Convertibles quiet around Fed rate raise; oil names pressured; solar up; SunPower flat on swap

By Rebecca Melvin

New York, Dec. 16 – U.S. convertibles remained in quiet mode on Wednesday amid a generally positive tone following the first rate raise from the Federal Reserve since the 2008 financial crisis. However energy names were under pressure as oil prices took another leg lower.

The Fed’s decision to move rates from near zero is viewed as positive for convertibles and the broader markets, a New York-based trader said.

“There was a decent reaction in the markets. It is a pretty rational reaction to what is essentially good news, some of the tension has been relieved and people look forward to moving forward on a more rational basis,” the trader said.

Members of the Federal Reserve Open Market committee decided unanimously to raise the target rate for the federal funds rate by 0.25% to 0.25% to 0.5%.

The FOMC also said rates would continue to rise gradually, with incremental raises expected in 2016.

During a press conference following the FOMC’s policy statement, Fed president Janet Yellen said that the rate raise “reflects the committee’s confidence that the economy will continue to strengthen.” But policy remains accommodative as “economic recovery has come a long way, but it is not yet complete,” she said.

Since March, the Fed has said it would raise the federal funds rate when the labor market was strong enough and when the 2% inflation target looked attainable. For November, the unemployment rate was 5%, down 0.6% from a year earlier.

Oil prices fell further. West Texas intermediate crude for January delivery fell $1.83, or 4.9%, to $35.52 per barrel after weekly inventory data from the U.S. Energy Information Administration showed that crude stocks increased by 4.8 million barrels for the week ended Dec. 11.

“It’s interesting to see how oil continues to react. Pent up inventories means demand will be lower in the future,” a trader said.

Chesapeake eases

Chesapeake Energy Corp.’s 2.5% convertibles were indicated lower at about 47.75 to 48 from 52.75 according to a market source. Chesapeake’s 2.25% convertibles were indicated down at about 33 from 40 while its shares pared early loses to end up 14 cents, or 3.7%, to $3.90. In the early going on Wednesday, Chesapeake’s stock had hit a 52-week low of $3.57.

The Oklahoma City-based oil and natural gas company announced the preliminary results of its private exchange offer which it said had resulted in about $2.8 billion of existing notes being tendered. The company is exchanging some of its currently outstanding notes for new 8% senior secured second-lien notes due 2022.

Chesapeake also announced that it was raising the amount of second-lien notes that could be issued in the exchange to $3 billion from $1.5 billion and extended the tender deadline to Friday.

Solar names up outright

Ahead of the Fed decision very little was trading, but solar names were up after lawmakers put forward a tax and budget deal that includes a continuation of the investor tax credit for solar energy.

SunPower Corp.’s 4% convertibles, which priced earlier this month, jumped another 10 points to about 115, but they were unchanged, or flat, on a swap basis, a New York-based trader said, against the underlying shares of the San Jose, Calif.-based solar company that were up $3.49, or 14%, at $27.91.

The older SunPower issues were also higher. The SunPower 0.875% convertibles rose to 83 from 78.5 and the SunPower 0.75% convertibles moved up to 123.6 from 114.7, according to a market source.

SolarCity Corp.’s convertibles were also higher after the appropriations and tax bills were introduced on Wednesday. The proposed legislation follows quickly on the heels of a global climate agreement in Paris, SolarCity noted in a press release.

SolarCity’s 1.625% convertibles due 2019 traded up to 81.50 early Wednesday from about 75 on Tuesday, according to Trace data. The underlying shares surged $10.15, or 25%, to $50.20. By the afternoon close, SolarCity shares were up $13.64, or 34%, to $53.69, and the SolarCity 1.625% convertibles traded last at 82.62.

SunEdison Inc.’s shares jumped $1.26, or 25.5%, to $6.21 after the tax credit vote and climate change deal. The SunEdison convertibles were also indicated higher. SunEdison’s 6.75% convertible preferreds were seen up to 369.35 from 294.75; the SunEdison 2.75% convertibles were indicated up at 58.15 from 50.25 and the SunEdison 2% convertible gained to 62.25 from 54.5, according to a market source.

Meanwhile, the SunEdison 2.375% convertibles were indicated rising to 45 from 41.

The market was bouncing a bit after the Fed decision after being largely focused on potential volatility that the widely telegraphed Fed meeting could spark.

“I’m not going to say there will not be volatility, but if they do what everyone expects, which is lift off, reiterate their intention to go slow and remain data driven, it shouldn’t be market-moving information. But there was certainly more vol. leading up to this than I would have expected,” a New York-based convertibles banker said.

In the broader markets, stocks were up, the Treasury curve flattened a bit and the U.S. dollar strengthened. The S&P 500 stock index climbed 29.66, or 1.5%, to 2,073.07; the Dow Jones industrial average rose 224.18, or 1.3%, to 17.749.09 and the Nasdaq Composite index gained 75.77 points, or 1.5%, to 5,071.13.

Mentioned in this article:

Chesapeake Energy Corp. NYSE: CHK

SolarCity Corp. NYSE: SCTY

SunEdison Corp.

SunPower Corp. Nasdaq: SPWR

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