Morning Commentary: Convertible investors ‘cautious’ amid SVB Financial Group fallout

By Abigail W. Adams

Portland, Me., March 13 – SVB Financial Group’s spectacular implosion continued to reverberate through global financial markets with the emergency measures undertaken by the Federal Reserve to guarantee all deposits at the bank dramatically altering the rate hike narrative.

Treasuries continued to rally with the two-year yield falling 53 basis points to 4.059% and the 10-year note yield falling 24 bps to 3.47% in early trade.

The market dialed back its expectations for a 50 bps rate increase next week with some now calling for no rate increase.

Equities remained volatile while credit spreads continued to widen as markets assessed president Joe Biden’s assurance of the safety of the banking sector.

Equity indexes fought off deep losses at the open to turn mixed with the Dow Jones industrial average up 174 points, or 0.56%, the S&P 500 index up 0.42%, the Nasdaq Composite index up 0.77% and the Russell 2000 index down 0.73% shortly before 11 a.m. ET.

While broader equities wavered, the banking sector plummeted with more than a dozen banks in the S&P 500 index down more than 10% and First Republic Bank next on the chopping block with stock halted in early trade after a more than 70% drop.

Banking regulators have taken emergency measures to guarantee all deposits at Silicon Valley Bank in an effort to stabilize the banking sector.

However, protection would not be extended to investors, Biden said.

“I think everyone’s really glad the deal didn’t get done,” a source said.

SVB’s dramatic implosion was sparked after disclosing a $1.8 billion loss on the liquidation of its for-sale securities portfolio and launching a $2.25 billion equity and equity-linked capital raise that included a $500 million offering of $50-par three-year depositary shares representing a 1/20th interest in $1,000-par series F mandatory convertible preferred stock.

The announcement sparked liquidity fears which resulted in a classic bank run.

SVB’s attempted capital raise was launched post-close Wednesday, March 8. The bank was under FDIC receivership by the early afternoon on Friday, March 10.

Silicon Valley Bank catered to tech startups, many of which populate the convertibles market.

Convertible issuers Etsy Inc., BILL Holdings, Inc. and Roblox Corp. have all disclosed their exposure to Silicon Valley Bank.

However, activity in the names was muted early in the session.

Convertible investors were “cautious,” with many accounts working through the weekend to evaluate their portfolios, a source said.

While there were no desperation sales hitting the market, there was selling in highly liquid names to raise cash, a source said.

“It’s easier to raise cash selling what you can than what you cannot but have to,” the source said.

Southern Co.’s 3.875% convertible notes due 2025 (Baa2/BBB) and Western Digital Corp.’s 1.5% convertible notes due Feb. 1, 2024 (Baa3) topped the volume charts early Monday although with little change in dollar price.

Southern Co.’s 3.875% convertible notes due 2025 were changing hands at 98.625 versus a stock price of $63.94 early in the session.

There was $12 million in reported volume.

Southern Co.’s stock was seen at $66.51, an increase of 3.94%, shortly before 11 a.m. ET.

Western Digital’s 1.5% convertible notes due 2024 were trading at 96.375 early in the session.

The yield was 5.945%.

There was $10 million in reported volume.

While the short-duration notes trade for their yield, Western Digital’s stock was changing hands at $35.04, a decrease of 2.83%, shortly before 11 a.m. ET.

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