Morning Commentary: Snap convertible notes fall outright, hold on hedge in early trading

By Abigail W. Adams

Portland, Me., July 22 – It was another quiet morning in the convertibles secondary space with equity markets mixed as Snap Inc.’s earnings disappointment dragged down the tech sector.

The Dow Jones industrial average was up 46 points, or 0.14%, shortly before 11 a.m. ET.

However, the S&P 500 index was down 0.22%, the Nasdaq Composite index was down 0.89% and the Russell 2000 index was down 0.73%.

While the tech sector was pulling back after its multisession rally, it was far from a panicked sell-off.

“People are getting comfortable again,” a source said. While the Federal Reserve is poised to announce another historic rate increase at its meeting next week, “a lot of the jockeying has already been done,” a source said.

While the broader convertibles secondary space was largely unchanged amid the sell-off, Snap’s convertible notes fell outright as stock got pummeled post-earnings.

Snap’s 0.125% convertible notes due 2028 were the social media company’s most actively traded tranche.

The notes fell 5 points outright to a new all-time low.

They were marked at 67.5 bid, 68 offered early in the session, a source said.

The notes still move on a heavy hedge despite their lower dollar price due to the company’s credit and the long duration of the notes.

The theoretical delta for the notes would be 40% to 60% based on the model used.

However, on a lighter hedge, the notes widened on the move down, a source said.

While volume in Snap’s other tranches was light, the 0% convertible notes due 2027 were down about 3 points outright to 69.5.

The 0.75% convertible notes due 2025 sank 10 points outright to a 92-handle early in the session.

However, the 0.75% notes were moving in line dollar-neutral, a source said.

Snap’s stock was changing hands at $10.22, a decrease of 37.58%, shortly before 11 a.m. ET.

Stock sank after the social media company released earnings, which reflected a significant slowdown in growth and a dire warning about advertising revenue.

Snap reported losses per share of 2 cents versus analyst expectations for losses of 3 cents. Revenue was $1.11 billion versus analyst expectations for $1.13 billion.

The company declined to issue forward guidance.

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