Wayfair convertibles active after earnings disappointment; U.S. Steel jumps; J2 steady

By Rebecca Melvin

New York, Nov. 1 – Wayfair Inc.’s convertibles continued to trade actively on Friday, initially extending losses before buyers stepped in, and following a slide in the paper along with the underlying common stock on Thursday.

The Wayfair 1% convertibles due 2026 traded at 87.95 early Friday, which was off by another 0.3 point on the day, before it recouped marginally, according to Trace data. That was still off significantly from above par earlier in the week.

The Wayfair 0.375% convertibles due 2022 traded at 105.33, which was off from 105.7 on Thursday last. The bond ended the session with a 106 handle. A week ago, the Wayfair 0.375% notes had traded as high as 127.9.

Some convertible players took a significant hit from the Wayfair carnage, but the convertible arbitrage strategy remained positive for the month, according to the BarclayHedge convertible arbitrage index.

BarclayHedge had the rate of return for convertible arbitrage market players up 0.2% for October, based on limited reporting by two funds so far. The return for September was 0.34%, based on 15 funds reporting. For the year so far through October, the convertible arbitrage index is up 6.85%.

The best single month of return for the BarclayHedge index was January, with a 2.26% return. The worst month was May with a minus 0.12% return. May was the only month that convertible arbitrage went negative. If the October return stays around 0.2%, that would be a big improvement over the same month last year when the return was minus 0.41%.

November has tended to be a difficult month for convertible arb hedged players, resulting in negative return for the past four years. November 2018 saw a minus 0.89% return, which was the worst result for the four years. Meanwhile, Hedge Fund Research’s convertible arbitrage index has a 0.55% rate of return for the month and 3.83% return for the year to date.

In a positive move on Friday, United States Steel Corp.’s 5% convertibles due 2026, which priced two weeks ago, spiraled up to 119.25, which was an outright climb of more than 11 points on the day. Shares of the Pittsburgh-based steelmaker, which slumped last month, surged $2.00, or 17%, to $13.51.

“U.S. Steel bonds continue to go higher dollar neutral post earnings,” a New York-based market source said, suggesting a 1-point expansion on Friday, coming on top of a 2-point improvement since issue on Oct. 16.

Investors seemed enthused by U.S. Steel’s smaller-than-expected loss on slightly better-than-expected revenue. U.S. Steel said it lost $0.21 per share compared to expectations for a $0.29 per share loss.

Also active in trade was J2 Global Inc., which reported third-quarter results that were “fine,” according to a New York-based market source.

The J2 stock was little changed in the early going and closed down 55 cents, or 0.6%, to $94.41.

The J2 convertibles might be removed from the Thomson Reuters convertibles index this month, the market source noted.

Removal is related to the dollar price of the bond. If the bond gets too expensive and is over 140, it gets bumped until the price goes back down to below 125. Likewise, if the price goes too low, or below 60, it will be taken out, the market source said.

Lam Research Corp.’s convertibles were pulled into trade on Friday, and the 2.625% notes due 2041 were lifting along with the underlying common shares of the Fremont, Calif., semiconductor equipment maker. The bonds were up 19 points to 853.5, according to Trace data, as shares were up $2.87, or 1%, to $274.30. Lam reported better-than-expected earnings a week ago.

The U.S. convertibles market saw three new issues announced and priced this past week, including $470 million in two notes deals and $1.15 billion in a single mandatory deal, during a busy week of earnings reports.

Winnebago Industries Inc. priced a $270 million deal of 1.5% convertible notes that traded up on their debut on Wednesday after the RV maker priced the 2025 paper at the tight end of talked terms.

Granite Construction Inc. priced $200 million of 2.75% convertible notes that traded unchanged on their debut on Wednesday after the construction and transportation contractor priced its 2024 paper at the cheap end of talked terms.

DTE Energy Co. priced $1.15 billion of 6.25% mandatory equity units that added in trade on their debut after the Detroit-based energy company priced the three-year paper at the midpoint of coupon talk and at the tight end of premium talk.

The Granite Construction bonds traded up by more than a point on Friday to 101.2. The common climbed on Friday, closing up 7.2% to $25.23.

Mentioned in this article:

DTE Energy Co. NYSE: DTE

Granite Construction Inc. NYSE: GVA

J2 Global Inc. Nasdaq: JCOM

Lam Research Corp. Nasdaq: LRCX

Winnebago Industries Inc. NYSE: WGO

Wayfair Inc. Nasdaq: W

United States Steel Corp. NYSE: X

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