Morning Commentary: Market eyes $1.3 billion of convertibles from Cree, MercadoLibre

By Abigail W. Adams

Portland, Me., Aug. 21 – The convertibles primary market kicked the week off in high gear with plans to price $1.3 billion over two deals after the market close on Tuesday.

MercadoLibre Inc. plans to price $800 million of 10-year convertible notes and Cree Inc. plans to sell $500 million of five-year convertible notes.

While MercadoLibre’s deal looked cheap based on underwriter’s assumptions, Cree’s new offering modeled rich, sources said. However, both deals are expected to perform well.

MercadoLibre looks cheap

MercadoLibre plans to price $800 million of 10-year convertible notes after the market close on Tuesday with price talk for a coupon of 1.5% to 2% and an initial conversion premium of 35% to 40%, according to a market source.

The deal is being marketed with a credit spread of 325 basis points over Libor and a 40% vol., a market source said.

One source pegged the deal 2.83 points cheap at the midpoint of talk. Another source pegged the deal about 1 point cheap.

The assumptions looked fair, a source said.

The Buenos Aires-based e-commerce company would have a much tighter credit spread if it was based in the United States, a market source said.

While the company “got clocked” on the exchange rate last quarter, its books look good, the source said.

Argentina also has a much more stable economy than some of its neighbors to the north, such as Brazil or Venezuela. The borrow on the company stock is also good, the source said.

The company intends to use proceeds to repurchase, exchange or otherwise retire its 2.25% convertible notes due 2019.

The 2.25% notes changed hands on Tuesday at 262.82, according to Trace data.

Cree looks rich

Cree plans to sell $500 million of five-year convertible notes after the market close on Tuesday with price talk for a coupon of 0.375% to 0.875% and an initial conversion premium of 30% to 35%, according to a market source.

The deal is being marketed with a credit spread of 225 bps over Libor and a 35% vol., a market source said.

Based on those assumptions the deal modeled about 0.5 point rich. Other sources pegged the deal about 0.75 point rich to 0.125 point rich.

However, the borrow on the company’s stock is decent and the deal is expected to go well, a market source said.

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