Convertibles mixed as trading picks up; Tesla edges up in long-only trade; Illumina slips

By Rebecca Melvin

New York, Jan. 4 – U.S. convertibles were mixed on Wednesday as trading action in the secondary market picked up following the quiet period that closed out 2016.

“The secondary market has come back to life a little bit after the quiet holiday period,” a New York-based trader said.

There was “fairly balanced” buying and selling as market players reconfigure their books in expectation of heftier new issuance, he said. But the trends were essentially a continuation of Tuesday’s action, with market players wary of rate-sensitive names and eager to add low-cost volatility and better-credit names.

There were few other discernible trends, the trader noted.

Tesla Motors Inc.’s convertibles were a focus of trade as they have been in recent action. The Tesla 0.25% convertibles due 2019, or the A tranche, and the Tesla 1.25% convertibles due 2021, or the B tranche, were both active, with long-only, outright buying pushing those issues up by a point and 1.5 points, respectively. The Tesla common stock was up 4.6% on the day to $226.99.

Illumina Inc.’s convertible bonds were active and slightly lower despite the common stock of the San Diego-based biotechnology company pushing up $4.40, or 3.4%, to $135.53.

The Illumina 0.5% convertible notes due 2021, which were atop the Trace data volume chart intraday, were seen at 97.625, which down 0.175 point. The Illumina 0% convertibles due 2019 were at 95.25, which was down 0.6 point.

Ship Finance International Ltd. made an appearance in trade on Wednesday, with the Ship Finance 5.75% convertibles due 2021 up 0.5 point at 100.66, according to Trace data. Ship Finance shares were up 25 cents, or 1.7%, at $15.25.

GAIN Capital Holdings Inc.’s convertible bond also traded. The GAIN Capital 4.125% convertibles changed hands at 96.95 with the common stock of the Bedminster, N.J.-based online trading services company up 15 cents, or 2.2%, at $6.90. The stock slipped slightly by the close to end up only 12 cents, or 1.8%, at $6.87.

Trading in the distressed convertibles arena was unremarkable, a trader said, with the Cobalt International Energy Inc. convertibles gaining about a point as Cobalt common shares added 2 cents, or 1.6%, to $1.29. But otherwise the sector was quiet.

The Cobalt 2.625% convertibles due 2019 were seen around 41.

In the primary market, Scottsdale, Ariz.-based real estate investment trust Colony Starwood Homes priced an upsized $300 million of five-year convertible senior notes after the market close.

The offering was increased from $250 million. The $45 million greenshoe was increased from $37.5 million.

The notes priced at par to yield 3.5% with an initial conversion premium of 25%.

The bond was talked with a coupon in the range of 3.25% to 3.75% and a conversion premium of 20% to 25% and was priced via bookrunner Morgan Stanley & Co. LLC.

The new deal launched on the first trading day of the year, which was seen as a good sign of more to come as deals generally come later in the month. Still January is historically a pretty light issuance month given corporate blackout periods ahead of the upcoming earnings season. But the expectation is that the strong equity market and higher interest rates will translate into stronger new issuance for the convertible market.

“The pipeline is stronger than it has been. There will be deals before the end of the month,” a New York-based syndicate source said.

With a higher interest rate environment, lower-coupon convertible debt is an appealing option for companies to use to raise capital. In addition, market players are eyeing the possibility that the interest deduction provision will be eliminated as part of a package of tax reforms this year. And if the interest deduction goes away, then lower coupon debt will outperform higher coupon debt, the syndicate source said.

But the paramount reason for optimism about strength of the convertible primary market is the strong equity market, the source said.

The release of the minutes of the Federal Open Market Committee from its Dec. 13-14 meeting produced no real response in the market. In the minutes, the Fed officials cited as wild cards for deciding how to adjust interest rates such things as the timing, size and composition of president-elect Donald Trump’s fiscal stimulus and economic policy decisions.

The FOMC increased its target Federal Funds rate by 0.25 basis points to 0.5% to 0.75% at the December meeting and said that there is the potential for as many as three rate raises this year.

Mentioned in this article:

Cobalt International Energy Inc. NYSE: CIE

Colony Starwood Homes NYSE: SFR

GAIN Capital Holdings Inc. Nasdaq: GCAP

Illumina Inc. Nasdaq: ILMN

Ship Finance International Ltd. NYSE: SFL

Tesla Motors Inc. Nasdaq: TSLA

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