Post Holdings withdraws offering; Tesla hits ‘magic number’; KBR weakens; Wayfair drops

By Abigail W. Adams

Portland, Me., Nov. 19 – Trading volume in the secondary space was light at the start of the truncated holiday week, as equity markets saw another brutal session with the Dow Jones industrial average closing the day down 395 points.

The bear market is coming, a market source said. Market conditions continued to stifle new deal activity with another prospective issuer withdrawing its offering.

Post Holdings, Inc. terminated its $400 million offering of series D cumulative perpetual convertible preferred stock, which was expected to price after the market close.

Meanwhile, the deals that priced last week continued to struggle in the secondary space.

Gogo Inc.’s newly priced 6% convertible notes due 2022 were not active on Monday. However, the one print seen was below par.

KBR Inc.’s 2.5% convertible notes due 2023 and Wayfair Inc.’s 1.125% convertible notes due 2024 continued to sink further below par on Monday.

While the FAANG stocks drove markets lower, Tesla Inc.’s fared well during Monday’s session.

Stock at one point climbed above the conversion price on the 0.25% convertible notes due 2019, raising the possibility the notes will be converted upon their maturity.

Post Holdings eyed

Post Holdings withdrew its planned offering of $400 million of series D cumulative perpetual convertible preferred stock, which had been expected to price after the market close on Monday.

“Weak market conditions during the trading day precluded reaching the terms the company had established as a condition for issuing the preferred stock. As this was an entirely opportunistic capital raise, Post management terminated the offering,” the company said in a press release.

Price talk was for a dividend of 4% to 4.5% and an initial conversion premium of 25% to 30%, according to a market source.

Underwriters were marketing the deal with assumptions of 475 basis points over Libor and a 24% vol., sources said.

Using those assumptions, the deal modeled about 3.79 points cheap, a market source said.

However, some sources felt the credit spread was “very aggressive.”

“I don’t see it,” a market source said. “Especially with high yields the way it is right now.”

The blowout in high-yield credit spreads continues with last week marking the largest widening in credit spreads in four years, a market source said.

Post Holdings has a market cap of $6 billion but a debt load of $8 billion, a source said.

Using a more conservative credit spread of 650 bps over Libor, the deal was pegged at fair value.

Post Holdings has an outstanding series of 2.5% perpetual convertible preferred stock, which is deep in the money.

Many expected holders of the outstanding preferred stock to sell in favor of the new issue.

The 2.5% convertible preferred stock becomes callable on Dec. 15.

Gogo prices

Gogo priced an upsized $215 million offering of four-year convertible notes after the market close on Friday with a coupon of 6% and a 20% initial conversion premium.

The deal was increased from a planned $200 million and came at the cheap end of talk for a coupon of 5.5% to 6% and an initial conversion premium of 20% to 25%.

The new paper was not active in the secondary space. However, the one print seen in mid-afternoon of the 6% notes was for 99.625, a market source said.

The timing of the deal, which priced post-close on Friday, is extremely rare in the convertibles space, sources said.

There was most likely a pre-established buyer for the convertible notes, a market source said.

Weak paper

The new paper to price last week continued to slide in secondary trading on Monday.

KBR’s 2.5% convertible notes due 2023 remained active in the secondary space with $10 million of the bonds on the tape by the late afternoon.

They were seen changing hands at 97.625 on an outright basis and were contracted another 0.25 point to 0.5 point dollar-neutral, sources said.

KBR stock closed Monday at $19.22, a decrease of 3.27%.

While volume was again light, Wayfair’s new 1.125% convertible notes due 2024 continued to drop on an outright basis.

The notes were down 2 points outright in the mid-afternoon on Monday. They were seen changing hands at 97.5 on an outright basis with about $5 million on the tape.

While down for most of the day, Wayfair stock plunged in the final hour of trading, closing the day down $5.19, or 5.91%, to $82.60.

Tesla’s magic number

While equity markets saw another brutal day on Monday, Tesla stock jumped in early trading, passing “the magic number,” a market source said.

Stock traded above the $359.87 conversion price of the 0.25% convertible notes due March 1, 2019 early in the session before coming in during the afternoon.

“For Tesla, it will be a huge feat to be able to convert out the 0.25% notes,” a market source said.

With the maturity of the notes approaching, the 0.25% convertible bonds have been a focal point for analysts with many previously questioning the company’s ability to cover them.

If the notes are in-the-money, the notes will be converted and fear about the company’s ability to pay will be obsolete.

While the 0.25% convertible notes were not active on Monday, Tesla’s 1.25% convertible notes due 2021 saw some activity.

The notes were seen changing hands at 115.375 versus an equity price of $360.20.

The 1.25% notes were slightly weaker on Monday. However, if the 0.25% convertible notes are converted out, Tesla’s entire capital structure will benefit, a source said.

Mentioned in this article:

Gogo Inc. Nasdaq: GOGO

KBR Inc. NYSE: KBR

Post Holdings, Inc. NYSE: POST

Tesla Inc. Nasdaq: TSLA

Wayfair Inc. NYSE: W

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