Morning Commentary: Illumina vol. assumptions questioned; FTI, New Mountain hit market

By Abigail W. Adams

Portland, Me., Aug. 16 – The primary market kicked back into action over the past week after a slow start to the month. While two new deals totaling $375 million hit the secondary space on Thursday, focus was on the deal set to price after the market close.

Illumina, Inc. plans to price $650 million of five-year convertible notes after the market close. Sources pegged the deal between 4 points rich and 0.75 point cheap with all questioning the vol. assumptions used by the underwriters.

As the secondary space awaits new paper from Illumina, the company’s outstanding 0% convertible notes due 2019 and 0.25% convertible notes due 2021 were major volume movers in the secondary space.

New paper from FTI Consulting, Inc. and New Mountain Finance Corp. were also active early in Thursday’s session although the notes were largely trading at par.

Illumina eyed

Illumina plans to price $650 million of five-year convertible notes after the market close on Thursday with price talk for a coupon of 0% and an initial conversion premium of 37.5% to 42.5%.

Underwriters are marketing the deal with a credit spread of 85 basis points over Libor and a 35% vol., according to a market source.

Using those assumptions, sources pegged the deal between 1 point rich and 0.75 point cheap at the midpoint of premium talk.

While there was large variation in the valuation of the deal, multiple sources said the vol. assumptions were aggressive.

“They’re way off on the vol.,” a market source said. “Very aggressive vol., stupid pricing,” another source said.

One source pegged the vol. more like 30%. Using a credit spread of 100 bps and a 30% vol., fair value for the deal would be 94, a source said. The deal may end up pricing at a discount, a source said.

While the mathematical side of the equation points to the deal being overvalued, the deal is expected to do well based on “the art” part of the equation, or the company’s story.

The deal will get done and is expected to perform well, sources said, especially if the bonds receive an investment-grade rating, a source said.

Illumina is an investment-grade company with a $60 billion market cap.

The deal is essentially an equity surrogate and should be looked at as a secondary equity offering, another source said.

Illumina active

While the secondary space awaits new paper from Illumina, the company’s outstanding convertible notes saw high-volume trading early in the session.

Illumina’s 0% convertible notes due 2019 were seen changing hands at 132.125 with about $18.5 million of the bonds on the tape early in the session.

Proceeds from the new convertible notes offering may be used to repay the 0% convertible notes, the company said in a press release.

Illumina’s 0.25% convertible notes due 2021 were seen changing hands at 140.625 with about $8 million of the bonds on the tape early in the session.

FTI Consulting dominates

New paper from FTI Consulting dominated trading activity in the secondary space. However, the notes were largely stuck at par.

FTI Consulting priced an upsized $275 million of five-year convertible notes after the market close on Wednesday at par with a coupon of 2% and an initial conversion premium of 32.5%.

Pricing came at the cheap end of talk for a coupon of 1.5% to 2% and at the midpoint of talk for an initial conversion premium of 30% to 35%, according to a market source.

The initial size of the deal was $250 million with a greenshoe of $37.5 million.

The notes were seen trading between par and 100.5, sources said. The lack of movement of the notes was attributed to the upsize, which saturated the after-market demand, a market source said.

About $51 million of the bonds were on the tape early in the session.

New Mountain prices

New Mountain sold $100 million of five-year convertible notes prior to the market open on Thursday at par at the cheap end of talk with a coupon of 5.75% and an initial conversion premium of 10%.

Price talk had been for a coupon of 5.5% to 5.75% and a fixed initial conversion premium of 10%, according to a market source.

The deal was also seen hovering around par early in Thursday’s session. The notes were seen trading between par and 100.25 with about $75 million of the bonds on the tape.

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