Morning Commentary: Tesla launches $1.35 billion of convertibles; PROS hits the market

By Abigail W. Adams

Portland, Me., May 2 – The convertibles primary and secondary market received a jolt of electricity on Thursday with both active following the launch of Tesla Inc.’s $1.35 billion convertible notes offering and new paper from PROS Holdings Inc. pricing.

Tesla plans to price $1.35 billion of five-year convertible notes after the market close on Thursday.

The deal looked cheap and was a wise move on the part of the struggling electric car manufacturer, sources said.

As players eyed the new offering in the works, Tesla’s outstanding convertible notes jumped in active trading on the news.

PROS Holdings’ newly priced 1% convertible notes due 2024 were also active in the secondary space with the notes hovering around par.

Tesla in focus

Tesla plans to price $1.35 billion of five-year convertible notes after the market close on Thursday with price talk for a coupon of 1.5% to 2% and an initial conversion premium of 27.5% to 32.5%, according to a market source.

The deal is pricing concurrently with a $630 million, or 2,723,198 common stock, offering.

The new offering was widely anticipated with many asking “when will they do it.”

The deal was heard to be in the market with a credit spread of 575 basis points over Libor and a 40% vol.

Sources pegged the deal about 1.5 points cheap at the midpoint of talk using those assumptions.

The capital raise was “a very wise move,” a market source said.

Tesla has struggled in recent weeks, hitting on a two-year low following its first-quarter earnings report.

The electric car manufacturer’s outstanding convertible bonds were making gains as stock popped on the news.

Tesla’s 1.25% convertible notes due 2021 were in focus in the secondary space with the notes initially popping 2 points outright to trade as high as 100.5 only to come in and trade just south of par shortly before 11 a.m. ET.

The notes were expanded 1.5 points dollar-neutral, a market source said.

The 2.375% convertible notes due 2022 also gained about 2 points outright to trade at 104.875. They were expanded about 1 point dollar-neutral.

SolarCity Corp.’s 1.625% convertible notes due Nov. 1, 2019 also improved on the news, rising 1 point to 98.

The new offering lifted Tesla’s capital structure with the credit spread tightening about 100 bps on anything with a four- to five-year duration, a source said.

Tesla stock traded as high as $247.13 early in the session but came in to trade at $240.33, an increase of 2.7%, shortly before 11 a.m. ET.

PROS at par

PROS Holdings priced $125 million of five-year convertible notes prior to the market open on Thursday at par with a coupon of 1% and an initial conversion premium of 30%.

Pricing came at the midpoint of talk for a coupon of 0.75% to 1.25% and an initial conversion premium of 27.5% to 32.5%, according to a market source.

The new paper was active in the secondary space for such a small issue, a market source said. More than $14 million of the bonds were on the tape about one hour into Thursday’s session.

The 1% convertible notes traded as low as 99.75 and as high as 101.25 but were mostly hovering around par.

They were changing hands at 100.125 bid, 100.875 offered versus a stock price of $50.45 early in the session, a market source said.

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