American Eagle convertibles offering eyed; Inphi skyrockets on debut; Snap expands

By Abigail W. Adams

Portland, Me., April 22 – The convertibles primary market continued at a steady pace with one overnight deal pricing after the market close on Tuesday and another overnight deal on deck.

American Eagle Outfitters, Inc. plans to price $400 million of five-year convertible notes after the market close on Wednesday.

The deal looked cheap based on underwriters’ assumptions. However, some viewed the offering from the embattled retail sector with skepticism.

With spreads staying tight and volatility high, the primary market’s steady pace of new deal activity is expected to continue.

Meanwhile, the secondary space was active on Wednesday with the market firm as equities rebounded on better-than-expected earnings reports.

Inphi Corp.’s newly priced 0.75% convertible notes due 2025 skyrocketed on both an outright and dollar-neutral basis on its secondary market debut.

The new offering jumpstarted activity in the company’s outstanding 0.75% convertible notes due 2021.

Snap Inc.’s 0.75% convertible notes due 2026 also saw heavy volume on Wednesday and jumped on both an outright and dollar-neutral basis as stock surged following an earnings beat.

American Eagle eyed

American Eagle plans to price $400 million of five-year convertible notes after the market close on Wednesday with price talk for a coupon of 3.25% to 3.75% and an initial conversion premium of 27.5% to 32.5%.

The deal is being marketed with assumptions of 950 basis points over Libor and a 40% vol., according to a market source.

Using those assumptions, the deal looked about 4 points cheap at the midpoint of talk.

The deal also modeled about 4 points cheap with a slightly tighter credit spread and vol., another source said.

While the deal modeled cheap, “retail’s a tough one,” a source said. “It’s going to be an uphill battle.”

The dollar price of the convertible notes is expected to be volatile with only a small movement in the stock causing a substantial movement in the bonds, due to the amount of shares that underlie them, a source said.

American Eagle is the third retailer to tap the convertibles market in as many weeks.

The already struggling sector has been among the hardest hit by the coronavirus.

American Eagle has furloughed store, field and corporate workers since April 5 and deferred the payment of its first-quarter dividend with stores shuttered due to the pandemic.

Much like Burlington Stores Inc.’s 2.25% convertible notes due 2025 and Dick’s Sporting Goods, Inc.’s 3.25% convertible notes due 2025, the deal is rescue financing.

While American Eagle had free cash flow pre-pandemic, it is unclear what the company’s fundamentals will look like when the economy reopens, a source said.

However, some sources were optimistic American Eagle would pull through the pandemic.

The company has liquidity and their fixed costs have some flexibility, a source said.

“If they can work this problem they may come through with less competition and live again,” the source said.

Inphi skyrockets

Inphi’s newly priced 0.75% convertible notes due 2025 skyrocketed on their secondary market debut.

Inphi priced an upsized $440 million of five-year convertible notes after the market close on Tuesday at par at the rich end of talk with a coupon of 0.75% and an initial conversion premium of 32.5%.

Price talk was 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 greenshoe was also upsized to $66 million.

The initial size of the offering was $330 million with a greenshoe of $50 million.

The notes dominated activity in the secondary space and saw a large dollar-neutral expansion.

The notes traded up to 104.5 early in the session.

They continued to climb as the session progressed and were seen changing hands at 105.375 in the late afternoon only to drop back to a 104-handle heading into the market close.

The notes expanded 4 points dollar-neutral, a market source said.

The bonds were the most actively traded in the secondary space with more than $31.5 million in reported volume shortly before the market close.

Concurrently with the new offering, the Santa Clara, Calif.-based semiconductor company entered into privately negotiated exchange agreements with holders of its 1.125% convertible notes due 2020.

The company exchanged $99.5 million of the principal amount of the 2020 notes for $99.9 million in cash, which represents principal and accrued interest and 1.4 million shares of common stock.

The new offering and the exchange jumpstarted activity in Inphi’s 0.75% convertible notes due 2021.

The notes were changing hands at 175.537 in the late afternoon with more than $25 million in reported volume.

Inphi stock traded to a high of $99.11 and a low of $94.28 before closing the day at $96.74.

Snap surges

Snap’s 0.75% convertible notes due 2026 jumped on an outright and dollar-neutral basis following a better-than-expected earnings report.

The notes gained more than 11 points outright. They traded as high as 102.75 in the late afternoon.

The notes were expanded about 0.5 point dollar-neutral early in the session, a market source said.

Snap stock traded to a low of $14.85 and a high of $17.15 before closing the day at $17.01, an increase of 36.63%.

Snap reported a loss per share of 8 cents versus analyst expectations for a loss per share of 7 cents.

While the company saw a slight miss on the bottom line, revenue and user growth beat expectations.

The camera and social media company reported revenue of $462 million versus analyst expectations for revenue of $428.8 million.

User growth grew by 20% year over year with the company reporting 229 million users in the first quarter.

Mentioned in this article:

American Eagle Outfitters, Inc. NYSE: AEO

Burlington Stores Inc. NYSE: BURL

Dick’s Sporting Goods, Inc. NYSE: DKS

Inphi Corp. NYSE: IPHI

Snap Inc. NYSE: SNAP

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