Morning Commentary: Pegasystems upsizes, expands on debut; Zillow mixed post-earnings

By Abigail W. Adams

Portland, Me., Feb. 20 – New paper was in focus in the secondary space on Thursday as Pegasystems Inc.’s upsized offering made its aftermarket debut.

Pegasystems priced an upsized $525 million of five-year convertible notes after the market close on Wednesday at par with a coupon of 0.75% and an initial conversion premium of 37.5%.

Pricing came at the rich end of revised price talk for a coupon of 0.75% to 1% and in line with an initial conversion premium of 37.5%, according to a market source.

Talk had tightened during bookbuilding from the initial talk for a coupon of 0.75% to 1.25% and an initial conversion premium of 32.5% to 37.5%.

The greenshoe was also upsized to $75 million.

The initial size of the deal was $450 million with a greenshoe of $67.5 million.

The new paper dominated activity in the secondary space and saw a large dollar-neutral expansion – a common theme among the deals to price in the past two weeks.

The 0.75% convertible notes due 2025 traded up to 104 on an outright basis with stock up more than 3%.

The notes were expanded about 2.5 points dollar-neutral, a market source said.

“This was very well received,” the source said.

The notes saw more than $100 million in reported volume about one hour into the session.

Pegasystems stock was $102.46, an increase of 4.32%, shortly before 11 a.m. ET.

While the deal modeled out to fair value at the midpoint of revised price talk, the market is hungry for new paper, sources said.

Demand more than pricing has driven the performance of recent convertible bond deals, a source said.

Meanwhile, Zillow Inc.’s convertible bonds were also active as stock soared following a fourth-quarter earnings beat.

While some tranches were expanding on the stock move, others were contracting, a market source said.

Zillow’s 1.5% convertible notes due 2023 rose 7 points outright to 111 early in Thursday’s session.

The notes expanded about 0.5 point dollar-neutral, a market source said.

The 1.5% notes move on a lower delta and have more room to run than Zillow’s other tranches of convertible notes.

Zillow’s 0.75% convertible notes due 2024 gained almost 20 points outright to 159.75.

The 2% convertible notes due 2021 rose 10 points to 132.25.

The 1.375% convertible notes due 2026 gained 23 points outright to 164.875.

However, the tranches were contracting due to pressure from outright accounts selling.

Zillow stock traded up to $65.92, an increase of 21.02%, shortly before 11 a.m. ET.

Stock skyrocketed after Zillow beat analyst expectations on the top and bottom lines in its fourth-quarter earnings report and gave upbeat guidance.

The online real estate database company reported a loss per share of 26 cents versus analyst expectations for a loss per share of 36 cents.

Revenue was $943.95 million versus analyst expectations for revenue of $814.6 million.

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