Redwood Trust’s new convertibles due 2027 close flat; Expedia, Snap notes active

By Rebecca Melvin

Concord, N.H., June 7 – The convertible bond market traded lightly on Tuesday with Redwood Trust Inc.’s new 7.75% five-year convertibles seeing decent action but ending the session flat as might be expected for a mortgage REIT note, market sources said.

Expedia Inc.’s 0% convertibles due 2026 (Baa3/BBB-/BBB-) were active and lower with the underlying stock down modestly amid no particular news.

Snap Inc.’s convertibles were also changing hands at a good clip and were seen mixed as the stock of the camera and social media company bounced between gains and losses. The shares closed up 14 cents, or almost 1%, at $15.28 on the day. They slipped in after-hours trade.

Overall, “volume is sort of light” and marked by smaller moves, like the broader market, and kind of “choppy,” a New York-based convertibles player told Prospect News.

“It’s kind of like yesterday. The market was all over the place,” the source said.

There were no new issues launched in the space on Tuesday, and the primary was also described as choppy in recent days.

Redwood Trust eyed

Redwood Trust’s new 7.75% convertibles due 2027 traded rather unsurprisingly right around par.

The notes were quoted 99.625 bid, 100.125 offered with the underlying shares at $9.36 as of 3:30 p.m. ET. By the close, it was likely par bid to 100.25 to 100.50 offered. On swap, it was flat.

“It’s definitely been trading; but it’s a REIT convert and those are a bit more boring,” a market source told Prospect News, explaining that the underlying common stock has low volatility.

The new convertible has dividend protection over what is being handed out for the common stock, which is currently 9.81%. The convertible functions much more like a fixed-income instrument in that investors are counting on redeeming their investment at maturity in five years and in the meantime collecting 7.75% yield.

“It’s generally safer and less volatile than many other convertibles,” the source said.

They were seen early Tuesday at 100 bid, 100.5 offered after the California-based housing credit company priced an upsized $200 million of the notes in the middle of coupon talk after the market close on Monday.

The deal was initially talked at $150 million size.

“Redwood is trading OK,” a second market source said on Tuesday.

Market shift

A few months ago, the convertibles market was “literally overwhelmed” with equity sensitive availability, and there was a lot of activity from hedge players or outright players choosing the common over the convertible,” a market source said.

At that time, two-thirds of the market was equity sensitive and one-third was total return. Now, only one-fifth is equity sensitive, and of the remaining market, half is total return and the other third is fixed-income.

“Professional outright investors need to be more thoughtful about how the convert looks compared to a few months ago. A few months ago, it was less important to have the details, but now it’s the convert that drives performance and portfolio managers need to mix and match to make the portfolio work, and credit worthiness is coming into play,” the source said.

Many company stocks have fallen substantially, and those convertibles are acting more like fixed income. For example, Norwegian Cruise Line Holdings Ltd. has seen its shares drop 27% in the past six months. The NCL convertible is trading in the 70s and has a 10% yield. And there are other technology and health care names that have fallen into the 70s and 80s and even lower.

“In this market, we tend to look at issues where the premiums are 80% and up, more fixed-income,” the source said.

Expedia active

Expedia’s 0% convertible notes due 2026 (Baa3/BBB-/BBB-) were an active name in trade. Those bonds were quoted down about 0.25 point on a 1.5% move lower in the underlying shares of the Seattle-based online travel company, a market source said at late morning.

The notes traded at 98.85 at 11:08 a.m. ET, which was down 1.36 points, according to Trace data, when the underlying shares stood at $132.30, which were down more than 2%. At late morning the Expedia notes were the top convertibles in trade. The shares ended up closing down $2.20, or 1.7%, at $131.15.

It wasn’t obvious why the shares and the convertibles were lower. The overall market was weighed down initially by Target Corp.’s downbeat operating margin guidance. It was the second downward revision in less than a month from the retailer, which currently struggles with excess inventory. All three Wall Street indexes opened lower, but the S&P 500 stock index and Nasdaq Composite index pulled slightly higher by late morning. The S&P 500 closed up $39.25, or nearly 1%, to 4,160.68.

Snap mixed

Snap’s convertibles were changing hands in the early going as shares of the camera and social media company bounced between gains and losses. The shares were flat to lower in afternoon trade but closed up 13 cents, or 0.86%, at $15.28.

Shares plunged two weeks ago when the company said it would miss its revenue and adjusted earnings estimates for the second quarter. The company cited faster-than-anticipated macro environment deterioration for the miss. Snap missed analysts’ earnings estimates for the first quarter, and for the year so far, Snap shares have sunk 68%.

At late morning, Snap’s 0.125% notes due 2028 traded at 74.087, which was off a third of a point.

Snap’s 0.75% notes due 2026 traded at 97, which was off 5.962 points.

Stocks slipped in choppy trading as investors digested Target’s margin forecast and await inflation data due later in the week.

Mentioned in this article:

Expedia Inc. Nasdaq: EXPE

Redwood Trust Inc. NYSE: RWT

Snap Inc. Nasdaq: SNAP

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