Convertibles heavy as sellers emerge; SanDisk mostly better on hedge after disappointing outlook

By Rebecca Melvin

New York, July 17 – U.S. convertibles felt “heavy” on Thursday as sellers emerged in the face of lower equities following news that a Malaysian Airlines civilian plane was shot down by a missile near the Russia-Ukraine border, killing all 295 passengers aboard.

Also roiling the markets on Thursday was news in the afternoon that Israeli prime minister Benjamin Netanyahu has instructed his military to begin a ground offensive in Gaza.

“Convertibles feel heavy right now,” a New York-based trader said. The trader said that the impulse to sell convertibles was related to selling in equity markets.

“Things are for sale mostly in the healthcare and tech” sectors, the trader said. WebMD Health Corp. was a good example of a name that felt heavier. “It has three tranches and they are all for sale,” the trader said.

Of the major stock indexes, the S&P 500 fell 23.45 points, or 1.2%, to 1,958.12; the Dow Jones industrial average fell 161.39 points, or 0.9%, to 15,976.81, and the Nasdaq stock market came off 62.52 points, or 1.4%, to 4,363.45.

In addition, gold and bond prices were higher, and the CBOE Volatility index spiked 32% to 14.54.

The yield on the U.S. 10-year Treasury note dropped to 2.458%.

A second New York-based convertibles trader said: “I can’t believe that anyone is in favor of a plane being shot down. But I think the market will kind of reverse; we’ll see the equity market come back in a day or two.”

As for trading before the plane crash, SanDisk Corp.’s convertible bonds fell on an outright basis along with a 14% slide in the underlying shares, but they traded mostly better on a dollar-neutral, or hedged, basis after the Milpitas, Calif.-based data storage company released lower guidance for the current quarter.

There were also block trades in MGIC Investment Corp.’s 5% convertibles due 2017, DryShips Inc.’s 5% convertibles due 2014 and Cobalt International Energy Inc.’s 2.625% convertibles due 2019. “Someone or some funds needed out,” a New York-based trader said.

The MGIC convertibles changed hands at 110.75 near the end of the session, according to Trace data. The Cobalt issue was seen at 89.2, and the DryShips convertibles, which traded extremely actively on Wednesday, printed between 98.72 and 99.75.

SanDisks trade flat or better

The SanDisk 1.5% convertibles due 2017, which were atop the Trace data volume chart, changed hands at 189ish early in the day, which was down nearly 10 points. With the shares at $95.00, the in-the-money convertibles were unchanged on a dollar-neutral basis.

Late in the session, the SanDisk 1.5% convertibles traded at 182.25, which was down 16.49 points, with the underlying shares at $93.21. The convertibles were still called unchanged on a hedged basis.

The SanDisk 0.5% convertibles due 2020 were quoted at 119.25 bid, 119.75 offered with the underlying shares at $95.00. That was higher by 0.5 point on a hedged basis, a New York-based trader said.

Toward the end of the session, the SanDisk 0.5% convertibles changed hands at 119.3, which was down 9.39 points, according to Trace data. With the stock ending still weaker, the paper was said to have expanded by 0.75 point.

SanDisk’s report for the period just completed was better than expected. For the second quarter, it announced earnings of $1.41 per share, which was better than the $1.39 per share that analysts were expecting. Revenue was up 10% at $1.63 billion for the quarter.

But for the current quarter, SanDisk said it expects revenue of $1.675 billion to $1.725 billion, which was below expectations for $1.74 billion in revenue.

Mentioned in this article:

Cobalt International Energy Inc. NYSE: CIE

DryShips Inc. Nasdaq: DRYS

MGIC Investment Corp. NYSE: MTG

SanDisk Corp. Nasdaq: SNDK

WebMD Health Corp. Nasdaq: WBMD

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