Morning Commentary: Convertibles market eyes Sea, GCI Holdings and Restoration Hardware

By Abigail W. Adams

Portland, Me., June 13 – The new deals are coming “hot and furious,” a market source said, with the primary planning to price $1.05 billion of convertibles over three deals after the market close on Wednesday.

GCI Liberty, Inc. plans to price $350 million of exchangeable senior debentures due 2046 tied to Charter Communications, Inc. common stock, Restoration Hardware Inc. plans to price $300 million of five-year convertible notes and Sea Ltd. plans to price $400 million of five-year convertible notes.

While Restoration Hardware’s offering was pegged at fair value, Sea’s offering looks cheap, sources said.

As the secondary space eyed the new deals in the pipeline, Intelsat SA’s newly priced 4.5% convertible notes due 2025 were not seen on the tape early in Wednesday’s session after the notes dominated trading activity in the secondary space on their market debut on Tuesday.

With another week with a steady supply of new deals, the convertibles space is returning to its pre-recession glory days, a market source said.

“This is giving us a bigger base and a little more depth to the universe, which we were having issues with,” the source said.

GCI’s deal

GCI Liberty plans to price $350 million of exchangeable senior debentures due 2046 tied to Charter Communications stock after the market close on Wednesday with price talk for a coupon of 1.375% to 1.875% and an initial exchange premium of 30% to 35%, according to a market source.

Proceeds will be used to make indemnification payments to Liberty Interactive LLC, a wholly owned subsidiary of Qurate Retail Inc., in connection with Liberty Interactive’s 1.75% exchangeable debentures due 2046 tied to Charter Communications stock.

The 1.75% debentures may be repurchased in privately negotiated transactions or by tender offer, according to a company news release.

The indemnification payments come in relation to Liberty Interactive’s acquisition of GCI Liberty and GCI Liberty’s subsequent split-off through a series of transactions in March.

Liberty Interactive’s 1.75% exchangeable debentures due 2046 fell to its subsidiary, the QVC Group, with GCI Liberty agreeing to pay the excess of the principal amount of the debenture to any holder exercising their exchange rights.

Liberty Interactive agreed to repurchase the 1.75% exchangeable debentures within six months of the closing of the transactions, according to a company news release.

RH at fair value

Restoration Hardware plans to price $300 million of five-year convertible notes after the market close on Wednesday with price talk for a fixed coupon of 0% and an initial conversion premium of 25% to 30%, according to a market source.

The deal is being marketed with a credit spread of 300 basis points over Libor and a 40% vol., which models about 0.25 point cheap at the midpoint of talk, a market source said.

Other sources pegged the deal at fair value using a credit spread of 400 bps over Libor and a 45% vol. The 400 bps credit spread is the assumed spread on Restoration Hardware’s 0% convertible notes due 2019 and 2020, a market source said.

However, the company will be using proceeds to take down its revolver and outstanding debt, which may be why underwriters are using a tighter spread, the source said.

Sea looks cheap

Sea plans to price $400 million of five-year convertible notes after the market close on Wednesday with price talk for a coupon of 2% to 2.5% and an initial conversion premium of 30% to 35%, according to a market source.

The deal is being marketed with a credit spread of 500 bps over Libor and a 40% vol., a market source said. Sources pegged the deal between 2.79 points to 3.6 points cheap at the midpoint of talk.

With a 38% vol., the deal models 1 point cheap, another source said.

While most software and tech companies have a credit spread of 250 bps to 325 bps, the Singapore-based digital entertainment, ecommerce, and digital financial services company’s spread is much wider.

“It’s an ADR and they haven’t been around that long,” a market source said. “There’s some hair on it.”

While the borrow is tight, “it’s not crazy,” the source said. Despite the hair, the deal is expected to do well.

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