition related, and they are ways that if you have to raise a lot of equity or equity-linked content, it’s a way of tapping a different investor base,” the syndicate source said.

Nevertheless, there have been some medium-sized bond deals that have been well received among investors.

Horizon Pharma Investment Ltd., a wholly owned subsidiary of Horizon Pharma plc, priced an upsized $350 million of seven-year exchangeable senior notes at the beginning of March that did very well in initial trading and continue to do well.

The Horizon Pharma 2.5% exchangeable is changing hands at about 110 with the underlying shares also better in the past two weeks.

“The stock is way up since issue,” a syndicate source said.

Horizon Pharma is a “name that was well received by the convert market. The company focused on outright allocations, and it was well followed by shareholders who believe that this was the right choice to raise capital,” the syndicate source said.

The company is a specialty pharmaceutical company, which is a sector that is in favor right now, the syndicate source said.

“Investors like the exposure and like the name,” he said.

As for Fed policy and its effect on convertibles issuance, a syndicate source noted that while the yield on the 10-year Treasury note is now below 2% following the Fed’s slightly dovish update, “there is still a decent probability of a June hike,” he said.

Tesla quiets after conference call

Tesla’s 1.25% convertibles due 2021 added about 1.5 points on an outright basis to 86.75 in the early going on Thursday, but fell back to as low as 85 as shares of the Palo Alto, Calif.-based electric car maker erased early gains to drop $5.06, or 2.5%, to $195.65. Tesla shares were up more than $1.00 earlier.

The Tesla Bs, or 1.25% convertibles, were up about 0.25 point on a dollar-neutral, or hedged, basis, a trader said.

Tesla 1.5% convertibles due 2018 were up 5.3 points at 171.29 in early action, but were quiet in afternoon trading.

“There was buying before the conference call, but once the stock sank, it was pretty quiet,” a trader said.

“It will probably open a little weaker tomorrow,” he said.

The trader said that market players were adding risk heading into the headline, but after the conference call, they “backed away from it.”

It was likely that market players thought that the shares would react positively to the call, he said.

Mentioned in this article:

Actavis plc NYSE: ACT

American Town Corp. NYSE: AMT

Chesapeake Energy Corp. NYSE: CHK

Horizon Pharma plc Nasdaq: HZNP

Tesla Motors Inc. Nasdaq: TSLA

Wheeler Real Estate Investment Trust Inc. Nasdaq: WHLR

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