RH ‘explores’ new convertible offering, existing notes mixed; Clovis expansion continues

By Abigail W. Adams

Portland, Me., Dec. 4 – Trading volume was light in the convertibles secondary space as equity markets experienced a brutal session with ambiguity surrounding the trade war truce and the flattening yield curve combining to spark a dramatic sell-off.

The Dow Jones industrial average opened the day down about 155 points and plummeted as the session progressed to close the day down 799 points.

Despite the turmoil in equities, there is a potential new deal on deck with RH, formerly Restoration Hardware, exploring the possible sale of $300 million of five-year convertible notes.

While the deal modeled cheap based on underwriters’ assumptions, sources were skeptical about the deal’s prospects given the carnage in equities.

While the overall market was down on Tuesday, RH’s equity saw gains on the heels of a third-quarter earnings beat.

The home furnishing company’s 0% convertible notes due 2019 and 0% convertible notes due 2020 expanded on the stock move, while the 0% convertible notes due 2023 were volatile.

The 2023 notes expanded early in the session but closed the day contracted in the wake of the new prospective offering.

Meanwhile, Clovis Oncology Inc.’s convertible notes continued to gain on Tuesday with stock among the day’s outperformers on news the cancer biotech firm’s patent in Europe was upheld.

RH ‘explores’ new offering

RH is “exploring” a potential offering of $300 million five-year convertible notes with price talk for a coupon of 0%, an initial conversion premium of 25% and a reoffer price of 99 to par, according to a company news release and a market source.

BofA Merrill Lynch is the bookrunner for the prospective Rule 144A deal.

The deal was in the market with a credit spread of 300 basis points over Libor and a 40% vol., according to a market source.

The deal modeled about 1 point cheap, another source said.

However, sources were skeptical about the deal’s execution.

“This is a really rough tape to bring a deal,” a market source said.

The language in the press release also did not inspire confidence.

The press release that announced the deal contained phrases such as “intends to explore a potential offering” and “in the event the company choses to complete” the proposed offering.

“Very interesting wording,” a source said.

Details about timing were unavailable by press time.

RH’s recent issue volatile

RH’s 0% convertible note due 2023, which priced at par in June, was volatile during Tuesday’s session.

The notes expanded early in the session but “got walloped” after the company announced it was exploring a new convertible notes offering, a market source said.

The 0% convertible notes due 2023 rose more than 12 points to break par in early trading and were improved about 0.5 point dollar-neutral depending on the hedge, a source said.

However, the notes sank to trade between 93.5 and 94 on an outright basis by the end of the session.

They were contracted 1.5 points dollar-neutral, a market source said. The performance of the 0% convertible notes due 2023 was attributed to the new offering.

“The new ones are exactly the same type of bond,” a source said.

Older RH notes expand

While RH’s most recent convertible notes were contracting on the new offering, the company’s in-the-money convertible notes expanded on the stock move.

The company’s 0% convertible notes due 2020 climbed 18 points outright early in the session. They were seen at 130.25 bid, 131 offered versus a stock price of $142.00, a market source said.

However, the notes also came in on an outright basis as stock pulled back from its early highs. The notes closed the day at 125.5.

The 0% notes due 2019 climbed 19 points outright to trade up to 130 early in the session but closed the day at 122.5.

Both tranches were up about 2.5 points dollar-neutral, a market source said.

They began the day on a 50% delta but were up to a 78% delta by the mid-afternoon, a source said.

RH’s stock traded as high as $148.54 during Tuesday’s session but closed the day at 137.13, an increase of 10.9%.

The stock was one of the top gainers on the New York Stock Exchange during Tuesday’s session after third-quarter earnings.

RH reported non-GAAP earnings per share of $1.73 versus analyst expectations of earnings per share of $1.27.

Revenue was $638.5 million versus analyst expectations for revenue of $632.6 million.

The company’s fourth-quarter guidance of earnings per share of $2.75 to $2.90 also exceeded analyst expectations with the projection for earnings per share of $2.51.

Clovis expands

Clovis Oncology’s convertible notes continued to expand on Tuesday as stock continued its upward momentum.

While volume was light, the cancer biotech’s struggling 1.25% convertible notes due 2025 traded up to 71.625 on an outright basis.

They were expanded another 1.75 points dollar-neutral, a market source said. The notes gained 3 points dollar-neutral during Monday’s session.

The 2.5% convertible notes due 2021 saw high-volume activity during Tuesday’s session. The notes traded up to 85.5 on an outright basis.

They were expanded about 2.5 points dollar-neutral, a market source.

The notes also gained about 3 points dollar-neutral during Monday’s session.

Clovis stock traded as high as $22.88 on Tuesday but closed the day at $19.99, an increase of 4.77%.

The company announced prior to the market open that Europe had upheld Clovis’ claims to patent protection on the crystalline form found in its ovarian cancer treatment pharmaceutical Rubraca.

The patent protection may extend to the United States, a market source said.

The news further propelled Clovis’ stock upward.

The company’s stock and convertible notes were also making gains on Monday after news broke that competitor Tesaro Inc. would be acquired by GlaxoSmithKline.

Mentioned in this article:

Clovis Oncology Inc. Nasdaq: CLVS

RH NYSE: RH

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