Convertibles wrap active week; Zillow, Intrexon, Arbor Realty price; Dermira in focus

By Abigail W. Adams

Portland, Me., June 29 – The convertibles primary market closed out another high-volume week for new paper by pricing $625 million over three deals.

Each deal priced at the cheap end of talk, an indication that investors are getting pickier given the influx of new paper in the market, sources said.

Zillow Group Inc. priced $325 million of five-year convertible notes after the market close on Thursday at the cheap end of talk with a coupon of 1.5% and an initial conversion premium of 37.5%.

The deal was reported to have struggled during bookbuilding and, while up outright, was flat on a dollar-neutral basis on its market debut, sources said.

Intrexon Corp. sold $200 million of five-year convertible notes after the market close on Thursday at the cheap end of talk with a coupon of 3.5% and an initial conversion premium of 27.5%.

While few bonds were trading, they were seen hovering around par.

Arbor Realty Trust, Inc. priced $100 million of three-year convertible notes after the market close on Thursday at the cheap end of talk with a coupon of 5.25% and an initial conversion premium of 10%.

The small offering was well-placed and was not seen trading, sources said.

While Zillow dominated trading activity in the secondary space, Dermira Inc.’s 3% convertible notes due 2022 were a distant second.

The notes expanded about 3 points dollar neutral amid huge stock moves following FDA approval of one of the company’s products.

Zillow falls flat

Zillow Group priced $325 million of five-year convertible notes after the market close on Thursday at the cheap end of talk with a coupon of 1.5% and an initial conversion premium of 37.5%.

Price talk had been for a coupon of 1% to 1.5% and an initial conversion premium of 37.5% to 42.5%.

A concurrent offering of $325 million, or 5,701,754 shares, of class C capital stock priced at $57.00 per share.

Zillow’s new 1.5% notes dominated trading activity in the secondary space with the more than $93 million of the bonds on the tape by late afternoon.

While the notes traded up to 101, they were largely flat on a dollar-neutral basis, a market source said.

With the convertible notes priced off of the concurrent offering, “everyone got the pop on the stock,” a market source said.

Zillow stock closed Friday at $59.06, an increase of 0.75%. Stock closed Thursday at $58.62.

The deal struggled during bookbuilding with some investors passing on the deal, sources said. With a credit spread of 225 basis points over Libor and a 16% vol., the deal modeled out to fair value at the midpoint of talk, sources said.

After a trend of rich pricing, investors are beginning to expect some cheapness given the abundance of supply.

The deal also had no make-whole table with the soft-call, which is unusual, sources said.

Intrexon’s deal

Intrexon priced $200 million of five-year convertible notes after the market close on Thursday at the cheap end of talk with a coupon of 3.5% and an initial conversion premium of 27.5%.

Price talk was for a coupon of 3% to 3.5% and an initial conversion premium of 27.5% to 32.5%.

Concurrently with the convertible notes offering, Intrexon priced $100 million, or 7,479,431 shares, of common stock at $13.37 per share.

The newly priced shares will be loaned to JPMorgan in a share lending agreement. Chief executive officer and principal shareholder Randal Kirk agreed to purchase all of the shares in the share lending agreement.

Intrexon stock is a tough borrow, and the share lending agreement was to sweeten the deal and attract hedge players, sources said.

Few bonds were seen trading on Friday. However, the bonds that did trade were seen trading between par and 100.5.

Arbor’s deal

Arbor Realty Trust priced $100 million of three-year convertible notes after the market close on Thursday at the cheap end of talk with a coupon of 5.25% and an initial conversion premium of 10%.

Price talk had been for a coupon of 4.75% to 5.25% and an initial conversion premium of 10% to 15%.

The small deal was well-placed, and the notes were not seen on the tape on Friday, sources said.

The company intends to use $78.9 million of the proceeds to enter into privately negotiated transactions with holders of $87.9 million of its 6.5% convertible senior notes due 2019 to exchange the 6.5% notes for cash and stock.

As well as the cash payment, Arbor will issue 3.4 million shares.

There were $100 million of the notes outstanding prior to the exchange agreement, according to Trace data.

Dermira in focus

Dermira’s 3% convertible notes due 2022 were major volume movers on Friday with the notes expanding several points dollar neutral after the company received FDA approval for one of its products.

The 3% notes were up almost 4 points outright to trade at 82.5, market sources said. The notes were up about 3.5 points dollar neutral on a 30% delta, a market source said.

Dermira stock surged 25% during intra-day trading but closed Friday at $9.20, an increase of 4.78%.

While trading activity paled in comparison to Zillow, the notes were the second most active of the day with more than $25 million of the bonds on the tape by late afternoon.

Dermira’s stock saw more than 11 times its normal trading average with 11,094,021 shares in play versus the 50-day average of 869,393.

The spike in stock came after the FDA approved Dermira’s product Qbrexza, a topical cloth for excessive armpit sweat.

There is “a lot of talk on the sellside” that Qbrexza may potentially be a $500 million product, a market source said. “But the stock is not acting like that,” the source said, noting how the stock had come in after surging.

Dermira’s 3% notes have long been busted with the name trading for its yield, which is 8.5%, a market source said. With a conversion price of $35.45, the notes are still far out of the money.

Mentioned in this article:

Arbor Realty Trust, Inc. NYSE: ABR

Dermira Inc. Nasdaq: DERM

Intrexon Corp. NYSE: XON

Zillow Group Inc. Nasdaq: Z

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