Morning Commentary: Palo Alto Networks to sell $1.5 billion convertible; Ironwood active

By Abigail W. Adams

Portland, Me., July 9 – The convertibles primary market entered into the July 9 week in high gear after a truncated holiday week that saw no new deals price.

Palo Alto Networks, Inc. plans to price a $1.5 billion offering of five-year convertible notes after the market close on Monday with price talk for a coupon of 0.5% to 1% and an initial conversion premium of 27.5% to 32.5%, according to a market source.

The deal is being marketed with a credit spread of 150 basis points over Libor and a 30% vol., according to a market source.

Sources pegged the deal between 0.34 point to 0.84 point cheap at the midpoint of talk. The 150 bps credit spread is typical of software companies, a market source said.

However, some sources felt the vol. assumption was aggressive.

While the implied vol. on Palo Alto options is about 32%, the historic vol. is much lower at about 25.5%, a market source said.

Using a lower vol., the deal models rich. With a vol. of 28%, the deal models out to about 99 fair value, a market source said. “I’m seeing no real, decent cheapness here,” the source said.

Proceeds from the convertible notes offering will be used to cover payments due upon the conversion and to redeem the company’s 0% convertible notes due 2019.

Palo Alto’s 0% convertible notes currently trade at parity with their outright level 189.

As the market eyed the new convertible note offering from Palo Alto, the secondary space also returned to action after a truncated holiday week of low trading volume.

There was about $54 million on the tape shortly after the market open.

Ironwood Pharmaceuticals Inc.’s 2.25% convertible notes due 2022 were among the top volume movers early in the session with the notes climbing about 5 points outright as stock again broke out to a new 52-week high.

The 2.25% convertible notes were seen trading at 141 with stock up more than 2% to $20.56 early in the session.

Ironwood’s convertible notes have been in focus since May when the company announced plans to split into two publicly traded companies with concern over what the split would mean for the convertible notes.

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