Convertibles market ends quarter with negative returns; Envestnet active; Upstart down

By Abigail W. Adams

Portland, Me., March 31 – The convertibles secondary space closed the first quarter of 2022 at a crawl with volume light as selling pressure again pushed equity markets into the red by the market close.

The Dow Jones industrial average closed the day down 551 points, or 1.56%, the S&P 500 index was down 1.57%, the Nasdaq Composite index closed down 1.54% and the Russell 2000 index closed down 1%.

There was $48 million in reported convertibles trading volume about one hour into the session and $400 million on the tape shortly before the market close.

“It’s a snoozer of a day,” a source said.

“Everyone who had something to do already did it,” another source said about end-of-quarter cleanup.

Accounts are closing their books on what has been a brutal quarter with rate increases and Russia’s invasion of the Ukraine sparking a run on risk assets.

However, convertibles hedge players have outperformed outright accounts and other asset classes with returns averaging negative 1%, a source said.

Outright accounts have gotten slammed by the sell-off in equities with the Bloomberg Barclays Convertible Securities ETF closing the first-quarter with negative year-to-date returns of 6.35%.

While the market environment has been brutal, “tomorrow is another quarter,” a source said.

Few names saw concentrated trading activity on Thursday and those that were active saw little movement in price.

Southwest Airlines Co.’s 1.25% convertibles due 2025 (Baa1/BBB) continued to see heavy volume although the notes were largely unchanged.

Envestnet Inc.’s 0.75% convertible notes due 2025 were also active with the notes nominally improved on an outright basis.

Upstart Holdings Inc.’s 0.25% convertible notes due 2026 were down outright with stock under pressure alongside broader markets.

While iQIYI Inc.’s 4% convertible notes due 2026 were active early in the session, activity in the name petered off as the session progressed.

However, the notes closed the day with minor losses following news it had been flagged by the Securities and Exchange Commission under the Holding Foreign Companies Accountable Act, violations of which could result in delisting.

Active issues

Southwest’s 1.25% convertible notes due 2025 were active although largely unchanged on Thursday.

The 1.25% notes were changing hands at 137 versus an equity price of $46.17 in the late afternoon.

The notes were unchanged dollar-neutral, a source said.

“I would have thought they’d do better with the drop in oil,” the source said.

There was $14 million in reported volume.

Southwest’s stock traded to a high of $46.39 and a low of $45.60 before closing the day at $45.81, an increase of 0.53%.

The convertible notes of airlines have been badly battered as crude oil futures spiked following Russia’s invasion of the Ukraine.

However, they have improved dramatically as crude oil futures have come in and travel demand has remained high.

Crude oil futures continued to trend lower on Thursday following news the Biden administration planned to release its emergency oil reserves to tackle high prices.

Envestnet’s 0.75% convertible notes due 2025 also saw some action during Thursday’s session.

The 0.75% notes were up about 0.75 point outright with stock up about 0.5%.

The 0.75% notes were changing hands at 97.625 versus a stock price of $76.04 heading into the market close.

There was $14 million in reported volume.

Envestnet’s stock traded to a high of $76.35 and a low of $73.97 before closing the day at $74.45, an increase of 0.65%.

Upstart under pressure

Upstart’s 0.25% convertible notes due 2026 continued to trade down with stock under pressure during Thursday’s session.

The 0.25% notes were down 2.25 points outright in active trading with stock off almost 4.5%.

The notes were changing hands at 85.5 versus a stock price of $110.82 in the late afternoon.

There was $9 million in reported volume.

Upstart’s stock traded to a high of $116 and a low of $108.88 before closing the day at $109.10, a decrease of 4.41%.

iQIYI down

While activity in the name petered out as the session progressed, iQIYI’s 4% convertible notes due 2026 were down in active trading early in the session.

The 4% convertible notes fell 0.75 point outright to trade at 70, according to a market source.

There was $5 million in reported volume.

While the notes were lower from Wednesday’s close, they were improved on the week with the notes closing last Friday at 69.

The yield on the notes was about 21%.

The Beijing-based online entertainment service provider’s American Depositary Shares traded to a low of $4.46 and a high of $4.75 before closing the day at $4.54, a decrease of 9.92%.

iQIYI announced on Thursday that it had been flagged by the SEC due its use of an auditor that could not be inspected by U.S. regulators and that it is working to explore a possible solution.

Foreign companies identified by the SEC for three consecutive years as violating the HFCAA will face delisting.

Investors are once again wary of the paper of China-based companies following statements from Chinese regulators that their regulatory crackdown on private industry is not over, a source said.

Mentioned in this article:

Envestnet Inc. NYSE: ENV

iQIYI Inc. Nasdaq: IQ

Southwest Airlines Co. NYSE: LUV

Upstart Holdings Inc. Nasdaq: UPST

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