Energy names continue to ‘come in;’ some vol. names take on new shine; GT Advanced slides again

By Rebecca Melvin

New York, Oct. 13 – Convertible credit names, including energy issues, remained very weak on Monday as equities continued to slide. Stock selling accelerated into the close.

Trading in convertibles was on the light side but more active than usual for a holiday Monday. The Securities Industry and Financial Markets Association recommended bond markets stay closed for the Columbus Day holiday.

Energy names were contracting anywhere from 0.5 points to multiple points as equities sold off, a New York-based convertibles trader said early Monday.

“I wouldn’t say it was active,” the trader said of the convertibles market. “But energy names are coming in.”

Among energy names in focus were Emerald Oil Inc., which priced $172.5 million of 2% convertibles in March, and Rex Energy Corp., which priced $140 million of 6% perpetual convertible preferreds in August. Shares of those companies fell 9% and 16%, respectively, on Monday.

Meanwhile, Cobalt International Energy Inc.’s 3.125% convertibles due 2024 continued to go lower, with a late print at 72.7, according to Trace data, which was down from about 75 on Friday.

Traders hadn’t seen Energy XXI (Bermuda) Ltd. in the market. But the company’s convertible tumbled for the last three sessions, and on Monday, shares of the company fell another 11% to $7.04.

Another convert issue Stone Energy Corp.’s 1.75% convertibles due 2017 fell by another point to 93.25 on Monday, after dropping 4.6 points on Friday, according to Trace data. Stone Energy shares fell $1.80, or 7%, to $22.74.

Light sweet crude futures for November delivery shed another 8 cents on Monday at $85.74 a barrel, after tumbling into a bear market last week. Brent crude oil for November delivery slid 1.5% to $88.89 a barrel, the lowest close since November 2010.

Meanwhile, Chicago Board Options Exchange Volatility Index soared 16% on Monday to 24.64, the highest level since June 2012.

On an outright basis, these losses have created some pain, but for hedged players they have by and large been neutral, a New York-based trader said. Meanwhile, some vol. convertibles are beginning to take on new luster and were “to buy,” as pricing remains more resilient compared to their underlying shares.

Buy levels are last week’s sell levels

“Vol. names that have great convexity are to buy,” the trader said. “Sell levels last week are buy levels this week.”

A good convexity profile would mean that if stock were to move down 20%, the stock would move to a larger degree than the bond.

Some examples of these are SunPower Corp.’s 4.5% convertibles due 2015; MGM Resorts International’s 4.25% convertibles due 2015; Electronic Arts Inc.’s 0.75% convertibles due 2016 and Tesla Motors Inc.’s 1.5% convertibles due 2018, the trader said.

Also on Monday, GT Advanced Technologies Inc.’s convertible bonds were quoted down to about 20 as shares of the Merrimack, N.H.-based solar and LED equipment company collapsed to $0.39.

The company filed for Chapter 11 bankruptcy protection last week and had traded down initially to as low as 29 before popping back up to as high as 40 last week.

Equities fell with the selloff accelerating into the market close. The S&P 500 stock index fell 31.39 points, or 1.7%, to 1,874.74. That level is just over where the index started the year at about 1,831, and down compared to its record high of 2,011 notched three-and-a-half weeks ago on Sept. 18.

The Dow Jones industrial average is in negative territory for the year so far.

“Things are very weak from a credit perspective. In this environment, credit is for sale, but vol. names are to buy,” a trader said.

Emerald Oil, Rex Energy fall

Emerald Oil 2% convertibles due 2019 were indicated down to 73.88 on Monday from 81.71. Shares of the Denver-based oil and natural gas company fell 40 cents, or 9%. to $3.93 apiece.

Rex Energy’s 6% convertibles were indicated down to 77ish from 85.5, with shares of the State College, Pa.-based energy exploration and production company dropping $1.64, or 16%, to $8.55 per share.

Cobalt International’s 3.125% convertibles due 2024, which priced in May, dropped another couple of points to about 72.7. They had recently been as high as 88.

Shares of the Houston-based oil and gas company were lower again, down 73 cents, or 6.8%, at $10.08.

Vol. names in focus

MGM’s 4.25% convertibles were seen 117.75 versus an underlying share price of $20.75 during the session.

But shares of the Las Vegas-based casino operator closed a little lower than that, ending down 49 cents, or 2.4%, to $20.27 per share, and a late Trace print went up at 116.275.

A trader said that he is seeing a shift from a month or two ago, when this name and others like it weren’t in demand and weren’t trading.

“They weren’t popularly traded,” he said of the bond that was in the 150s. But now that the bond is 117 with the stock lower, “the audience is changing,” and there is some renewed demand.

The Tesla stock has been on a tear all year, so even though it fell $12.00 on Monday to $224.59, it has a lot further to go before it would turn negative for the year.

Mentioned in this article:

Cobalt International Energy Inc. NYSE: CIE

Electronics Arts Inc. NYSE: EA

Emerald Oil Inc. AMEX: EOX

Energy XXI (Bermuda) Ltd. Nasdaq: EXXI

GT Advanced Technologies Inc. Nasdaq: GTAT

MGM Resorts International NYSE: MGM

Rex Energy Corp. Nasdaq: REXX

Stone Energy Corp. NYSE: SGY

SunPower Corp. Nasdaq: SPWR

Tesla Motors Inc. Nasdaq: TSLA

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