Southwest convertibles dominate, improve outright; Expedia, Booking active; Shopify weaker

By Abigail W. Adams

Portland, Me., July 12 – It was another quiet day in the convertible secondary space on a choppy day for equity markets.

Equity indexes again wavered between gains and losses before a round of late-day selling pushed them firmly into the red.

The Dow Jones industrial average closed down 193 points or 0.62%, the S&P 500 index closed down 0.92%, the Nasdaq Composite index closed down 0.95% and the Russell 2000 index closed down 0.22%.

The market appeared to be in a consolidation phase with no strong conviction in either direction, a source said.

However, that may change following the latest Consumer Price Index report on Wednesday and the launch of second-quarter earnings.

The lack of conviction in risk assets was evident in the thin volume in the convertibles space with few accounts making moves despite the large yields busted convertible notes were offering.

There was $68 million in reported volume about one hour into the session and $378 million on the tape about one hour before the market close.

The tape belonged to travel-related investment-grade convertible notes.

Southwest Airlines Co.’s 1.25% convertibles due 2025 (Baa1/BBB) continued to dominate activity in the secondary space with the notes rising alongside stock following American Airlines Group Inc.’s release of preliminary earnings results.

While the notes were not active, American’s 6.5% convertible notes due 2025 popped alongside stock after the airline released preliminary earnings results, which raised expectations for the industry ahead of Delta Air Lines Inc.’s Wednesday earnings report.

Expedia Inc.’s 0% convertibles due 2026 (Baa3/BBB-/BBB-), Booking Holdings Inc.’s 0.75% convertible notes due 2025 (A3/A-) were also continuing to see heavy volume although with little movement in price.

Shopify Inc.’s 0.125% convertible notes due 2025 were active with the notes weaker outright.

Airlines in focus

Airlines were in focus on Tuesday following an upwardly revised earnings forecast from American Airlines and with Delta Air Lines set to report on Wednesday.

Southwest’s 1.25% convertibles due 2025 continued to dominate the tape with the notes gaining outright alongside stock.

The 1.25% notes gained 4 points outright with stock up about 5% in intraday activity.

The notes were trading at 123.75 versus a stock price of $38.28 early in the session.

They were changing hands at 125.5 versus a stock price of $38.85 in the late afternoon.

There was $63 million in reported volume, an above average amount even for Southwest which has dominated the volume chart for more than one week, a source said.

Southwest stock traded to a low of $37.31 and a high of $39.08 before closing the day at $38.54, an increase of 4.64%.

While activity was light, American Airlines’ 6.5% convertible notes due 2025 popped alongside stock after releasing preliminary earnings results.

The 6.5% notes jumped 5 points outright with stock up almost 10%.

The notes were changing hands at 114.5 versus a stock price of $14.36 early in the session.

They traded at 115.5 in the early afternoon as stock continued its upward momentum.

American stock traded to a low of $13.56 and a high of $15.04 before closing the day at $14.77, an increase of 9.98%.

American Airlines stock took off after the airline released preliminary earnings results with revenue forecasts besting previously released expectations.

The company said it expects to report its first pre-tax quarterly profit since the onset of the pandemic with revenue of $13.39 billion, which bested previously released guidance, and pre-tax income of $585 million.

American is scheduled to report earnings on July 21.

Industry peer Delta Air Lines is set to report earnings pre-market open Wednesday.

Travel active

Investment-grade travel names dominated the tape on Tuesday with Expedia’s 0% convertibles due 2026 and Bookings’ 0.75% convertible notes due 2025 again seeing heavy volume although with little movement in prices.

Expedia’s 0% convertible notes continued to trade on an 88-handle with several $5 million-plus prints between 88.5 and 88.875, according to a market source.

There was $24 million in reported volume.

Stock traded to a low of $91.32 and a high of $93.55 before closing the day at $92.03, an increase of 0.95%.

Bookings’ 0.75% convertible notes continued to trade in a tight range between 122 and 123.

There was $12 million in reported volume.

Bookings’ stock traded to a low of $1,717.03 and a high of $1,762.33 before closing the day at $1,738.25, an increase of 0.79%.

Bookings’ and Expedia’s convertible notes have seen heavy volume over the past two session, which sources attribute to account repositioning.

Shopify weaker

Shopify’s 0.125% convertible notes due 2025 were weaker in active trading on Tuesday.

The notes fell about 1 point outright to return to an 85-handle.

The notes were changing hands at 85.5 with a yield just shy of 5% in the late afternoon.

There was $10 million in reported volume.

With a conversion premium north of 300%, the convertible notes are not equity-sensitive.

However, Shopify stock closed Tuesday flat after wavering between gains and losses.

Stock traded to a high of $33.48 and a low of $31.70 before closing the day at $32.38, an increase of 0.19%.

The Canadian e-commerce company recently completed a 10-for-1 stock split.

However, the stock split did little to change the value of the convertible notes, a source said.

Mentioned in this article:

American Airlines Group Inc. Nasdaq: AAL

Booking Holdings Inc. Nasdaq: BKNG

Expedia Inc. Nasdaq: EXPE

Shopify Inc. NYSE: SHOP

Southwest Airlines Co. NYSE: LUV

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