Tesla ends little changed in active trade; GT Advanced jumps outright; Cowen looks cheap

By Rebecca Melvin

New York, March 4 - U.S. convertibles were on the quiet side Tuesday as equities rebounded from Monday's losses following comments by Russian president Vladimir Putin that relieved the financial markets' worries over the conflict in Ukraine's Crimea region.

For a third straight day, Tesla Motors Inc.'s two new convertibles remained the most actively traded issues in the space, and they ended little changed on the day.

The longer-dated Tesla 1.25% convertibles traded at 100.125 bid, 100.75 offered in the early going versus an underlying share price of $258.00. But at the end of the session, the issue was trading back down to 99.5 with the underlying shares settling at $254.84, little changed from Monday.

"They are going to trade the way the stock does," an East Coast-based buysider said of the Tesla bonds.

Elsewhere, convertibles were thinly traded and mostly in line with equities. GT Advanced Technologies Inc. jumped on an outright basis in tandem with the underlying shares after the Merrimack, N.H.-based solar and LED industries technology company said a delay in its 10-K form filing wouldn't affect its previously issued guidance and financial results reported on Feb. 24. In addition, Goldman Sachs & Co. initiated coverage on the company's shares at a "buy."

The newer GT Advanced 3% convertibles due 2020, which priced Dec. 4, traded up about 8 points to 154.2, according to Trace data, with the underlying shares up around 6% at a little more than $16.00.

The older GT Advanced 3% convertibles due 2017 traded up to 219.3, which was higher by nearly 14 points on the day, according to Trace data.

In the primary market, Cowen Group Inc.'s planned $125 million of five-year convertible deal was looking somewhat cheap and expected to receive a warm reception in the market.

It's "a couple of points cheap," and demand for the notes should be "decent" because it is an atypical financial issuer, a market source said.

In other words Cowen is a brokerage with some asset management and not a company in the more common segments of the financial sector that often use the convert market, including mortgage real estate investment trusts, business development companies or other types of asset lenders, he said.

"Part of the reason people like different issuers is that there are not a bunch of comparables, and that inserts a little bit more uncertainty in the pricing," the market source said.

Tesla active with shares

The longer-dated Tesla 1.25% convertibles due 2021 ended the day at about 99.5 with the underlying shares at $254.84, which was little changed from the paper's closing mark on Monday. Intraday, the longer Tesla notes traded up to 100.125 bid, 100.75 offered, however, versus an underlying share price of $258.00.

Tesla's new 0.25% convertibles due 2019 ended the day about a point higher than the longer issue at 100.5, according to Trace data. The 0.25% toggled above and below par in tandem with the underlying shares, which ended the session up $4.28, or 1.7%, to $254.84.

A source said that the bonds were going to trade in tandem with the underlying shares and pointed out that it might not be a top for the stock.

Market players that passed on the older Tesla convertible last spring on the grounds that the stock was at all-time highs missed out on a great move, he said.

"The stock is up 200% since that first deal, and the convert is a 90% delta name. Regardless of personal beliefs of where Tesla stock is valued, or if the stock is priced inappropriately right now, if you want to own Tesla, the convertible is a great way to do it," the source said.

The new bonds offer investors a new way to play the name since they have a different profile than the older bonds.

Tesla priced $2 billion of the notes in base deals late Thursday, or $800 million of the shorter A notes and an upsized $1.2 billion of the longer B notes.

In addition, Tesla has an older $660 million convertible with a 1.5% coupon that priced last March.

Planned Cowen eyed

Cowen's planned $125 million convertible bonds, which are expected to price late Tuesday, are "atypical" for a financial-sector convertible, with the closest cousin being the Jefferies Group Inc. $300 million convertible issue priced in 2009.

New York-based Jefferies, which was acquired by Leucadia National Corp. last year, was a bigger firm than Cowen and closer to a Bulge Bracket bank, a market source said, but Cowen, also based in New York, is similar.

It is essentially a brokerage, which is a fairly straight forward business model to understand and different from other types of financials that use the convert space to raise funds, the market source said.

But Cowen also is an asset manager, "which tends to have decent values and typically speaking is more stable than a brokerage if it's managed properly," he said.

The company appears to be doing some opportunistic financing because it sees good chances to put capital to work, he said.

This source said that based on a credit spread of 500 basis points over Libor and a 30% to 35% vol., the deal looked a couple of points cheap.

A second source said that based on a 500 bps credit spread and 30% vol., the deal was 3.6% cheap.

This source thought 500 bps was too tight for the credit spread and was leaning toward a spread that was more than 600 bps.

At the wider spread and using 30% vol., the deal looked fair value, he said. Using the wider spread and 35% vol., the deal looked 3.1% cheap.

Because there is a little bit more uncertainty in the pricing given few directly related comparables, pricing may be a more generous, the first source said.

Cowen is pricing the deal with a coupon talked at 2.5% to 3%, which is much higher than some of the technology sector companies that have brought deals in the convert space recently, but at the same time, Cowen has a much lower vol., the source pointed out.

Mentioned in this article:

Cowen Group Inc. Nasdaq: COWN

GT Advanced Technologies Inc. Nasdaq: GTAT

Tesla Motors Inc. Nasdaq: TSLA

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