Recent convertibles firm dollar neutral amid broader equity sell-off; Weatherford active

By Abigail W. Adams

Portland, Me., Feb. 5 – Trading activity in the convertible bond market was quiet on Monday as the Dow Jones industrial average and S&P 500 index continued their nosedive.

Western Digital Corp.’s 1.5% notes due 2024 dropped about a point outright but were up on a dollar-neutral basis, a market source said.

Weatherford International Ltd.’s 5.875% convertible notes due 2021 continued to trade down on an outright basis, slipping below par for much of the day. For some, however, the 5.875% notes remained unchanged on a dollar-neutral basis.

Equity markets continued their downward spiral on Monday. The Dow Jones industrial average closed Monday’s session down 1,175 points, or 4.6%. The S&P 500 index closed Monday down 113 points, or 4.10%.

While equity markets plunged, the convertibles space was quiet with limited trading activity, sources said.

Year’s gains pull back

The stock market sell-off, which began last week, trimmed some of the gains in recent convertibles market performance.

The convertibles market started the year off strongly, but the pullback last week “was pretty massive,” a market source said.

Outright players saw returns of 3.94% in January with underlying equity up 6.28%, according to the Bloomberg Barclays Convertibles Bond index. Those returns dropped about 2% last week as equity markets began to sell off.

Returns for the long-only market dropped to 1.94% last week, as the return on equity dropped to 3.94%.

Returns for hedge players were minimal in January with returns for the HFRX convertible arbitrage index at 0.01%.

Last week’s deals

The decline in equity markets last week was partly to blame for Alder BioPharmaceuticals Inc.’s new 2.5% convertible notes falling apart shortly after hitting the secondary market on Jan. 30.

While in high demand during the subscription process, the notes have traded in the 97 to 98 range since pricing. The biotech company’s equity dropped as the convertible notes entered the market.

The notes plunged to 95 in limited trading on Monday as Alder stock dropped another 3.82% to close the day at $13.225.

Western Digital 1.5% notes due 2024, on the other hand, remained in focus and continued to perform well on a dollar-neutral basis.

The notes lost some strength on an outright basis with trades in the 100 to 101.7 range for much of the session, according to Trace data. Western Digital stock was down 4.46%, closing Monday at $81.45.

However, the notes were up about 20 cents on a dollar-neutral basis from Friday’s close, a market source said.

The landmark $1 billion deal from the large-cap investment-grade San Jose, Calif.-based computer data storage company has expanded on a dollar-neutral basis since its market debut on Jan. 31.

Weatherford active

Weatherford International’s 5.875% convertible notes due 2021 remained in focus on Monday. After dropping about 5 points on an outright basis on Friday, the 5.875% notes traded below par for much of Monday’s session.

The notes reached as high as 102 in scattered trades but were mostly trading in the 98 to 99 range on Monday, according to Trace data. Weatherford stock plummeted on Monday, closing the day at $3.09, a decrease of 11.71%.

Everyone uses a different delta for Weatherford, a market source said. For some, the bond was unchanged on a dollar-neutral basis.

Weatherford’s 5.875% convertible notes have been active since the company reported its fourth-quarter earnings on Friday prior to the market open.

Weatherford reported net losses of 33 cents per diluted share for the fourth quarter and an adjusted operating loss of $84 million.

Net losses in the third quarter of 2017 were 22 cents per diluted share and operating losses of $8 million. The losses were attributed to reduced activity in Venezuela and a change in accounting procedures for revenue, according to a company news release.

Weatherford has had a rough beginning to the New Year. The 5.875% notes dropped to the 101 range on Jan. 2 after its underlying equity tanked in response to news the company was scrapping its joint venture with Schlumberger for its North American pressure pumping and well completion operations.

Weatherford opted instead to divest the business to Schlumberger for $430 million in cash. The notes were in the 107 to 108 range at the end of 2017.

Weatherford has been active since the Houston-based multinational oil and natural gas service company reported its fourth-quarter earnings before the market open Friday.

Mentioned in this article:

Alder BioPharmaceuticals Inc. Nasdaq: ALDR

Weatherford International Ltd. NYSE: WFT

Western Digital Corp. Nasdaq: WDC

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