Market eyes GDS convertibles; Exact Sciences reaches new heights; Microchip active

By Abigail W. Adams

Portland, Me., May 30 – While primary market activity has slowed in the convertibles space, it has not stopped, with one new deal set to price after the market close on Wednesday.

GDS Holdings Ltd. plans to price $250 million of seven-year convertible notes 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.

While the deal models cheap based on the assumptions used by underwriters, sources pegged the credit spread for the Shanghai-based developer and operator of data centers in China much wider.

Exact Sciences Corp.’s 1% convertible notes due 2025 were the outperformers of Wednesday’s session, a market source said.

While the notes were trading in line on a dollar-neutral basis, they reached their highest outright prices since they hit the market in January.

Microchip Technology Inc.’s convertible notes were active and making gains on an outright basis alongside the stock after the semiconductor company completed its acquisition of Microsemi Corp.

Recent deals from NRG Energy and Square Inc. also remained active in the convertibles space.

GDS notes eyed

GDS Holdings’ offering of seven-year convertible notes looks cheap based on the assumptions used by underwriters. However, sources pegged the credit assumption wider.

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 $7.00 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.

Bankruptcy laws in China are much different than the bankruptcy laws in the United States.

Exact Sciences’ new height

While the market eyed GDS Holdings’ new convertible notes offering, Exact Sciences’ 1% convertible notes due 2025 reached their highest outright price since hitting the market in January.

The 1% notes climbed about 7 points outright to trade as high as 105.75 during Wednesday’s session as stock skyrocketed.

“It’s the highest it’s been since it came,” a market source said.

The 1% notes were seen trading at 104.86 versus an equity price of $58.79 late in the session.

Despite the move in outright prices, the 1% notes were moving largely in line dollar neutral, a market source said.

“They’re really not opening up,” the source said.

However, the upward move is significant for long only accounts, the source said.

The 1% notes have struggled since hitting the market.

Exact Sciences priced an upsized $600 million of the 1% notes with an issue price of 98.75 mid-January.

The notes from the Madison, Wis.-based molecular diagnostics company, which is focused on the early detection of colorectal cancer, experienced a sell-off shortly after pricing.

The sell-off was sparked by positive clinical results for a rival colorectal screening product from a Taiwan-based competitor.

The notes traded as low as 88 in early April but rebounded after a positive first-quarter earnings report later in the month.

The notes were trading in the 98 to 99 range for much of May, according to Trace data.

Exact Sciences stock jumped on Wednesday after the American Cancer Society lowered its recommended screening age for colorectal cancer to 45 from 50.

Exact Sciences stock closed Wednesday at $58.59, an increase of 11.13%.

Microchip in focus

Microchip’s 1.625% convertible notes due 2027 were in focus on Wednesday with the notes climbing on an outright basis as stock jumped after the completion of its acquisition of Microsemi.

The 1.625% notes due 2027 were up 2.75 points to trade at 126.875 versus an equity price of 95.72. About $14 million of the bonds traded by late afternoon.

While trading paled in comparison to the 1.625% notes, Microchip’s 2.25% convertible notes due 2037 were active and also gained about 2.75 points.

The notes were seen trading at 127.5 versus an equity price of $97.32.

Microchip stock closed Wednesday at $97.49, an increase of 2.37%.

Volume movers

Recent deals from NRG Energy and Square remained active in the secondary space with the notes continuing to make gains on an outright basis alongside the stock.

NRG Energy’s 2.75% convertible notes due 2048 were up about 1 point outright to trade at 102.25 versus an equity price of $34.52. The notes were largely moving in line dollar neutral, a market source said.

About $12 million of the notes had traded by late afternoon.

The 2.75% notes were seen expanded 0.75 point on Tuesday since they hit the market on May 22.

NRG Energy stock closed Wednesday at $34.41, an increase of 2.05%.

Square’s new 0.5% convertible notes due 2023 also continued to see gains on an outright basis on Wednesday although the notes were seen trading largely in line dollar neutral.

The 0.5% notes were up about 1.325 points on an outright basis to trade at 104.875 versus an equity price of $57.81.

Square’s 0.5% notes were seen up 2.25 points dollar neutral since they hit the market on May 23.

Square stock closed Wednesday at $57.91, an increase of 1.74%.

Mentioned in this article:

Exact Sciences Corp. Nasdaq: EXAS

GDS Holdings Ltd. Nasdaq: GDS

Microchip Technology Inc. Nasdaq: MCHP

NRG Energy NYSE: NRG

Square Inc. NYSE: SQ

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