Illumina volatility assumptions questioned; FTI Consulting, New Mountain hit market

By Abigail W. Adams

Portland, Me., Aug. 16 – The convertibles primary market kicked back into action over the past week after a slow start to the month.

Two new deals totaling $375 million hit the secondary space on Thursday with one more 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.

However, the deal was said to be multiple times oversubscribed and is expected to do well despite the rich pricing.

As the secondary space awaits new paper from Illumina, the company’s outstanding 0% convertible notes due 2019 and 0.5% 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 during Thursday’s session with the notes trading up on an outright basis and FTI Consulting seeing a modest dollar-neutral expansion.

Illumina oversubscribed

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 some 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.

While the pricing of the deal looked rich, it was heard to be in hot demand and well oversubscribed during bookbuilding.

The mathematical side of the equation points to the deal being overvalued, a market source said. However, the deal is expected to do well based on “the art” part of the equation, or the company’s story.

Illumina is a well-known name in the convertibles space and a strong credit, sources said.

The company is rated investment-grade with a $61 billion market cap. The deal will perform well especially if the bonds receive an unsolicited investment-grade rating, a source said.

The bonds are more like an equity surrogate with the offering akin to 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 on Thursday.

Illumina’s 0% convertible notes due 2019 were coming in about 1.25 points, a market source said.

The 0% notes were seen changing hands at 132.125 early in the session but dropped to trade south of 131.5 later in the afternoon.

More than $40 million of the bonds were on the tape by late afternoon.

While in slightly, the 0% notes continued to trade about 2 points above parity, sources said.

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 0.5% convertible notes due 2021 were also active during Thursday’s session and seen coming in a little more than 1 point.

The notes were changing hands around 140.625 with about $20 million of the bonds on the tape by late afternoon.

While in slightly, the notes continued to trade with about a 10-point premium to parity.

Illumina stock closed Thursday at $326.98, a decrease of 0.26%.

The 0.5% notes were trading with a higher premium than the 0% notes because of the value of the embedded call and put options.

“There’s still three years of call and put value in that one,” a market source said. “And the small coupon makes a difference.”

Some holders of Illumina’s outstanding convertible notes were reluctant to roll into the new deal, due to its richness.

FTI Consulting dominates

New paper from FTI Consulting dominated trading activity in the secondary space with the notes up slightly on an outright and dollar-neutral basis.

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 early in the session, sources said. They were seen at 100.25 bid, 100.75 offered later in the afternoon.

The notes were seen as unchanged to expanded about 0.25 point dollar-neutral. There was decent volume in both swap and outright trades, a market source said.

FTI Consulting stock closed Thursday at $77.10, an increase of 0.77%.

While the notes did trade up, the deal looked cheap and the notes did not trade as high as anticipated, a market source said.

The lack of movement of the notes was attributed to the upsizing, which saturated the after-market demand, a market source said.

About $75 million of the bonds were on the tape by late afternoon with flippers active, a market source said.

New Mountain up outright

While not as active in the secondary space, New Mountain’s new paper was also trading up on an outright basis.

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 notes were seen trading between par and 100.25 with about $7 million of the bonds on the tape early in the session.

The notes gained strength in active trading into the afternoon and were seen at 100.75 bid, 101 offered.

New Mountain stock closed Thursday at $14.00, an increase of 1.45%.

Mentioned in this article:

FTI Consulting, Inc. NYSE: FCN

Illumina, Inc. Nasdaq: ILMN

New Mountain Finance Corp. NYSE: NMFC

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