Convertibles weak; Intel drops outright after earnings; Red Hat below par; Monster on tap

By Rebecca Melvin

New York, Oct. 15 – U.S. convertibles moved lower amid a downdraft in equities on Wednesday, but many names, like some of the newer, investment-grade paper, held in on a hedged basis amid a massive move in the bond market, a New York-based trader said.

Red Hat Inc.’s newer 0.25% convertibles due 2019, an $805 million issue that priced Oct. 2, fell below par to about 99.75 amid a 3% stock decline. The bond’s valuation was still attractive, a trader said, given the impact of the bond market move on the paper’s valuation.

“Some of the longer-dated, IG paper has done OK because of the bond market move. This was a massive move and it makes a gigantic difference in valuations,” the trader said.

He added that he hadn’t seen much of the Red Hat paper in trade on Wednesday.

Early Wednesday, Intel Corp. was a focus, accounting for a sizable chunk of total volume traded after the Santa Clara, Calif.-based chipmaker reported better-than-expected earnings, but the stock price moved down.

Fellow tech name SanDisk Corp. saw some demand during the session, particularly the SanDisk 1.5% convertibles, which market players sought as a means of providing downside protection.

“It’s a solid credit and that bond was doing well, a trader said of the SanDisk 1.5% convertible; the company’s sister convertibles, a 0.5% bond, was also OK but not trading significantly.

Names like SunEdison Inc. and Healthways Inc. were examples of the types of names that have recently ‘come in’ sharply. Healthways has a 1.5% convertible senior note due 2018 that priced in July 2013.

“If anything, it’s a little lower with the rest of the market,” a trader said of SunEdison.

Energy remained a focus, but there was light volume in the sector.

There was a bid in Alpha Natural Resources Inc.’s 3.75% convertibles at 53. Those bonds traded on Tuesday at 53.5 bid, 54 offered.

“That’s a stand up bid in this market,” a trader said.

Energy XXI (Bermuda) Ltd. was bid at 64 early in the session and those bonds were seen to have traded higher by the afternoon, quoted in the high 60s.

The Energy XXI was down on Tuesday and tumbled much of last week.

“There was not a ton of volume,” a trader said of EXXI, but “it was moving back up and guys were paying attention to that.”

After the market close, Monster Worldwide Inc. launched an offering of $125 million of five-year convertible senior notes in a Rule 144A deal.

The U.S. Treasury 10-year note’s yield fell below 2% during the session but edged above 2% by the end of the session.

Weak economic data was partly behind the move. But one trader said that he wasn’t sure what all the reasons were for what essentially amounted to capitulation.

New RedHat drops below par

RedHat’s 0.25% convertibles due 2019 traded lower to about 99.75 with the underlying shares off 0.8%.

One trader said longer-dated, investment-grade paper such as the Red Hat bond had done OK during the brutal session Wednesday, and that the valuation was attractive.

But a second source said names like this with low coupons and longer duration were unappealing. “These things have zero protection to the downside,” he said. They have durations that are too long, and pricing that was not generous enough.

The small coupon, 2018, 2019 bonds are getting slaughtered,” he said. But that has been going on for six weeks or more, he noted.

Another source said that of the recent Red hat convertible, “In a weak enough market, this issue could become a very attractive busted convertible, as happened to the similar Red Hat issue priced in [the early 2000s].”

Meanwhile, certain vol. names were also getting panned: “Names at 170 down from 200, that’s a long way to the put. But if you have a convertible trading at 110, that is a different story, you can make that up,” a trader said.

Intel finds support

Intel’s 2.95% convertibles due 2035 slipped to about 119 from 123 bid, 124 offered with the shares dropping about 4%.

The Intel’s 3.25% due 2039 traded down about 6 or 7 points to 150.

The Intel “bonds are starting to hold with the stock down,” a New York-based trader said, adding that they were finding some support at the lower levels.

On a hedged basis, the bonds were seen unchanged on their respective deltas.

Intel reported earnings for the period ended Sept. 27 of $3.32 billion, or 66 cents a share, which was up from the year-earlier period of $2.95 billion, or 58 cents a share. Revenue was $14.55 billion, which was up from $13.48 billion for the same period last year.

Analysts had expected earnings of 65 cents a share on revenue of $14.44 billion.

But gross margin for the quarter was 65%, up 258 basis points from the year-earlier period, and lower than the guidance of 66% at the midpoint.

Looking ahead, Intel projected revenue of $14.7 billion for the current quarter, plus or minus $500 million, with a gross margin of 64%, plus or minus a couple percentage points. Analysts called for revenue of $14.48 billion and profit margins of about 62%.

Intel shares finished at $31.28, which was down 87 cents, or 2.7%.

Monster to price

Monster plans to price $125 million of five-year convertible senior notes in a private offering.

The New York-based online employment services company will use proceeds to pay for the cost of the capped call transaction, to repay in full a term loan under an existing credit facility and to repay a portion of the revolving debt under an existing credit facility (with no corresponding reduction of the existing revolver).

The deal has a greenshoe for $18.75 million and is coming with a capped call transaction. The notes are non-callable.

Mentioned in this article:

Alpha Natural Resources Inc. NYSE: ANR

Energy XXI (Bermuda) Ltd. Nasdaq: EXXI

Healthways Inc. Nasdaq: HWAY

Intel Corp. Nasdaq: INTC

Monster Worldwide Inc. NYSE: MWW

RedHat Inc. NYSE: RHT

SanDisk Corp. Nasdaq: SNDK

SunEdison Inc. Nasdaq: SUNE

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