Universal American convertibles quiet in aftermarket; Tesla drops on swap, SolarCity jumps

By Rebecca Melvin

New York, June 22 – Despite Universal American Corp.’s new $115 million issue of 4% convertibles in the market on Wednesday, the attention of most market players was turned to news that electric car maker Tesla Motors Inc. has offered to buy SolarCity Corp. for $26.50 to $28.50 per share, or about $2.6 billion to $2.8 billion.

Tesla’s convertibles slumped on both an outright and dollar-neutral, or hedged, basis in response to the news, but new life was breathed into SolarCity’s convertibles.

Tesla’s chief executive officer, Elon Musk, is also chairman of SolarCity, and he owns 19% of Tesla and 22% of SolarCity. Musk has recused himself from voting on the deal. But many market players still viewed it as “a little shameless” and as having “no real strategic play.”

The Tesla 1.25% convertibles, or the B convertibles, dropped the most on swap, down 3 points.

It’s piling on a lot of SolarCity debt ahead of the Tesla B convertibles, which mature in 2021, a New York-based trader noted.

“You are putting SolarCity debt before that tranche,” the trader said.

Meanwhile, Universal American’s new 4% convertibles were not heard in trade Wednesday after the White Plains, N.Y.-based health care company launched $100 million of the five-year senior notes with a $15 million greenshoe late Tuesday for pricing ahead of the market open on Wednesday. The deal came at terms that had been fixed before marketing. Shares of Universal American fell 7.5%.

The new bond “was not active,” a trader said, adding that it looked like a very small group of outright investors received most of the allocations, with only a few hedged players getting involved.

Tesla’s convertibles slid on an outright basis and contracted on a dollar-neutral, or swap, basis, while SolarCity’s convertibles gained. Tesla’s convertibles were a lot more active than SolarCity’s.

Elsewhere, the convertibles market was seen as mostly flattish. “There were no changes to valuations, otherwise,” a trader said.

Some market activity is waiting on the result of the British vote on Thursday to either leave or remain in the European Union.

A lot of attention is on that, a trader said. Financial markets are anxious about the impact of an exit and the potential for a recession there that would affect the United States.

A British exit of the European Union would interrupt almost 60 years of expansion of integration in that region.

Universal American quiet

Universal American’s 4% convertibles due 2021 were not heard in trade on Wednesday after the White Plains, N.Y.-based health care company priced $100 million of the senior notes plus a fully exercised $15 million greenshoe. Shares of the company slumped 63 cents, or 7.5%, to $7.72.

“It looks like only a few outrights took down the majority of that issue,” a trader said of the new Universal American paper and the reason that there was little trading in it on its debut Wednesday.

Universal American priced $100 million of the 4% convertible senior notes due 2021 plus a fully exercised $15 million greenshoe via a Rule 144A deal via bookrunner Goldman Sachs & Co.

“There were only a few outrights that took down the majority of that issue,” the trader said.

Pricing of the deal came at terms that were fixed ahead of marketing, including a 4% coupon and $9.44 initial conversion price.

The initial conversion rate of 105.8890 shares of common stock per $1,000 principal amount is equivalent to the $9.44 per share conversion price, which is a premium of about 13.1% to Tuesday’s closing share price, when the deal priced. But the offering was marketed with a $7.26 reference price, implying an initial conversion premium of 30%, according to a market source.

The notes are non-callable with no investor puts. They will be convertible into stock, cash or a combination of cash or stock at the issuer’s option.

Proceeds will be used, along with cash on hand, to repurchase all the shares of common stock held by affiliates of Perry Capital and Welsh, Carson, Anderson & Stowe for $6.80 per share, totaling about $123 million. The stock repurchase price equaled a nearly 20% discount to Tuesday’s closing share price.

The company also plans to repurchase about $15 million of its common stock from purchasers of the notes concurrently with the closing of this offering.

Tesla slumps outright

The Tesla 1.25% convertibles due 2021, or the B convertibles, traded down to 83.25 to 84, which was down from 90 to 91 previously. The convertibles contracted 3 points on a swap basis, a New York-based trader said.

Shares dropped $22.95, or 10%, to $196.66.

The Tesla A convertibles, or 0.25% convertibles due 2019, were trading at 88.5 bid, 89.375 offered, which was down from about 93 previously and represented a contraction of 2 points on swap.

The Tesla 1.5% convertibles due 2018, or the “olds,” dropped to 161.125 bid, 161.875 offered from about 176 on Tuesday. And that bond was down about 1 point to 1.25 points on swap.

Tesla has already been beleaguered by questions about the feasibility of the company’s announced production target of 500,000 cars by 2018. The company produced 15,510 cars in the 2016 first quarter and expects to produce about 85,500 for the year.

But SolarCity’s convertibles were moving in the opposite direction. SolarCity’s 1.625% convertibles due 2019 surged about 15 points to 71. Earlier in the session they were trading actively around 72 initially and then at 70.

That is about a 12% yield to maturity, a New York-based trader said of the issue that was more active than the company’s other convertible bond, a 2.75% convertible due 2018.

The SolarCity 2.75% convertibles were initially quiet, but they also rose about 10 points to about 78 by the close. That paper had jumped up to 80. Previously they were about 64.

SolarCity common shares had been up about $1.90, or 9%, on the day but pared those gains to close up 68 cents, or 3.3%, at $21.88.

For SolarCity there is a lot of optimism. It is a great credit improvement for a company that was essentially shut out of the capital markets, a trader said.

“There is a disruptive car company with disruptive technology, and they are bailing out a solar power company. It doesn’t make a lot of sense,” a trader said.

Mentioned in this article:

SolarCity Corp. Nasdaq: SCTY

Tesla Motors Inc. Nasdaq: TSLA

Universal American Corp. NYSE: UAM

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