Transocean convertibles in spotlight; Marriott, Arconic remain in focus; EFII active

By Abigail W. Adams

Portland, Me., May 1 – There was a notable uptick in activity in the convertibles space on Tuesday after a sluggish start to the week.

More than $345 million was seen on the tape late afternoon Tuesday compared to $250 million late afternoon Monday.

The convertibles space is now entering the heart of earnings season, which is expected to activate trading activity, despite no new paper entering the space so far this week.

Transocean Inc.’s 0.5% convertible notes due 2023 again emerged as a major volume leader after reporting first-quarter earnings after the market close Monday.

The notes were seen up about 0.5 point on a dollar-neutral basis. The notes previously dominated the convertibles space mid-April amid a rise in oil prices.

Electronics for Imaging Inc.’s 0.75% convertible notes due 2019 were also major volume movers during Tuesday’s session after reporting first-quarter earnings after the market close on Monday.

While EFII’s stock skyrocketed, the notes gained only 1 point outright due to the low delta and high premium of the notes, a market source said.

Marriott Vacations WorldWide Corp.’s 1.5% convertible notes due 2022 and Arconic Inc.’s 1.625% convertible notes due 2019 remained active on Tuesday after dominating secondary activity on Monday.

Marriott’s 1.5% convertible notes due 2022 were up about 1 point outright as stock rebounded after dropping more than 8% on Monday.

Arconic’s 1.625% convertible notes continued to expand dollar neutral with outright and crossover investors eyeing the name as the notes approach par, market sources said.

While the Dow Jones industrial average was down 176 points during Tuesday’s session, credit markets held, a market source said.

The majority of names trading were largely trading sideways, the source said. There was a reversal seen in some names in the health care sector with Clovis Oncology Inc.’s stock rebounding and the 1.25% convertible notes due 2025 stabilizing and improving slightly dollar neutral, a market source said.

The notes traded just south of 92.5 on Tuesday. Clovis stock closed the session at $45.14, an increase of 4.06%, after trading as low as $42.20 early in the session.

Transocean dominates

Transocean’s 0.5% convertible notes again dominated trading in the secondary market on Tuesday after the Switzerland-based offshore drilling contractor reported first-quarter earnings after the market close on Monday.

The notes were seen trading at 135 versus an equity price of $12.05, about a 2% decrease. They were expanded about 0.5 point dollar neutral, a market source said. Transocean stock closed Tuesday at $12.03, a decrease of 2.74%.

Transocean’s first-quarter earnings beat analyst expectations on revenue but missed on earnings per share.

Transocean reported revenue of $664 million, versus analyst expectations of $657 million, but reported an adjusted loss per share of 48 cents, versus analyst expectations of 36 cents.

Transocean issued the 0.5% convertible notes as part of the acquisition of Cyprus-based offshore drilling company Songa Offshore SE.

The notes were trading in a range of 110 to 116 prior to April 10 when the notes climbed to their current levels alongside a rise in stock and the price of crude oil.

EFII active

EFII’s 0.75% convertible notes due 2019 were second only to Transocean in terms of volume movement on Tuesday.

While active, the notes only gained about 1 point to trade up to 98.325 as stock skyrocketed.

EFII’s stock closed Tuesday at $32.33, an increase of 16.71%.

The lack of movement in the trading price of EFII’s convertible notes “just goes to show how big a premium they have,” a market source said. EFII’s current conversion premium is 63%.

The conversion premium based on Monday’s closing stock price was 90%.

The Silicon Valley, Calif.-based digital printing technology company reported first-quarter earnings after the market close on Monday.

EFII reported non-GAAP earnings per share of 38 cents, which was inline with analyst expectations. However, EFII saw sales climb 17% in the first quarter, which exceeded expectations.

Outrights eye Arconic

Arconic’s 1.625% convertible notes expanded amid the sell-off in stock on Monday. The expansion continued on Tuesday although trading activity was mostly the result of outright and crossover investors moving into the name.

While the expansion depended on the delta used, the 1.625% notes were seen up about 5/8 point on a 40% delta on Monday.

The notes expanded another 1/8 to ¼ point dollar neutral on Tuesday with the delta adjusted to 25%, a source said. The delta “did what it was supposed to do,” the source said.

With the convertible notes approaching par, outright accounts and crossover investors were now eyeing the notes, a market source said.

The convertible notes were trading in a range of 100.625 to 100.875 during Tuesday’s session after dropping about 4 points outright on Monday. Arconic stock closed Tuesday’s session at $17.68, a decrease of 0.73%.

Monday’s sell-off was triggered by the company’s lowered future guidance due to the rising cost of aluminum. Arconic lowered its 2018 guidance to earnings per share of $1.17 to $1.27 from $1.45 to $1.55 per share.

While Arconic’s equity slumped on the news, the company’s credit held, a market source said.

Marriott active

Marriott’s 1.5% notes were again active on Tuesday with the notes up about 1 point outright as the company’s stock rebounded.

The 1.5% notes were seen trading at 106.86 versus an equity price of $124.29, a 1.37% increase.

The notes have been a major volume mover in the convertible space since Monday when Marriott announced it would acquire Miami-based time share operator ILG in a cash and stock transaction valued at $4.7 billion.

The 1.5% notes were down about 5 points outright on Monday but unchanged on a dollar-neutral basis as the stock dropped more than 8%.

Mentioned in this article:

Arconic Inc. NYSE: ARNC

Clovis Oncology Inc. Nasdaq: CLVS

Electronics for Imaging Inc. Nasdaq: EFII

Marriott Vacations WorldWide Corp. NYSE: VAC

Transocean Inc. NYSE: RIG

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