K2M, Canopy on tap; convertibles market eyes Sea, GCI Holdings, 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, a smaller $65 million offering prior to the market open on Thursday and a C$400 Rule 144A/Regulation S offering after Thursday’s close.

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. intends to sell $400 million of five-year convertible notes.

K2M Group Holdings, Inc. plans to price $65 million in seven-year convertible notes prior to the market open on Thursday.

J.P. Morgan Securities LLC is bookrunner for the Rule 144A deal, which carries a greenshoe of $10 million.

Canopy Growth Corp. plans to price C$400 million in five-year convertible notes after the market close Thursday with price talk for a coupon of 4.25% to 4.75% and an initial conversion premium of 20% to 25%, according to a market source.

Cowen Group and BMO Capital Markets Corp. are bookrunners for the Rule 144A and Regulation S deal, which carries a greenshoe of C$60 million.

While Restoration Hardware’s offering was pegged at fair value, K2M’s and Sea’s offerings look cheap, sources said.

GCI Liberty’s deal looks OK and is expected to do well, sources said.

However, the company is “a headspinner,” a market source said.

As the secondary space eyed the new deals in the pipeline, trading activity surrounding Intelsat SA’s newly priced 4.5% convertible notes due 2025 tempered on Wednesday, although the notes’ dollar-neutral expansion continued.

Citrix Systems Inc.’s 0.5% convertible notes due 2019 dominated trading activity in the secondary space as the notes were dropped from Thomson Reuters Convertible Indices on Wednesday.

The indices seem to be dropping and adding more names than usual, a market source said.

Trading activity in the secondary space on Wednesday focused on several of the convertible bonds that will be dropped or added to the indices with the additions including several of the deals that priced in recent weeks.

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.

K2M looks cheap

K2M plans to price $65 million of seven-year convertible notes prior to the market open on Thursday with price talk for a coupon of 2.625% to 3.125% and an initial conversion premium of 20% to 25%, according to a market source.

The deal is being marketed with a credit spread of 600 basis points over Libor and a 30% vol. and models about 2.5 points cheap at the midpoint of talk, a market source said.

However, small deals like K2M’s are problematic, a market source said.

“If you buy it you have to be prepared to own it for a long time because underwriters rarely offer much liquidity,” the source said.

GCI’s ‘headspinner’

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.

While the deal looks OK and is expected to do well, GCI Liberty “is a tough credit,” a market source said. “It’s a headspinner to figure out who owns what.”

The deal also has no takeover protection, another source said. The telecommunications space is “going to have a huge M&A bent” following district court approval of AT&T’s acquisition of Time Warner Cable, the source said.

While the lack of takeover protection is a drawback, GCI Liberty is also not the most attractive acquisition target, the source said.

GCI Liberty’s exchangeable debentures offering comes in connection to its spinoff from Liberty Interactive LLC.

Proceeds will be used to make indemnification payments to Liberty Interactive, 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 new offering is practically identical to Liberty Interactive’s 1.75% debentures tied to Charter, a market source said.

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

“Unless you’re a part of that deal, it’s tough to say why you would want to switch to a new one,” a market source said.

The indemnification payments were agreed to as part of 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 bps 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.

While the primary market prepared Restoration Hardware’s new offering, the company’s outstanding 0% convertible notes due 2019 and 2020 remained active in the secondary space.

Restoration Hardware’s 0% convertible notes due 2019 were seen trading at 137.4 versus an equity price of $154.36 with about $8 million of the bonds on the tape.

The company’s 0% convertible notes due 2020 were seen trading at 136 versus an equity price of $153 with about $7 million of the bonds on the tape by late afternoon.

Both notes made large gains on an outright and dollar-neutral basis on Tuesday prior to the launch of the new convertible notes offering.

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, e-commerce, 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.

Intelsat day two

The trading frenzy surrounding Intelsat’s new 4.5% convertible notes due 2025 tempered on Wednesday, although the notes continued to make gains on an outright and dollar-neutral basis.

The notes were seen trading at 113.5 versus an equity price of $15.91 with about $6 million of the bonds on the tape by late afternoon.

The notes were up about 2 points outright and were expanded another 0.75 point dollar neutral after an almost 7-point expansion on their market debut on Tuesday.

The low trading activity of the notes their second day in the market was a surprise to some.

The notes dominated trading activity on Tuesday with more than $126 million of the bonds traded.

“It looks like everyone did what they needed to do,” a market source said.

Citrix dominates

Citrix’s 0.5% convertible notes due 2019 dominated trading activity in the secondary space on Wednesday with more than $70 million of the bonds traded by late afternoon.

The notes continued to change hands at parity.

They were seen trading at 147.3 versus an equity price of $106.13. Citrix’s 0.5% notes have been active since Monday in the run up to the notes removal from the Thomson Reuters Convertibles Indices.

The 0.5% notes were removed on Wednesday.

Many large outright accounts use the indices as their benchmark and buy and sell names based on their addition or subtraction to the indices, a market source said.

Several of the convertible notes on the tape on Wednesday were also dropped from the indices or will be added to them on Thursday.

Mentioned in this article:

Citrix Systems Inc. Nasdaq: CTXS

Charter Communications, Inc. Nasdaq: CHTR

Intelsat SA NYSE: I

K2M Group Holdings, Inc. Nasdaq: KTWO

Restoration Hardware Inc. NYSE: RH

Sea Ltd. NYSE: SE

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