DryShips convertibles drop after straight deal pulled; SunEdison, Citrix contract on hedge

By Rebecca Melvin

New York, Oct. 14 – More turbulence hit the convertibles market on Tuesday with DryShips Inc.’s 5% convertibles due Dec. 1 dropping hard in active trade after the Athens-based drybulk and tanker shipping company said it has withdrawn its planned $700 million offering of three-year senior secured notes and will look instead to a $350 million bridge facility to help fund the upcoming maturity of the 5% convertible senior notes.

DryShips’ convertibles fell several points to 89, which was down from as much as 100 last week.

That situation combined with others like GT Advanced Technologies Inc.’s bankruptcy filing last week, which took the company’s shares to essentially $0 from about $13.00 overnight, has contributed to a lot of pain and anxiety in the convertibles market recently, sources said.

The GT Advanced 3% convertibles due 2017 traded at 21 on Tuesday, which was down from more than par before the filing.

Nevertheless, a bit of stability seemed to return to the market on Tuesday even though low liquidity, which resulted from the recent upheavals, was still in effect, a New York-based convertibles sellside source said.

“What you are seeing is not a lot of selling, per se, but not a lot of buying. Liquidity has come to a grinding halt, and it hasn’t taken that much supply to move the market lower,” the sellside source said.

In the broader markets on Tuesday, equities were mostly higher, but oil fell again, with the West Texas Intermediate dropping nearly 5% to $81.79, its lowest level since 2012.

Pressuring the oil markets was the International Energy Agency’s announcement that it has cut its 2014 and 2015 forecast for demand by 200,000 and 300,000 barrels per day, respectively.

Back in convertibles Tuesday, the SunEdison Inc. convertibles were lower, contracting on a dollar-neutral, or hedged, basis by about 0.5 point, a New York-based trader said.

Citrix Systems Inc.’s 0.5% convertibles were also down in active trade, contracting by about 0.625 point, the trader said. And fellow cloud-computing company, Salesforce.com Inc. saw its convertibles slip mostly in line with lower shares.

While it looked like technology convertibles were replacing energy names on the hot seat of the market on Tuesday, a source said that the pain that the market has experienced has been across the board. “Nothing was safe,” and no one sector or convertible profile can be singled out, he said.

The source held that what has happened to the convertibles market in the last two months is intrinsic to it, namely that a “major” amount of new issuance hit the market and tipped the balance of the market to one of oversupply.

“The main culprit was issuance, combined with a major amount of uncertainly over interest rates and the global economy. The resulting vol., which would normally be what people are looking for, was not positive because it came too fast,” he said.

“Smaller doses would have been better, especially since the market has been lulled with gains that have been up in a straight line for the last three years,” the source said.

“Today was a little better than the last few days; it was definitely a little more stable,” he said.

DryShips drops on funding gap

DryShips’ 5% convertibles due Dec. 1 fell several points to 89 and were seen at 89 bid, 90 offered at the end of the session after the company said it has withdrawn its planned $700 million offering of three-year senior secured notes and has instead agreed on a $350 million bridge facility to help fund the upcoming maturity of the 5% convertibles.

DryShips blamed “current market conditions” for the decision not to go ahead with the high-yield bond sale.

The news was followed by downgrades from Deutsche Bank and Imperial Capital.

A New York-based trader said of the funding situation, “They have the bridge, but they have a funding gap above and beyond that.”

A second trader said, “The bond matures in six weeks, and are trading at 90, so there is something missing.”

SunEdison, Citrix lower

SunEdison’s newer convertible, a 0.25% senior note due 2020, changed hands early Tuesday at 82.5, and the company’s older 2.75% convertibles due 2021 changed hands at 114.6, according to Trace data.

The bonds underperformed shares that slid in the early going on news that the St. Peters, Mo.-based semiconductor and solar technology company is doubling its letter-of-credit facility to $800 million from $400 million.

But SunEdison shares reversed early losses to end higher by 50 cents, or 3.5%, to $14.80 by the end of the session.

The SunEdison convertibles have come in in recent sessions and were lower by another 0.5 point on Tuesday.

One source said that the market is overly squeamish. “The market is nervous. GTAT was definitely a scare factor. The bankruptcy filing was seemingly out of the blue with no real signs beforehand of major problems.”

Separately Citrix’s 0.5% convertibles due 2019 traded Tuesday at 103.58 with the shares at about $65.15. Shares closed off their intra-day high at $64.94, which was up 22 cents, or 0.4%.

Salesforce.com’s 0.25% convertibles due 2018 traded at 105.77, according to Trace data, which was down from 106.50 to 106.75 on Monday. On Friday, the bond traded at 110, and at the beginning of September the bonds were 115 to 116.

Salesforce shares ended down 51 cents, or nearly 1%, at $52.72. The shares are down 8.9% in the last week, having traded at $57.90 last Wednesday.

Mentioned in this article:

DryShips Inc. Nasdaq: DRYS

Citrix Systems Inc. Nasdaq: CTXS

GT Advanced Technologies Inc. Nasdaq: GTAT

Salesforce.com Inc. NYSE: CRM

SunEdison Inc. Nasdaq: SUNE

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