Morning Commentary: Convertibles market weighs Five9, Teladoc offerings with mixed views

By Abigail W. Adams

Portland, Me., May 3 – After a period of silence earlier in the week, the convertible bond primary market reactivated after earnings announcements. Two deals totaling $425 million are expected to price after the market close on Thursday.

Five9 Inc. and Teladoc Inc. are on deck with new offerings. While Five9’s deal is expected to do well, Teladoc’s deal does not look attractive, sources said.

Five9’s deal

Five9 plans to price $200 million of five-year convertible notes with price talk for a coupon of 0% to 0.125% and an initial conversion premium of 30% to 35%, according to a market source.

The deal comes with a call spread.

With a credit spread of 250 basis points and a 40% vol., the deal models out to par at the mid-point of talk, a market source said.

Based on the performance of other software companies that have priced recently, Five9 is expected to do OK, the source said.

Most other deals have priced with a credit assumption around 300 bps. “I think they’ve gotten tighter,” the source said.

The recent software deals have “spiked into the announcement,” with the convertible notes priced with stocks high. Five9 is no different.

Five9’s convertible notes offering comes on the heels of the cloud computing software provider’s first-quarter earnings beat on Tuesday and a management change-up.

Five9 reported non-GAAP earnings per share of 8 cents for the first quarter, versus analyst expectations of earnings per share of 3 cents. The company’s reported revenue of $58.9 million, which also exceeded analyst expectations of $55.1 million.

Five9 also announced Tuesday former Cisco executive Rowan Trollope will serve as the company’s new chief executive officer effective Thursday.

While Five9 stock jumped almost 8% on Wednesday following the announcements, the stock was down 6.29% to $30.40 early in Thursday’s session. Five9’s 52-week high and low is $34.23 and $17.95, respectively.

With the convertible offering $200 million and Five9’s market cap $1.75 billion, the notes may trade better than they model. “I wouldn’t expect it to fly but it might trade high based on the market cap,” the source said.

The borrow on the common stock is good, the source said.

Teladoc’s deal

Teladoc plans to price $225 million of seven-year convertible notes after the market close on Thursday with price talk for a coupon of 0.875% to 1.375% and an initial conversion premium of 27.5% to 32.5%, according to a market source.

The deal is being marketed with a 400 bps credit spread and a 40% vol., a market source said.

With a credit spread of 475 bps, the deal looks fair, a market source said. However, with a credit spread of 400 bps, the deal “does not look attractive,” a market source said.

At the mid-point of talk, the deal falls under par, the source said.

Teladoc stock has more than doubled in a year, which may be the story underwriters are selling, “but I don’t see this modeling,” the source said.

The virtual health care delivery services provider is a repeat issuer of convertible notes.

Teladoc’s outstanding 3% notes due 2022 saw some trading activity on Wednesday prior to the launch of the new convertible note offering with $7 million bonds traded by late afternoon Wednesday.

The 3% notes gained about 4 points outright to trade up to 127 with stock up about 5%. Teladoc also announced first-quarter earnings prior to the market open on Wednesday.

Teladoc reported a loss of 39 cents per share for the first quarter, which beat analyst expectations of a loss of 43 cents per share.

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