Convertibles ‘for sale’ amid weaker equities, oil prices; SunEdison complex droops

By Rebecca Melvin

New York, Aug. 19 – Weaker equity markets and a slide in oil prices weighed on convertibles on Wednesday, with a wave of selling that boosted trading volume that has been otherwise sluggish for much of August.

“Things are pretty weak,” a New York-based trader said during Wednesday’s session. “There’s a pretty weak equity tape, but you would think that things would be a little bit better with rates. But we are lagging the rate move, for sure.”

Five-year U.S. Treasuries were 8 basis points tighter at the end of Wednesday, representing a 5% drop in the yield to 1.4966%.

“There should be an adjustment,” but there was not, the trader said of the effect of the rate move on convertibles.

Pretty active, pretty weak

A second New York-based sellsider said convertibles were “for sale across the board.” He noted that the weakness represented the continuation of a trend that has been in place in August and for much of the summer.

The reason for the bump up of activity on Wednesday was not immediately known. “I think there is an expectation that things will be fairly quiet the rest of the summer,” a trader said. A clean up may have been underway ahead of the expected slowdown, he said.

SunEdison Inc.’s convertibles, which had a positive day on Tuesday on the debut of the $650 million of 6.75% perpetual convertible preferreds, were lower on Wednesday.

“SUNE has imploded. The stock is down 6%,” a trader said at late morning. The stock actually closed down 7%.

Elsewhere, Chinese internet names, such as Ctrip.com International Ltd., were lower, a trader noted.

Among technology names, Intel Corp., which was actively traded, was lower on an outright basis but unchanged on a dollar-neutral, or hedged, basis.

Web.com Group Inc.’s 1% convertible notes due 2018 fell on an outright basis but also “held in” on swap as the common shares of the Jacksonville, Fla.-based global domain name register tanked following news Tuesday of a data breach.

Web.com was seen down 3 points at about 94, according to Trace data. “That held OK. Convertibles players view it as a buying opportunity, because such a small percentage of customers will have any real impact,” a trader said.

In the broader markets, all eyes Wednesday afternoon were on the minutes released from the Federal Open Market Committee’s last meeting. Equities lifted initially following the release of the minutes but then slumped back in a continuation of the day’s trend as the notes didn’t give a solid reading one way or the other on whether the central bank intends to move ahead with a rate raise from its near-zero policy at its next meeting in four weeks.

“Most [officials] judged that the conditions for policy firming had not yet been achieved,” the Fed’s July 28-29 meeting minutes said. At the same time, some officials argued that a rate increase could convey confidence about the economic outlook and an acknowledgment of progress the economy has already made.

“Members generally agreed that additional information on the outlook would be necessary before deciding to implement an increase in the target rate,” the minutes said.

Intel lower outright

Intel’s 2.95% convertibles due 2035, which traded very actively, were down about a point on an outright basis but unchanged on a swap basis, a trader said.

“Intel was about the only one down, unchanged,” a trader said, attributing its resilience to the fact that it’s a high-grade credit.

The Intel 2.95% convertibles changed hands at 116.7, which was down 1 point outright, according to Trace data.

Intel shares closed down 55 cents, or 1.9%, at $28.36.

SanDisk Corp. took a 5% hit in its common stock, but the chip maker’s convertibles were not seen to be trading actively, a trader said. The SanDisk 1.5% convertibles due 2017 traded at 126, according to Trace data.

SunEdison ‘imploded’

Shares of St. Peters, Mo.-based SunEdison, a solar technology company, were off 6% in the first half of the day but ended a little below that, down $1.03, or 7%, at $13.47.

The SunEdison convertibles were down about 0.5 point on a hedged basis.

The SunEdison 6.75% preferred, which debuted in the market on Tuesday, closed at 98.75 bid, 99.75 offered versus an underlying share price of $13.47, a second trader said.

That was down from 104.375 bid, 105.125 offered versus an underlying share price of $14.68 on Tuesday, when the paper gained more than 4 points on a hedged basis.

The SunEdison 2.625% convertible due 2023, or the E tranche, and the SunEdison 3.375% convertibles due 2025, or the F tranche, both of which priced in May, were quoted at about 69 at the end of the session. That was down a point or two on an outright basis from Tuesday. The bonds had also been better on swap on Tuesday.

The SunEdison 2.75% convertibles due 2021, or the B tranche, traded down to 112 from about 118, according to Trace data.

“SunEdison has been the talk of the market for two weeks,” a trader said.

The complex had done well on Tuesday after the convertible preferreds priced. Shares had held in and there was news that the company has formed a $1 billion investment vehicle with a Goldman Sachs Group-managed fund, West Street Infrastructure Partners III, for future solar projects.

Mentioned in this article:

Ctrip.com International Ltd. Nasdaq: CTRP

Intel Corp. Nasdaq: INTC

SanDisk Corp. Nasdaq: SNDK

SunEdison Inc. Nasdaq: SUNE

Web.com Group Inc. Nasdaq: WWWW

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