Morning Commentary: Market awaits Splunk’s $1.7 billion two-part convertibles offering

By Abigail W. Adams

Portland, Me., Sept. 18 – The convertibles primary market plans to price the largest deal of the year after the market close on Tuesday – a $1.7 billion two-tranche convertible notes offering from software company Splunk Inc.

The offering looks cheap and is in demand during bookbuilding, sources said.

Splunk plans to price an $850 million tranche of five-year convertible notes and an $850 million tranche of seven-year convertible notes.

Price talk for the five-year tranche is for a coupon of 0.25% to 0.75% and an initial conversion premium of 27.5% to 32.5%, according to a market source.

Price talk for the seven-year tranche is for a coupon of 0.625% to 1.125% and an initial conversion premium of 27.5% to 32.5%.

The five-year tranche is non-callable for three years and the seven-year tranche non-callable for four years with both then provisionally callable subject to a 130% hurdle with a make-whole.

Underwriters are marketing the five-year tranche with a credit spread of 160 bps over Libor and a 35% vol., a market source said.

The deal looked to be about 2.2 points cheap at the midpoint of talk, a source said.

The seven-year tranche is being marketed with a credit spread of 180 bps over Libor and a 35% vol. The tranche was pegged about 2.73 points cheap. The assumptions looked fair, a source said.

There was strong interest in the deal, which is doing well during bookbuilding, a market source said.

While the largest deal year to date, there have been several billion-dollar convertible notes offerings from the tech sector in 2018.

Palo Alto Networks Inc. priced $1.5 billion of 0.75% convertible notes due 2023 in July, with the greenshoe later partially exercised lifting the size of the deal to $1.69 billion.

Akamai Technologies Inc. sold $1 billion of 0.125% convertible notes due 2025 in May, with the greenshoe later exercised in full lifting the size of the deal to $1.15 billion.

Western Digital Corp. priced $1 billion of 1.5% convertible notes due 2024 in January, with the greenshoe lifting the size the of the deal to $1.1 billion.

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