Convertibles secondary soft amid stock sell-off; Ares Capital active; Affirm, Lucid down

By Abigail W. Adams

Portland, Me., Jan. 5 – The convertibles secondary space was soft on Wednesday as the sell-off in the tech sector spread to other corners of equity markets amid a spiking 10-year Treasury yield.

While the Dow Jones industrial average was positive early in Wednesday’s session, it turned negative alongside other benchmarks.

The Dow closed Wednesday down 393 points, or 1.07%, the Nasdaq Composite closed down 3.34%, the S&P 500 index closed down 1.94% and the Russell 2000 closed down 3.26%.

The 10-year Treasury yield hit as high as 1.711% before closing the day at 1.696%.

For the equity of convertible issuers, “there are more double digit moves to the downside than I’ve seen in a long time,” a source said.

There was about $77 million reported convertible bond trading about one hour into the session and $626 million on the tape about one hour before the close.

Affirm Holdings Inc.’s 0% convertible notes due 2026 continued their downward trajectory in active trading.

Lucid Group Inc.’s 1.25% convertible notes due 2026 gave back much of their gains from earlier in the week with the notes again falling below their discounted issue price.

While high-flying convertible issuers continued to get pummeled, Ares Capital Corp.’s 3.75% convertible notes due Feb. 1, 2022 were the top traded name in the space as the convertible notes approach their maturity.

Affirm down again

Affirm’s 0% convertible notes due 2026 again set a new low in active trading as the fintech company’s stock continued its downward spiral.

The 0% convertible notes were changing hands at 84.75 versus an equity price of $85.15 early in the session, according to a market source.

They continued to trend lower as the session progressed and were trading at a new outright low of 84 heading into the market close.

Affirm’s stock traded to a high of $85.68 and a low of $78.91 before closing the day at $79.53, a decrease of 6.88%.

Affirm’s 0% convertible notes have been under pressure since December when high-flying stocks sold off as the market priced in previously unexpected Federal Reserve rate increases in 2022.

Affirm priced a $1.725 billion issue of the 0% notes at par with an initial conversion premium of 55% in mid-November.

Lucid lower

The volatility in Lucid’s 1.25% convertible notes due 2026 continued on Wednesday with the notes giving back much of their gains from earlier in the week.

The 1.25% convertible notes were off about 4 points outright with stock down almost 7%.

The notes were trading on a 96-handle by the late afternoon, a source said.

They contracted about 0.25 point dollar-neutral.

The electric vehicle manufacturer’s stock traded to a high of $39.06 and a low of $36.13 before closing the day at $36.68, a decrease of 6.93%.

The notes saw a strong start to the new year, hitting 103 on Monday, their highest outright level since pricing.

However, the notes have come in since.

The 1.25% notes have been volatile since the company priced the $2.01 billion issue at 99.5 in mid-December.

Ares’ end of life

While convertible issuers continued to see huge movements in their equities, Ares Capital’s 3.75% convertible notes due Feb. 1, 2022 were the most actively traded name in the secondary space on Wednesday as the notes approach their maturity.

The 3.75% notes saw a large trade at 111.875 early in the session.

However, they came in alongside stock as the session progressed and were changing hands at 110.5 heading into the close.

There was more than $40 million in reported volume.

“It’s an end-of-life trade,” a source said.

Parity, determined using the volume weighted average price of shares since Monday, was about 111.07 early in the session, a source said.

However, the averaging period for the notes will begin on Thursday and last through Jan. 27, which still gives the notes some optionality, the source said.

Ares Capital’s stock traded to a high of $21.28 and a low of $20.82 before closing the day at $20.92, a decrease of 1.46%.

Mentioned in this article:

Affirm Holdings Inc. Nasdaq: AFRM

Ares Capital Corp. Nasdaq: ARCC

Lucid Group Inc. Nasdaq: LCID

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