Convertibles secondary contraction continues; Southwest Airlines lower; Block active

By Abigail W. Adams

Portland, Me., Sept. 26 – The convertibles primary market remained dormant on Monday with expectations for new deal activity low as turmoil continued in equity and credit markets.

A relatively calm start to the day quickly broke to the downside as Treasury yields continued to reach new heights and losses mounted in equities as the Bank of England promised sustained rate hikes until inflation hit its target.

The Dow Jones industrial average closed Monday down 330 points, or 1.11%, the S&P 500 index closed down 1.03%, the Nasdaq Composite index closed down 0.60% and the Russell 2000 index closed down 1.41%.

While volume in the secondary space remained light, the names that did trade were lower.

“People are looking for bids,” a source said, and selling when they could find one.

There was $45 million in reported volume about one hour into the session and $376 million on the tape about one hour before the market close.

Alnylam Pharmaceuticals Inc.’s 1% convertible notes due 2027 continued their downtrend with the notes sinking further below par and contracting dollar-neutral in active trade.

Southwest Airlines Co.’s 1.25% convertibles due 2025 (Baa1/BBB) once again topped the volume charts with the notes coming in on a dollar-neutral basis after holding up well in the previous market downturns.

Block Inc.’s 0.125% convertible notes due 2025 and Pioneer Natural Resources Co.’s 0.25% convertible notes due 2025 (Baa1/BBB) were among the volume movers of Monday’s session although with little change in price.

Alnylam lower

Alnylam’s 1% convertible notes due 2027 continued their downward trend with the notes sinking further below par and contracting dollar-neutral.

The notes fell about 1 point outright as stock wavered between gains and losses.

The notes were changing hands at 97.125 versus a stock price of $199.09 in the late afternoon.

They contracted 0.5 to 0.75 point dollar-neutral, a source said.

There was $12 million in reported volume.

Alnylam’s stock traded to a low of $197.20 and a high of $204.52 before closing the day at $197.39, a decrease of 1.69%.

The notes, which priced at par on Sept. 12, initially performed well in the secondary space.

However, they gave back much of the gains and turned negative late last week, a source said.

Southwest contracts

Southwest Airlines’ 1.25% convertible notes due 2025 once again dominated the tape on Monday with the notes continuing to come in dollar-neutral after holding up well in previous sell-offs.

The 1.25% notes were down about 3 points outright with stock off 2%.

They were trading at 115.375 heading into the market close.

There was $30 million in reported volume.

While the notes have held up well on a dollar-neutral basis, they were starting to come in with the notes contracted 2 points over the past week, a source said.

Southwest’s stock traded to a high of $32.33 and a low of $31.30 before closing the day at $31.37, a decrease of 2.12%.

Active issues

Block’s 0.125% convertible notes due 2025 and Pioneer Natural Resources’ 0.25% convertible notes due 2025 were active during Monday’s session although with little movement in price.

Block’s 0.125% notes were changing hands at 91.25 versus a stock price of $54.67 in the late afternoon, according to a market source.

There was $15 million in reported volume.

The company formerly known as Square’s stock traded to a high of $57.74 and a low of $54.13 before closing the day at $54.14, a decrease of 3.79%.

Pioneer Natural Resources’ 0.25% notes were active on a volatile day for energy with crude oil futures paring some losses early in the session only to continue their downtrend as the session progressed.

The 0.25% notes were seen at 209.5 versus a stock price of $207.51 early in the session, according to a market source.

They traded at 206.875 versus a stock price of $206.69 in the late afternoon.

There was $9 million in reported volume.

Pioneer’s stock traded to a high of $210.44 and a low of $205.01 before closing the day at $205.41, a decrease of 1.71%.

The 0.25% notes were among the few winners of 2022 as equity surged amid climbing oil prices.

However, the notes have come down significantly since their mid-June peak in the 250s.

Crude oil futures have given back all gains on the year with WTI crude oil futures settling at $76.48, a decrease of $2.26 or 2.84%.

Pioneer’s deep-in-the money convertible notes move in lockstep with equity.

Mentioned in this article:

Alnylam Pharmaceuticals Inc. Nasdaq: ALNY

Block Inc. NYSE: SQ

Pioneer Natural Resources Co. NYSE: PXD

Southwest Airlines Co. NYSE: LUV

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