Federal Realty convertibles eyed; Spirit AeroSystems under pressure; Cytokinetics active

By Abigail W. Adams

Portland, Me., Jan. 8 – The convertibles primary market hit the ground running on Monday with one new offering on deck.

The deal is the first investment-grade offering of the year, a trend that began in 2023 and promises to continue.

Federal Realty OP LP plans to price $400 million of five-year notes exchangeable for Federal Realty Investment Trust’s stock (expected Baa1/BBB+) after the market close on Monday.

The deal did not scream cheap, sources said.

However, the continued march of high-grade names to the convertibles market was hailed as a positive for the asset class.

Meanwhile, it was a quiet yet firm day in the convertibles secondary space as equity markets logged strong gains after a rough start to the year.

The Dow Jones industrial average closed Monday up 217 points, or 0.58%, the S&P 500 index closed up 1.41%, the Nasdaq Composite index closed up 2.20% and the Russell 2000 index closed up 1.78%.

There was $36 million in reported volume about one hour into the session and $328 million in the late afternoon with topical news and the launch of JPMorgan’s health care conference sparking some movement in the space.

Spirit AeroSystems, Inc.’s 3.25% exchangeable senior notes due 2028 sank on both an outright and dollar-neutral basis on news of its involvement in the door panel that blew out of an Alaska Airlines flight last Friday.

News that Novartis was in late-stage talks to acquire Cytokinetics Inc. sent Cytokinetics’ 3.5% convertible notes due 2027 to fresh heights and lifted the broader convertible biotech space as market players eyed other potential deals to come out of the JPMorgan health care conference.

Federal Realty eyed

Federal Realty plans to price $400 million of five-year exchangeable notes after the market close on Monday with price talk for a coupon of 3.25% to 3.75% and an initial exchange premium of 20% to 25%.

The deal was heard to be in the market with assumptions of 175 basis points over SOFR and a 22% vol.

Using those assumptions, the deal looked 1 point to 1.75 points cheap at the midpoint of talk, sources said.

The deal did not look fantastic in terms of cheapness.

However, investment-grade issues are still able to command better pricing due to the quality of their credit.

And Federal Realty is a great company, a source said.

The deal did not look amazing; however, it still played to solid demand with the offering a couple of times oversubscribed, a source said.

While the influx of low vol. investment-grade paper in 2023 was met with low enthusiasm, the continued march of high-grade names to the convertibles market remains a positive for the asset class.

High-grade convertible issuance has largely been concentrated in utility companies and REITs.

However, the hope is for the sectors to broaden with high-grade tech, industrial and other names to look to the convertibles market for their financing needs, a source said.

Spirit under pressure

Spirit AeroSystems’ 3.25% exchangeable senior notes due 2028 crashed on an outright and dollar-neutral basis following news that it was the supplier of an aircraft component involved in a door failure mid-flight on Alaska Airlines last Friday.

The 3.25% notes fell 10 points outright with stock off more than 12% in intraday activity.

The notes were changing hands at 122.25 versus a stock price of $28.99 in the late afternoon.

The notes contracted about 2 points dollar-neutral.

“They got their doors blown off,” a source said.

There was $10 million in reported volume.

Spirit AeroSystems’ stock traded to a low of $26.63 and a high of $30.22 before closing at $28.20, a decrease of 11.10%.

The Boeing supplier has been plagued with quality control issues for the past several months with non-conforming parts impacting Boeing’s delivery schedule on several occasions.

The company is again under scrutiny following the blowout of the door on the Boeing 737 Max 9.

Cytokinetics buyout

Cytokinetics’ 3.5% convertible notes due 2027 hit fresh heights on Monday as news circulated that Novartis was in late-stage talks for an acquisition of the company.

The 3.5% notes jumped another 24 points with stock up 16%.

They were trading at 217 versus a stock price of $106.25 in the late afternoon.

The notes were largely moving in line dollar neutral, a source said.

There was $6 million in reported volume.

Cytokinetics’ stock traded to a low of $85.86 and a high of $110.25 before closing at $108.06, an increase of 15.29%.

Stock skyrocketed mid-session after the Wall Street Journal confirmed what the market had long suspected – Cytokinetics would soon be acquired.

Novartis was reported to be in late-stage talks for the company with the official announcement expected as soon as the end of the week.

The convertible notes stand to gain from the acquisition; however, it is still too soon to tell to what extent, a source said.

The Cytokinetics news lifted the biotech sector in the secondary space.

There was some disappointment early in the session that the health care deals announced at the outset of the JPMorgan health care conference did not involve convertible issuers.

However, the Cytokinetics news announced mid-session changed that.

“People got excited again,” a source said, with several health care names bid up.

Mentioned in this article:

Cytokinetics Inc. Nasdaq: CYTK

Federal Realty Investment Trust NYSE: FRT

Spirit AeroSystems Inc. NYSE: SPR

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