Akamai convertibles mixed post earnings; GDS Holdings sees slight rebound; Molina jumps

By Abigail W. Adams

Portland, Me., Aug. 1 – While the prospects for new paper in the convertibles market this week are diminishing, major stock movements have spurred trading activity in the secondary space.

Akamai Technologies Inc.’s 0.125% convertible notes due 2025 and 0% convertible notes due 2019 were major volume movers in the space with the 0.125% notes contracting and the 0% notes expanding as stock dropped post second-quarter earnings.

GDS Holdings Ltd.’s 2% notes due 2025 also remained in focus after a disastrous Tuesday. The notes saw a slight rebound on Wednesday gaining about 2.5 points to 3 points on a dollar-neutral basis after a 10-point contraction on Tuesday, a market source said.

Molina Healthcare Inc.’s 1.125% convertible bonds due 2020 saw major gains on Wednesday with the notes pushing above parity after a second-quarter earnings beat.

Caesars Entertainment Corp.’s 5% convertible notes due 2024 were dropping outright but expanding dollar-neutral as its stock tumbled after its second-quarter earnings.

There is still no word on a possible exchange or buyback of the convertible notes as the casino operator works toward plans to deleverage itself.

‘All about Akamai’

Trading volume in the convertibles space on Wednesday “was all about Akamai,” a market source said.

Akamai’s 0.125% convertible notes due 2025 were the volume leaders with more than $26 million on the tape by late afternoon.

The notes dropped more than 4 points to their lowest outright level since the $1.15 billion issue hit the market on May 17.

The 0.125% convertible notes were trading at 96.625 with the stock down about $5 early in the session. They bounced back to just under 98 as stock pared its losses into the afternoon.

The 0.125% notes were seen contracted about 0.5 point on a dollar-neutral basis, a market source said.

While Akamai’s 0.125% notes contracted, the company’s 0% notes due 2019 were expanding. The notes were trading down about 1 point outright to 99.6.

However, the notes were expanded about 0.25 point dollar-neutral, a market source said.

Akamai’s stock was down as much as 6.5% during Wednesday’s session but closed the day at $71.63, a decrease of 4.82%.

Akamai stock “had a huge run,” a source said. “Now it’s giving a little back. It’s not unusual.”

The drop in Akamai’s stock came after the cloud service provider reported second-quarter earnings after the market close on Tuesday.

While the company beat analyst expectations for earnings per share, third-quarter guidance fell short.

Akamai reported non-GAAP earnings per share of 83 cents for the second quarter; analysts had expected 79 cents per share.

GDS regains some footing

GDS Holdings’ 2% notes due 2025 remained in focus on Wednesday and regained some footing after a disastrous Tuesday.

After a brief rise that saw the notes as high as 78 in early trades, the notes sank back down to trade in the 73 to 74 range early Wednesday.

The notes stood poised to close the day at 75.5 with stock up about 15%. The notes regained some footing on a dollar-neutral basis and expanded about 2.5 points to 3 points, a market source said.

They were moving on about a 35% delta.

GDS stock closed Wednesday at $25.28, an increase of 15.8%.

GDS has been in focus since Tuesday when the notes fell more than 22 points outright and contracted 10 points on a dollar-neutral basis as stock dropped 37%.

GDS stock and convertible notes got crushed on Tuesday after short-seller Blue Orca Capital released a report alleging the Shanghai-based data center operator had borrowed recklessly, overvalued acquisitions to siphon money to insiders and overstated its service area, utilization rates and revenues.

GDS has since responded to the report, which reflects “a fundamental misunderstanding of the company’s business,” according to a GDS press release.

GDS reaffirmed its utilization rates and service areas and defended its acquisitions.

Analysts have questioned the claims in the report with Credit Suisse upgrading GDS to outperform from neutral on Wednesday.

Sources were mixed on the merit of the report.

While Chinese companies are a common target for short-seller reports, inflation of revenue in accounting statements is also common, a source said.

The allegations in the report “sound about typical,” the source said.

GDS Holdings’ balance sheets reflect a $1 billion increase in cash and equivalents from the fourth-quarter of 2017 to the first-quarter of 2018. However, there was also a $1 billion rise in debt.

GDS subsidiary EDC Chengdu Industrial drew down RMB 845 million of an RMB 1 billion delayed-draw term loan on March 31.

The loan is secured and will be paid out in the case of bankruptcy before the convertible notes, a market source said.

GDS priced a $250 million issue of the convertible notes on May 31 with the greenshoe later lifting the total size of the deal to $300 million.

Molina gains

Molina Healthcare’s 1.125% convertible notes jumped about 44 points on Wednesday as stock soared after a second-quarter earnings beat.

The 1.125% notes have long traded at double parity, a market source said. They were previously trading in the 250 range but shot as high as 302 on Wednesday.

The notes were now trading with about a 0.5 point premium, or 0.5 point above parity, the source said.

Molina stock closed Wednesday at $121.94, an increase of 17.15%.

Molina reported non-GAAP earnings per share of $2.25 for the second quarter, more than double analyst expectations for earnings per share of $1.09.

Caesars’ future eyed

Caesars’ 5% convertible notes due 2024 were dropping outright but seeing gains on a dollar-neutral basis as stock tanked after the company’s second-quarter earnings report.

While the notes are the target of a possible exchange or buyback as the company works toward its goal of deleveraging, there were no updates on the future of the notes, a source said.

The 5% notes were down about 18 points outright and were quoted at 160 at the market close. They were seen up about 0.5 point dollar-neutral on an 85% delta, a market source said.

Caesars stock closed Wednesday at $9.65, a decrease of 14.6%.

While Caesars beat analyst expectations in its second-quarter earnings report, it was cautious in its future guidance, which sent shares tumbling.

Mentioned in this article:

Akamai Technologies Inc. Nasdaq: AKAM

Caesars Entertainment Corp. Nasdaq: CZR

GDS Holdings Ltd. Nasdaq: GDS

Molina Healthcare Inc. NYSE: MOH

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