Coupa convertibles drop on swap in heavy volume; airlines up; Sea, Splunk notes weaken

By Rebecca Melvin

Concord, N.H., March 15 – Coupa Software Inc.’s 0.125% convertible notes due 2025 plunged in tandem with their underlying shares on Tuesday and were down 2.5 points on swap after the San Mateo, Calif.-based cloud platform business lowered guidance after the market close on Monday.

The Coupa convertibles were seen trading at 86.81 at late morning, which was down from about par previously, on $27.5 million of bonds trading by 11 a.m. ET, according to Trace data. Volume in this single Coupa convertible accounted for about 10% of market volume overall at late morning.

A sister convertible, the Coupa 0.375% convertibles due 2026, fell 2 points on swap, a New York-based convertibles source said.

Shares of the cloud platform for business spend management were down about 17%. The shares tanked after the company provided a forecast for 2023 that missed estimates. Its fiscal fourth-quarter results were better than expected, however.

Airline convertibles were also active in trade on Tuesday as their underlying shares rallied after higher guidance provided by Southwest Airlines Co. and other carriers. The companies said air travel is rebounding from recent weakness caused by spread of the Covid Omicron variant.

Southwest’s 1.25% convertibles due 2025 traded up 3.3 points on the day to 129.25, which was in line with the underlying shares of the carrier, which were up 4.9%. American Airlines Group Inc.’s 6.5% convertibles due 2025 traded up 8.3 points to 123.697 with the underlying shares up 9%.

But some other sector names remained under pressure, including Singapore e-commerce behemoth Sea Ltd.’s 0.25% convertible notes due 2026, which were sluggish following a downward move from Monday and despite better shares on Tuesday. The bonds were weak at 74.556, which was down 2 points outright on the day, according to Trace data. The American Depositary Shares of Sea closed up $5.99, or 6.8%, to $83.77.

Splunk Inc.’s 1.125% convertible notes due 2025 were down another point despite a turnaround in the underlying shares, which closed up 1.5%. On Monday, the Splunk convertibles were down outright but expanded on a dollar-neutral basis as stock dropped alongside broader markets.

In the broader markets, equities rebounded on Tuesday, with the Dow Jones industrial average ending the day up 599.10 points, or 1.8%, to 33,544.34; the S&P 500 stock index adding 89.34 points, or 2.1%, to 4,262.45, and the Nasdaq Composite climbing 367.40 points, which was up 2.9% to 12,948.62 on the day.

But over the last two and half months, equity markets have slumped. Prior to Tuesday, the Dow was down 8.5% for the year to date; the S&P 500 stock index was down 11.375%, and the Nasdaq Composite was down 18%.

The war in Ukraine and ongoing disruptions related to Covid-19 have sparked volatility in the markets.

Meanwhile, convertibles trading volume on Tuesday was unexpectedly hefty in the early going as a Federal Reserve policy-setting meeting got underway in Washington, D.C. The meeting was widely expected to kick off a rate hiking cycle at its conclusion on Wednesday since the Fed has clearly signaled its aim of curbing rising inflation.

But geopolitical uncertainty in eastern Europe and resulting commodity and energy price gyrations have led investors to anticipate the smallest incremental increase rather than a larger one. The current Federal Funds rate is 0% to 0.25%, the level to where it was lowered at the beginning of the pandemic.

Primary side quiet

The U.S. convertibles primary market is a mere shadow of what it was at this time last year. The issuance tally year to date is $5.06 billion in 12 deals as of March 14, compared to $33.01 billion in 59 deals for the same period of 2021, according to Prospect News’ data.

For March alone there has been only $1.32 billion in four deals priced, compared to $14.76 billion in 25 deals for March 2021.

“The market has really dropped off a cliff,” a convertibles source said on Tuesday, attributing the decline to lower stock market levels. “Companies don’t like issuing their stock when prices are down so much, and that is essentially what they are doing when they issue a convert,” the source said.

Europe is worrying, the source continued. “People are not including the ripple effect of the ruble being down, the expansion in credit default swaps and the impact of the credit worthiness of some U.S. companies. When there are margin calls [on the ruble], they have to sell.”

Pricing in convertibles is down significantly and there is potentially more to go, the source said.

“The number of convertibles below par price-wise is fairly large. We’ve had the largest drop in prices below par in a year or two,” the source noted.

The bonds that are ‘yielder’ are likely to hold up better than those with lighter yield to maturity. Names with 7% to 8% yield to maturity should so OK, but names including those that are equity sensitive, with 0% to 0.5% coupons and trading 3% to 4% yield to maturity, may be in for some pain, the source said.

Economic data on Tuesday included the latest reading of the Producer Price Index, which was seen supporting a Federal Funds rate increase. The PPI rose a seasonally adjusted 0.8% in February from the prior month, slowing from January’s upwardly revised 1.2% increase but still significantly elevated at 10% in February on a 12-month basis. That level represents a significant high mark for the PPI, according to the Labor Department.

Pandemic related supply disruptions have pushed goods prices higher for much of the past year and are attributable for a lot of the increase. But Russia’s invasion of Ukraine is also to blame as the aggression has sparked global energy and commodity market price gyrations The PPI core pride index, excluding volatile food and energy, climbed 0.2% in February from a month earlier.

Last week the Consumer Price Index rose to a four-decade high of 7.9% in February, the Labor Department said.

There is pressure on the Federal Reserve to speed up a series of interest rate hikes expected this spring aimed at curbing demand and inflation.

In addition to the Fed rate decision and its economic projections on Wednesday, the market is also watching for the EIA weekly petroleum status report, housing starts and unemployment insurance weekly claims report this week as well as industrial production & capacity utilization.

The Fed is tightening interest rate policy to get inflation back down to its 2% goal, from the current running rate of 7.9%.

Widening credit spreads place added pressure on convertible notes trading near their bond floor.

Coupa crashes

Coupa’s 2025 convertible notes fell hard in heavy volume at the market open. Their price rebounded slightly by the close but remained down more than 12 points outright on the day at 87.81. The low print during the session was 84.5 at the open.

Coupa priced $700 million of the convertibles with an initial conversion premium of 35% in June 2019.

The company also has convertibles due 2026 that were also lower but on less volume.

The company’s’ 0.375% convertibles due June 15, 2026 traded last at 78.479, which was down from about 84.5 previously.

Coupa’s stock dropped 19% to $72.55, which was down $17.27 on the day.

Analysts from both Oppenheimer Holdings Inc. and Piper Sandler downgraded Coupa’s stock on Tuesday. Oppenheimer lowered its rating to “market perform” from “outperform” and Piper Sandler analysts lowered their rating to a “neutral” rating from “overweight.” Piper Sandler also set a new price target of $70.00, down from $230.00 previously.

The company said that it expects revenue of $838 million for the current fiscal quarter, which was well below estimates for revenue for the period of $876.4 million. It also expects adjusted profit of 17 cents, compared to analysts’ expectations of 73 cents per share.

The company has been on an acquisition spree and said in its latest report that it will take 19 months to 24 months to strengthen new business trends to more fully tilt overall subscription growth to a higher level.

Mentioned in this article:

American Airlines Group Inc. NYSE: AAL

Coupa Software Inc. Nasdaq: COUP

Sea Ltd. NYSE ADR: SE

Southwest Airlines Co. NYSE: AAL

Splunk Inc. Nasdaq: SPLK

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