Convertibles quiet; Teslas lower outright, mixed on hedge in active trade; older Encore up

By Rebecca Melvin

New York, March 7 - U.S. convertibles were quiet Friday as equities vacillated between gains and losses following a better-than-expected February U.S. jobs report and concerns about Russia's next moves regarding the Crimea and Ukraine.

"It's pretty quiet," a New York-based sellsider said of the convertibles market.

Another New York-based trader pointed out that Trace volume data was low and dominated by trading of the convertibles of Tesla Motors Inc. and Priceline.com Inc.

Tesla's convertibles have been the centerpiece of trade all week with the remainder of the market quiet, although with more buyers than sellers in the arena.

On Friday Tesla's older 1.5% convertibles were lower outright, but improved on a dollar-neutral, or hedged, basis, and Tesla's new, longer-dated convertibles were lower outright and had contracted on hedge.

From issue - it has been one week since the $2 billion of the Tesla bonds in two tranches debuted in the market - the longer-dated convertibles are about 0.25 point lower on hedge, and the new, shorter-dated bonds are about 0.25 point better, a New York-based trader said.

Encore Capital Group Inc.'s 3% convertibles due 2017 were better by 3 points in the early going Friday at 165.682, according to Trace data, with the underlying shares of the San Diego-based specialty finance company up about 1%.

Salesforce.com Inc.'s 0.75% convertibles due 2015 changed hands at 290.428 with shares of the San Francisco-based cloud computing company down about 1% at about $62.00. The 0.75% Salesforce paper was down on an outright basis, but looked to be holding in on a hedged basis, and compared to trades in the issue at 285 versus a share price of $60.97 on Jan. 31.

Ares Capital Corp.'s 5.125% convertibles due 2016 were fairly active and up 0.125 point on an outright basis at 108.375 with the underlying shares of the New York-based business development company vacillating between small gains and losses.

Equities ended mixed Friday amid positive U.S. economic data and Russia concerns.

The U.S. Labor Department reported that U.S. nonfarm payrolls increased by a seasonally adjusted 175,000 in February, which was better than expectations for a rise in payrolls by 152,000.

In addition, the economy added slightly more jobs in recent months than previously believed, with 129,000 jobs added in January, which was revised up from 113,000, and 84,000 jobs added in December, which was revised up from 75,000.

The unemployment rate ticked up however to 6.7% in February from 6.6% in January.

Meanwhile in the Crimea region, armed forces thought to be Russian had seized a Ukrainian military post by Friday afternoon, according to a Reuters report.

And on the heels of an hour long telephone call between U.S. president Barack Obama and Russian president Vladimir Putin, Russian foreign minister Sergei Lavrov warned that sanctions would "hit the United States like a boomerang" and he cautioned against taking "hasty and reckless steps."

Teslas dominate trade

The longer-dated Tesla 1.25% convertibles due 2021 were seen 98.375 near the end of the day Friday, which was little changed on the week, but lower on the day and lower from issue, a New York-based trader said.

Tesla shares were at $247.11 when those bonds were trading, which was down 2%. Tesla shares ended slightly weaker from that level, down $6.73, or 2.7%, at $246.21.

Earlier in the week, the Tesla longer-dated bonds were at 99.5 with the underlying shares at $254.00. They had also traded up to 100.125 bid, 100.75 offered versus an underlying share price of $258.00.

Tesla's older 1.5% convertibles due 2018 were seen at 206.423 late Friday, which was down 3 points on the day.

Tesla's new 0.25% convertibles due 2019 weren't trading as actively as the other two issues on Friday, but they were seen in trade at 100.25 bid, 100.75 offered, which was down from as high as 102 on Thursday.

The older 1.5% bonds were better by 0.25 point to 0.5 point, while the new, longer ones were about 0.25 point lower.

From issue, the A series, or the shorter-dated notes, are up a little by about 0.25 point, and the B series, or the longer ones are lower.

In general the bonds trade in tandem with the underlying share, but from day one they have slightly lagged. The new bonds offer investors a new way to play the name since they have a different profile than the older bonds. They are both seen trading on a delta hedge of 60% to 65%.

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.

Mentioned in this article:

Ares Capital Corp. Nasdaq: ARCC

Encore Capital Group Inc. Nasdaq: ECPG

Priceline.com Inc. Nasdaq: PCLN

Salesforce.com Inc. NYSE: CRM

Tesla Motors Inc. Nasdaq: TSLA

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