How could changes in interest rates or credit spreads affect the valuation of these convertibles?

Impact of rates and spreads on the VIAVI 0.625 % senior convertible notes

The 0.625 % senior convertible notes are a hybrid security: their price is the sum of a straight‑bond component and an embedded‑equity component. The bond leg is priced off a discount‑rate that reflects the prevailing Treasury curve plus a credit‑spread premium for VIAVI’s credit quality. When interest rates rise, the risk‑free benchmark used in the discount model climbs, forcing a higher present‑value discount on the note’s cash‑flows. Because the notes’ coupon is very low (0.625 %), the bond leg is especially sensitive to even modest rate moves—each 25‑bp increase in the 10‑year Treasury can shave 2–3 % off the note’s clean price. A widening credit spread (e.g., due to a downgrade or sector‑wide stress) adds an extra spread to the discount rate, further eroding the bond value. In practice, a 100‑bp spread expansion would depress the note’s price by roughly 4–5 % given the long‑dated 2031 maturity.

Conversely, declining rates or tightening spreads compress the discount factor, boosting the bond component and, by extension, the convertible’s overall valuation. A tighter spread also raises the implied “credit‑risk” yield, making the conversion feature more attractive relative to the underlying equity. Traders should monitor the 10‑year Treasury curve and VIAVI’s credit metrics (e.g., CDS, leverage) because a 50‑bp spread compression could lift the convertible’s price by 2–3 % and increase the delta to the underlying stock. In a rising‑rate environment, a short‑convertible position may be justified, or a hedge using a forward‑start credit‑default swap could protect the bond leg, while the equity upside remains limited. In a falling‑rate, spread‑tightening scenario, a long‑convertible stance—potentially paired with a modest delta‑neutral equity hedge—offers upside from both the bond recovery and the conversion premium.