Morning Commentary: Market eyes GDS convertible notes offering; secondary trading quiet

By Abigail W. Adams

Portland, Me., May 30 – Convertibles trading volume was light in the secondary space early in Wednesday’s session as the primary market prepares a new deal.

GDS Holdings Ltd. plans to price $250 million of seven-year convertible notes after the market close on Wednesday with price talk for a coupon of 1.75% to 2.25% and an initial conversion premium of 30% to 35%, according to a market source.

With a credit spread of 750 basis points over Libor and a 45% vol., the deal models out to par at the midpoint of talk, a market source said.

With a lower credit spread, the deal would model cheap, but “I refuse to go lower,” the source said.

Underwriters are marketing the deal with a credit spread of 500 bps over Libor and a 40% vol., another source said.

While most software companies have a credit spread of 225 bps to 335 bps over Libor, several factors go into the wider spread for the Shanghai-based developer and operator of data centers in China, a source said.

The underwriters knew there would be investor push-back on tighter terms for a Shanghai-based company, especially with the run the company’s American Depositary Shares have had in the last year, the source said.

GDS shares have more than quadrupled over the past year. They were $7 one year ago and closed Tuesday at $41.02.

While the borrow is decent, there is less transparency with American Depositary Shares, the source said. “The borrow looks good but you never know with ADRs,” the source said.

GDS has upwards of $6.6 billion in debt and $1.8 billion in cash. “It concerns me,” the source said.

While the market eyes the new convertible note offering from GDS, secondary trading was light with about $63 million in trading volume early in the session.

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