HC2 to tap convertibles market; KBR eyed; Lumentum trades down outright, up on hedge

By Abigail W. Adams

Portland, Me., Nov. 12 – The week of Nov. 12 promises to be a busy one for the convertibles primary market, provided market conditions do not prevent potential issuers from launching offerings.

KBR Inc. planned to price $350 million of five-year convertible notes after the market close on Monday.

The deal modeled rich based on underwriters’ assumptions but was seen as fair value with a wider credit spread, sources said.

In a restructured offering, HC2 Holdings Inc. said it planned to price $55 million of four-year convertible notes in conjunction with a downsized offering of $470 million of three-year senior notes.

HC2 Holdings initially launched a $535 million offering of five-year senior notes on Oct. 22, but market conditions prevented the deal’s execution.

Meanwhile, trading volume in the secondary space was relatively light as equity markets opened the week with another brutal session and bond markets were closed for Veterans Day.

The Dow Jones industrial average closed the day down 602 points and the Nasdaq off 206 points with the tech sector again weighing on markets, this time due to investor jitters over iPhone demand.

Apple suppliers were in focus in the secondary space.

Lumentum Holdings Inc.’s 0.25% convertible notes due 2024 saw active trading with the notes cratering outright but improving on hedge after the optical components maker slashed its forward guidance.

II-VI Inc.’s 0.25% convertible notes due 2022 continued their downward momentum and dropped well below par on Monday. However, the notes were slightly improved on hedge based on the delta used, a market source said.

In a bright spot in the tech sector, Apptio Inc.’s 0.875% convertible notes due 2023 skyrocketed on an outright basis alongside stock after the company announced it would go private in a $1.94 billion buyout.

KBR in focus

KBR plans to price $350 million of five-year convertible notes after the market close on Monday with price talk for a coupon of 2% to 2.5% 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 350 basis points over Libor and a 35% vol., which models rich, a market source said.

However, the credit spread “seems pretty tight,” the source said.

Another source pegged the credit spread as 450 bps over Libor.

Using a credit spread of 450 bps over Libor and a 35% vol., the deal models out to fair value, the source said.

The engineering, procurement and construction company has a solid EBITDA, which could be an argument for a tighter credit spread, the source said.

However, the company’s cash flow is “shaky.” While improved over the second quarter, cash flow was still negative in the third quarter, “ergo some of the caution,” the source said.

KBR also has $1.4 billion in secured debt in the form of term loans, revolvers and letters of credit.

The longer dated term loan due in 2025 has a credit spread of 375 bps over Libor, and the shorter dated term loan due 2023 has a credit spread of 300 bps over Libor, the source said.

However, other sources noted the relatively high coupon as a plus for the deal. “It’s a nice little lead off” to the anticipated primary market activity, a market source said.

HC2 eyes convertibles market

HC2 Holdings is tapping the convertibles market with a $55 million offering of four-year convertible notes as part of a restructured senior notes offering.

Jefferies LLC is bookrunner for the Rule 144A and Regulation S convertible and senior notes offerings.

The senior notes offering was initially announced on Oct. 22 as a $535 million offering of five-year senior notes.

The deal was downsized and restructured to a $470 million offering of three-year senior notes and coupled with the $55 million convertible notes offering in response to market conditions, the company said in the press release.

The $535 million offering was shortened to a three-year maturity and with official price talk for an 11½% coupon at a reoffer price of 98.75 to yield 12% circulated last Wednesday, according to a market source.

No further details were available as of press time.

Lumentum expands

Lumentum Holdings’ 0.25% convertible notes due 2024 were in focus with the notes tumbling alongside stock after the optical components maker slashed its forward guidance.

The 0.25% notes dropped more than 18 points outright on Monday.

They were seen trading at 97.25 versus an equity price of $41.00.

The notes expanded about 1.5 points on a dollar-neutral basis on a 60% delta, a market source said.

Lumentum stock closed Monday at $37.50, a decrease of 32.98%.

Stock cratered on Monday after the optical components maker slashed its second-quarter guidance after one of its largest customers asked it to reduce shipments.

The company cut its second-quarter guidance to earnings per share of $1.15 to $1.34 from the previous projection of earnings per share of $1.60 to $1.75.

Revenue was decreased to $335 million to $355 million from the previous range of $405 million to $430 million.

Apple is responsible for 30% of Lumentum’s revenue, Huawei 11% and Ciena Corp 11%, MarketWatch reported.

II-VI below par

Apple supplier II-VI’s 0.25% convertible notes due 2022 dropped well below par during Monday’s session after tumbling on Friday after it announced its planned acquisition of Finisar Corp.

While the notes dropped another 8 points outright, they were seen slightly improved on a dollar-neutral basis.

The notes were seen trading at 96.66 in the mid-afternoon, which was improved by about 10 cents dollar-neutral on a 67% delta, a market source said.

However, with stock down by one-third in two days, one percentage point difference in the delta could have a large impact, the source said.

After trading as low as $31.92, II-VI stock closed Monday at $33.24, a decrease of 12.55%.

II-VI’s 0.25% convertible notes sank 11 points outright and contracted 0.75 point dollar-neutral on Friday after it announced it would acquire Finisar in a cash and stock deal valued at $3.2 billion.

Prior to Friday, the notes were trading at 116.

Apptio jumps

Apptio’s 0.875% convertible notes due 2023 skyrocketed on an outright basis on Monday after the company announced it would go private after a buyout.

The notes jumped 16 points outright to trade up to 112.375, although volume was light.

The notes were largely flat on a dollar-neutral basis, a market source said.

Apptio stock jumped to $37.65, an increase of 51.51% on Monday.

Vista Equity Partners plans to acquire the technology business management software company and take it private in a $1.94 billion deal, the companies announced on Sunday.

Mentioned in this article:

II-VI Inc. Nasdaq: IIVI

Apptio Inc. Nasdaq: APTI

HC2 Holdings Inc. NYSE: HCHC

KBR Inc. NYSE: KBR

Lumentum Holdings Inc. Nasdaq: LITE

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