GDS a ‘disaster,’ contracts 10 points on short-seller report; Illumina, Aerojet active

By Abigail W. Adams

Portland, Me., July 31 –While no new paper entered the space on Tuesday, the convertible secondary market was moving with major stock fluctuations pushing outstanding issuances into the spotlight.

All eyes were on GDS Holdings Ltd.’s 2% convertible notes due 2025 on Tuesday as the notes crashed and burned on both an outright and dollar-neutral basis after short-seller Blue Orca Capital released a report valuing the Shanghai-based data center operator’s equity at $0.

The notes dropped more than 22 points outright and contracted 10 points dollar neutral, a market source said.

Aerojet Rocketdyne Holdings Inc.’s 2.25% convertible notes due 2023 saw large gains on an outright basis and a modest dollar-neutral expansion as stock soared after a second-quarter earnings beat.

Illumina Inc.’s convertible notes remained major volume movers in the secondary space as the biotech company’s stock recouped and surpassed its losses from Monday, also after a second-quarter earnings beat.

GDS nosedives

GDS Holdings’ 2% convertible notes due 2025 were Tuesday’s “disaster,” a market source said. The notes plummeted more than 22 points outright and 10 points on a dollar-neutral after a report from Blue Orca Capital valued the company’s equity at $0.

The 2% convertible notes were quoted at 96 at the beginning of Tuesday’s session. They ended the day quoted at 74, according to a market source. The notes were trading at 107 as recently as last week.

While seen trading on an 81 handle in the mid-afternoon, the notes continued to trade down as stock plummeted. They were seen trading at 74.6 versus an equity price of $22.18 shortly before the market close.

The notes were contracted about 10 points dollar neutral. About $18 million of the bonds were on the tape by late afternoon.

GDS Holdings’ American Depositary Shares closed Tuesday at $21.8668, a decrease of 37.07%. “They got crushed,” a market source said. “But they’re not tanking on anything more than a short report.”

GDS’ equity tanked after short-seller Blue Orca Capital released a report on the Shanghai-based company. The report alleged the company has “borrowed recklessly to siphon off at least RMB 696 million to insiders.”

The report also alleged the company overstated its service area, utilization rates and revenues in its Securities and Exchange Commission filings. While the report valued GDS equity at $4.32 a share, it stated the equity could easily be worth $0.

The report is reminiscent of Spruce Point Capital Management’s report on Momo Inc., released just as the Beijing-based company’s 1.25% convertible notes due 2025 debuted in the secondary market on June 27. Momo’s stock and convertible notes have struggled since.

Momo’s 1.25% convertible notes traded at 94.5 on Tuesday, according to Trace data. Momo stock closed the day at $41.02. Momo stock was $45.34 when the convertible notes priced.

Chinese companies are a common target of the reports from short-sellers because more often than not the companies do not respond, a market source said.

Aerojet soars

Aerojet’s 2.25% convertible notes due 2023 were also active in the secondary space as stock soared after a second-quarter earnings beat.

The notes were up about 18 points outright and 0.5 point dollar neutral, sources said.

They were seen trading at 139.258 versus an equity of $32.85 with about $12 million of the bonds on the tape by late afternoon. Aerojet stock closed Tuesday at $33.70, an increase of 21.57%.

Aerojet reported earnings per share of 45 cents for the second quarter, beating analyst expectations of earnings per share of 26 cents.

Illumina in focus

Illumina’s 0% convertible notes due 2019 and 0.5% convertible notes due 2021 remained in focus on Tuesday as the biotech company’s stock recouped and surpassed Monday’s losses after an earnings beat.

The 0% notes were up 10 points outright. They were seen trading at 129.56 versus an equity price of $320.90 with about $20 million of the bonds on the tape by late afternoon.

While the company’s convertible notes saw large outright movements as stock underwent large fluctuations over the past two days, the notes “are hanging in there,” a market source said.

The notes trade with about 4 points of premium, the source said.

Illumina’s 0.5% notes were up about 7 points outright. They were seen trading at 141.25 versus an equity price of $317.77 with about $13 million of the bonds on the tape.

After a $10 drop on Monday in the run-up to its second-quarter earnings announcement, Illumina stock closed Tuesday up $35 at $324.36, an increase of 12.14%.

Illumina announced non-GAAP earnings per share of $1.43 for the second-quarter, beating analyst expectations of earnings per share of $1.11.

Mentioned in this article:

Aerojet Rocketdyne Holdings Inc. NYSE: AJRD

GDS Holdings Ltd. Nasdaq: GDS

Illumina Inc. Nasdaq: ILMN

Momo Inc. Nasdaq: MOMO

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