Convertibles improve after Fed raises rates; Pandora gains after ruling; Navistar lower

By Rebecca Melvin

New York, Dec. 17 – Despite a swing lower in U.S. equities on Thursday, convertibles remained better across the board on the heels of the first Federal Reserve rate hike since 2006.

“They were better to buy; people are pleased,” a New York-based trader said, meaning that there were more bids to buy convertibles in the market than offers to sell them.

A second trader said that the convertibles market was “a lot better” in the early going. On average, convertibles were 0.25 point better, he said. But stocks were higher in the early going, and then fell to a sharply lower close.

When stocks “rolled over,” convertibles leveled off to slightly weaker levels, the trader said.

Pandora Media Inc.’s convertibles expanded on swap by 1.5 points to 2 points after a ruling by the copyright royalty board that was more favorable for Pandora than some had feared.

The internet radio company, along with others of its ilk, will pay more for music played, but not as much as record companies and artists had hoped.

“There really were no other standout name besides Pandora,” a New York-based trader said about Thursday’s secondary market.

Navistar International Corp.’s convertibles were indicated lower after the Lisle, Ill.-based trucking company reported a fourth-quarter net loss, but earnings excluding items that exceeded estimates.

Shares of the Lisle, Ill.-based trucking company popped initially but then slid throughout the session to end 1.7% lower.

In the broader markets, the S&P 500 stock index climbed initially but ultimately fell 31.18 points, or 1.5%, to 2,041.89 on the day; the Dow Jones industrial average fell 253.25 points, or 1.4%, to 17,495.84, and the Nasdaq Composite index gave back 68.58 points, or 1.4%, to 5,022.55.

On Wednesday, the equity markets had rallied after the first rate raise from the Federal Reserve since the 2008 financial crisis. Members of the Federal Open Market Committee decided unanimously to raise the target rate for the Federal Funds rate by 0.25% to 0.25% to 0.5%.

The FOMC also said rates would continue to rise gradually, with incremental raises expected in 2016.

During a press conference following the FOMC’s policy statement, Fed chairman Janet Yellen said that the rate raise “reflects the committee’s confidence that the economy will continue to strengthen.” But policy remains accommodative as “economic recovery has come a long way, but it is not yet complete,” she said.

Oil prices extended losses. West Texas intermediate crude for January delivery slipped another $0.72, or 2%, to $34.80 per barrel, which was on top of a 4.9% drop on Wednesday. The U.S. Energy Information Administration showed that crude stocks increased by 4.8 million barrels for the week ended Dec. 11.

Pandora gains

Pandora’s 1.75% convertibles due 2020 traded up on Thursday on both an outright and a dollar-neutral, or swap, basis, with the bonds last seen up at about 114 with shares of the Oakland, Calif.-based internet radio service at $15.25. The bonds were also quoted at 113.5 versus an underlying share price of $15.00 in the early going.

Shares jumped $1.82, or nearly 13.5%, to $15.26.

The bond has been a blockbuster since it was upsized and priced at the rich end of coupon talk at the beginning of this month. The positive pricing was notable given the overhang of the Copyright Royalty Board decision. The bond expanded upon release for secondary action and has moved up ever since.

The deal shows that the convertible bond market is open for business even though the high-yield market has been weaker, especially in early December, a syndicate source said.

Under the federal Copyright Royalty Board’s ruling, Pandora will pay 17 cents for every 100 times their free radio users listen to a song and 22 cents per 100 times for paying subscribers.

Navistar indicated lower

Navistar’s 4.5% convertibles due 2018 were seen lower at 44 on Thursday compared to 49.75 previously.

Navistar’s 4.75% convertibles were seen lower at 40 compared to 44 previously.

Navistar shares pared early gains for a 14 cent, or 1.7% loss to $7.98.

Adjusted earnings were $209 million for the period ended Oct. 31. Sales fell 17% to $2.49 billion, which was below the $2.55 billion estimated.

Earlier this month shares dropped after Morgan Stanley cut its price target on the company, raising questions whether the company has enough cash to continue normal operations. Last Friday, the Navistar convertibles gapped down alarmingly from a 60s handle to 44 for the Navistar 4.75% convertibles.

Mentioned in this article:

Navistar International Corp. NYSE: NAV

Pandora Media Inc. Nasdaq: P

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