Convertibles market sees $1.65 billion of new supply, has ‘momentary indigestion’

By Abigail W. Adams

Portland, Me., Jan. 31 – Wednesday’s session in the convertible bond market began with $1.65 billion of new deals hitting a secondary market that is still working to absorb an influx of new paper from last week.

The three new deals that priced after the market close Tuesday came at the middle and cheap end of price talk.

“Investors feel that there is so much new paper, and with more coming in, there’s a little bit of a sense of ‘we don’t have to buy this,’” a market source said.

While the secondary market struggles with “momentary indigestion,” it is expected to be short-lived with long-term benefits, the source said.

In a deal called a landmark for the convertibles space, Western Digital Corp. priced $1 billion of six-year convertible notes after the market close on Tuesday at the cheap end of talk with a coupon of 1.5% and an initial conversion premium of 40%.

The 1.5% notes dominated trading activity in the secondary market, accounting for nearly $200 million of the about $615 million in trading volume by dollar amount in play by late afternoon Wednesday.

Endeavour Mining Corp. priced $300 million of five-year convertible notes after the market close on Tuesday at the cheap end of talk with a coupon of 3% and an initial conversion premium of 32.5%.

While overshadowed by Western Digital, the notes also saw healthy trading activity and made gains on an outright and dollar-neutral basis.

JPMorgan Chase Financial Co. LLC priced $350 million of five-year cash-settled convertible notes linked to Voya Financial, Inc. stock after the market close on Tuesday with a coupon of 0.25% and an initial conversion premium of 32.5%.

The cash-settled notes were trading in the 100 to 100.5 range early in Wednesday’s session, but attracted little attention.

Momentary indigestion

The convertibles market has seen $1.9 billion of new paper from four deals over the course of the week with $1.65 billion hitting the secondary space on Wednesday alone. Last week, $975 million of new paper entered the space.

“There is some momentary indigestion,” a market source said. “It will be a week or two of a kind of a pause, but at the end of the day it will be resolved if the market continues to do well.”

It is no surprise that there have been so many deals recently with the passage of the tax bill in December. Convertibles are starting to look more interesting than high-yield bonds, the source said.

There may be “moments of pause” as the market digests, but in the long-term it will be good for the market, the source said.

Western Digital dominates

While the secondary market experiences some indigestion, Western Digital’s 1.5% notes due 2024 were moving during Wednesday’s session.

The $1 billion deal from the large-cap San Jose, Calif.-based computer data storage company is a landmark for the convertible space, a market source said, which has seen a shortage of issuances from large-cap investment-grade companies.

The notes changed hands more than 200 times and accounted for more than 30% of trading volume by dollar amount by late afternoon.

With an initial conversion premium of 40%, pricing came at the cheap end of talk. Price talk had been for a coupon of 1% to 1.5% and an initial conversion premium of 40% to 45%.

However, pricing “was aggressive,” a market source said.

The deal attracted outright players during the bookbuilding process. “It was nicely allocated to outrights,” a syndicate source said.

Western Digital’s stock was up as the new 1.5% convertible notes due 2024 entered the secondary market, which helped their performance.

The 1.5% notes were in the 102.5 to 103 range throughout Wednesday’s session. Western Digital stock ended the day at $88.98, an increase of 2.18%.

“The stock is up, so everything is going just fine,” a source said.

Endeavour active

While paling in comparison to Western Digital, Endeavour Mining’s 3% convertible notes also saw some trading action on Wednesday.

The new paper from the Rule 144A and Regulation S deal was in the 101.25 to 101.75 range throughout Wednesday’s session, a market source said. The 3% notes expanded about 0.5 point on a dollar-neutral basis, a source said.

However, Endeavour stock is not listed for trade in the United States, so “liquidity is meh,” a market source said.

The deal attracted several cross-over investors, a syndicate source said.

Endeavour priced $300 million of five-year convertible notes after the market close on Tuesday at the cheap end of talk with a coupon of 3% and an initial conversion premium of 32.5%.

Price talk had been for a coupon of 2.25% to 3% and an initial conversion premium of 32.5% to 37.5%, according to a market source.

Endeavour stock was up almost 5% on the Toronto Stock Exchange as the new paper entered the market. Stock closed the day at C$22.71, an increase of 4.17%.

The synthetic

JPMorgan’s 0.25% cash-settled notes linked to Voya Financial attracted little trading attention on Wednesday.

JPMorgan priced $350 million of five-year cash-settled convertible notes linked to Voya Financial after the market close on Tuesday with a coupon of 0.25% and an initial conversion premium of 32.5%.

With an initial conversion premium of 32.5%, pricing came at the middle of talk for a coupon of 0% to 0.5% and at the cheap end of talk for an initial conversion premium of 32.5% to 37.5%.

The notes were trading in the 100 to 100.5 range early in Wednesday’s session, although the initial reference price will not be determined until next week.

The initial conversion premium will be 32.5% above the initial reference price, which will be equal to the volume-weighted average price of stock over a trading period of five consecutive days beginning Jan. 31, according to a company news release.

The cash-settled notes are more of a synthetic than a traditional convertible, a market source said.

Mentioned in this article:

Endeavour Mining Corp. Toronto: EDV

Voya Financial Inc. NYSE: VOYA

Western Digital Corp. Nasdaq: WDC

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