Convertibles market eyes Square, Envestnet; FireEye, NRG Energy notes flat on debut

By Abigail W. Adams

Portland, Me., May 22 – The convertibles primary market has been in high gear with a flood of new paper hitting the secondary space on Tuesday and more on the way.

Envestnet Inc. plans to price a $300 million offering and Square Inc. plans to price a $750 million offering after the market close on Tuesday.

Both are well-known names in the convertibles space, and the deals are expected to do well.

New convertible notes from FireEye Inc. and NRG Energy Inc. hit the secondary market on Tuesday and dominated trading activity.

FireEye’s new 0.875% notes due 2024 “traded a little sloppy” and dropped below par out of the gate, a market source said.

NRG Energy’s new 2.75% notes due 2048 started strong out of the gate but dropped to just above par early in the session where it remained for most of the day, sources said.

Both deals were largely flat on a dollar-neutral basis, sources said.

While new paper has been the focus of the convertibles space recently, Dycom Industries Inc.’s 0.75% convertible notes due 2021 saw some action on Tuesday with the notes dropping more than 15 points on an outright basis as the stock tanked after the specialty contract service provider missed earnings and slashed its forward guidance in its first-quarter earnings report.

Square has ‘all the numbers’

Square plans to price $750 million of five-year convertible notes after the market close on Tuesday with price talk for a coupon of 0% to 0.5% and an initial conversion premium of 42.5% to 47.5%.

The deal is believed to be in the market with either a credit spread of 150 basis points or a credit spread of 175 bps over Libor and a 42% vol., a market sources said.

With a credit spread of 175 bps, the deal models about 0.5 point rich at the midpoint of talk, a market source said.

While the deal modeled rich at the midpoint of talk, it is expected to price on the cheap end, a source said.

It is rare for a company with such a tight credit spread to also have a high volatility, a source said.

The company’s credit spread is well deserved, another source said. “This company has a lot of dynamics. In terms of cash, EBITDA, market cap, it has all the numbers,” a source said.

The company has low debt and a positive cash flow.

The low coupon and high premium of the new deal are unappealing at face value, a market source said.

However, Square’s outstanding 0.375% convertible notes due 2022 were one of the outperformers of 2017.

“People are enamored with Square,” a source said.

The 0.375% notes now trade well above double par with the notes trading up to 242 in mid-March, according to Trace data.

Square priced the 0.375% notes in February 2017 with stock at $17.00. The conversion price for the 0.375% notes is $22.95.

Square stock closed Tuesday at $54.63, a decrease of 3.12%.

Square’s stock has “had a hell of a run,” a market source said.

Envestnet looks fine

Envestnet plans to price $300 million of five-year convertible notes after the market close on Tuesday with price talk for a coupon of 1.25% to 1.75% and an initial conversion premium of 30% to 35%.

The deal is being marketed with a credit spread of 250 bps over Libor and a 32% vol., a market source said. Even with a lower vol., the deal would look OK, the source said.

Envestnet is also a repeat issuer of convertible notes.

Envestnet’s 1.75% convertible notes due 2019 dropped about 1.5 points outright to trade at 105.25 on Tuesday with stock down $2.

Envestnet stock closed Tuesday at $52.55, a decrease of 4.89%.

FireEye’s deal

FireEye priced $525 million of six-year convertible notes after the market close on Monday with a coupon of 0.875% and an initial conversion premium of 35%.

Pricing came toward the cheap end of talk for a coupon of 0.5% to 1% and at the cheap end of talk for an initial conversion premium of 35% to 40%, according to a market source.

The new 0.875% notes “traded a little sloppy” on their debut, a market source said. They were seen at 99.75 bid, 100.125 offered pre-open but traded down to 99 with the stock off 1% early in the session, a market source said.

The notes remained below par for much of the afternoon, a market source said. They were seen wrapped around 99.5 in high-volume trading.

The notes were largely trading in line dollar neutral.

They have a theoretical delta of 70% but will likely trade a little lighter, a source said.

Approximately $340.2 million of the proceeds from the new offering will be used to repurchase the Milpitas, Calif.-based cybersecurity company’s outstanding 1% convertible notes due 2035.

Most of the holders of the 1% notes that participated in the repurchase and the new 0.875% notes offering were outright buyers, a market source said.

Some of the 1% notes appeared to be repurchased early Tuesday with several trades at 97, a market source said.

The 1% notes have been trading in the 95 range for much of May.

FireEye also has $460 million outstanding in 1.625% notes due 2035. The 1.625% notes traded at 92.5 on Tuesday, according to Trace data.

FireEye stock closed Tuesday at $16.75, a decrease of 2.39%.

NRG Energy

NRG Energy sold $500 million of 30-year convertible notes after the market close on Monday with a coupon of 2.75% and an initial conversion premium of 42.5%.

Pricing came at the cheap end of talk for a coupon of 2.25% to 2.75% and at the midpoint of talk for an initial conversion premium of 40% to 45%, according to a market source.

The notes “started strong but whittled down,” a market source said early in the session. The notes were seen between 100.5 to 101 but soon dropped down to just above par.

The notes continued to trade just north of par into the afternoon and were flat on a dollar-neutral basis.

The notes appeared to be moving on a 65% delta, a market source said.

NRG stock was up soon after the opening bell but was down slightly for much of Tuesday’s session. NRG stock closed Tuesday at $33.45, a decrease of 0.15%.

Dycom’s earnings

Dycom’s 0.75% convertible notes due 2021 dropped on an outright basis alongside the company’s stock on Tuesday after the company reported disappointing first-quarter earnings and slashed its forward guidance.

The 0.75% notes were trading in a range of 114 to 119 during Tuesday’s session. The notes closed Monday at 132, according to Trace data.

Dycom’s stock traded to a low of $92 and a high of $101.91 before closing the day at $92.64, a decrease of 20.28%.

Dycom’s 0.75% convertible notes were in the money as of Monday but the stock dropped below the conversion price at the market close Tuesday. The conversion price on the 0.75% notes is $96.89.

Dycom reported non-GAAP earnings per share of 65 cents, which missed analyst expectations of earnings per share of 69 cents.

Dycom revised its future guidance to earnings per share of $4.26 to $5.15 for 2018 versus the previous guidance of $5.22 to $6.14 per share.

Mentioned in this article:

Dycom Industries Inc. NYSE: DY

Envestnet Inc. NYSE: ENV

FireEye Inc. Nasdaq: FEYE

NRG Energy Inc. NYSE: NRG

Square Inc. NYSE: SQ

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