Royal Caribbean convertible in demand, talk tightens; Varex eyed; Palo Alto below par

By Abigail W. Adams

Portland, Me., June 4 – The convertibles primary market stood poised to end the first week of June with a bang with two deals totaling $1.15 billion on deck.

Royal Caribbean Cruises Ltd. plans to price $1 billion of three-year convertible notes and Varex Imaging Corp. plans to sell $150 million of five-year convertible notes after the market close on Thursday.

Royal Caribbean’s notes were in demand during bookbuilding with talk tightening.

The offering was “deja vu,” a source said, with terms that were similar to Carnival Corp.’s convertible notes offering.

While Varex’s offering looked cheap based on underwriters’ assumptions, the deal was heard to be wall-crossed.

As market players eyed the new deals in the pipeline, Palo Alto Networks Inc.’s megadeal hit the secondary space.

While the new paper was firm dollar-neutral, the notes were below par with stock off during Thursday’s session.

Royal Caribbean in demand

Royal Caribbean plans to price $1 billion of three-year convertible notes after the market close on Thursday.

The deal played to substantial demand with talk tightening to a coupon range of 4.25% to 4.5% and a fixed initial conversion premium of 25%.

Initial price talk was for a coupon of 5% to 5.5% and an initial conversion premium of 20% to 25%, according to a market source.

The deal was heard to be marketed with assumptions of 1,400 basis points over Libor and a 45% vol.

Using those assumptions, the deal looked about 7.4 points cheap at the midpoint of initial talk, a source said.

The notes are pricing concurrently with a $1 billion three-year senior notes offering.

The senior notes priced at par to yield 9 1/8%, tighter than talk for a yield in the high 9% to 10% area.

Royal Caribbean’s offering is “deja vu all over again,” a market source said.

The terms were very similar to the terms for Carnival’s offering, the source said.

Carnival priced a $2.01 billion issue of its 5.75% convertible notes due 2023 in April.

It was the first deal to price since the primary market was sidelined by the March meltdown.

Carnival’s deal was marketed with assumptions of 1,400 bps over Libor and a 40% vol.

Talk was initially for a coupon of 5.75% to 6.25% and an initial conversion premium of 17.5% to 22.5% but was tightened during bookbuilding to a coupon of 5.5% to 5.75% and an initial conversion premium of 22.5% to 25%.

Carnival’s notes skyrocketed in the aftermarket.

They jumped more than 13 points outright on Thursday to change hands at 190.375 in the late afternoon.

Carnival’s stock closed Thursday at $18.48, an increase of 7.13%.

Less than two months after pricing, Carnival’s 5.75% notes are deep-in-the-money and trade with a heavy delta.

Carnival’s notes were trading with about 4.5 points of premium, a source said.

The travel industry, in general, has been hot in recent weeks.

The cruise lines and airlines that tapped the convertibles market for the liquidity to stay afloat amid the pandemic have risen double digits on optimism over the reopening, a source said.

However, cruise lines and airlines are very different markets.

“No one has to go on a cruise,” a source said.

While Royal Caribbean’s offering played to strong demand, the deal is not without its risks, a source said.

Varex looks cheap

Varex imaging plans to price $150 million of five-year convertible notes after the market close on Thursday with price talk for a coupon of 3.5% to 4% and an initial conversion premium of 25% to 30%.

The deal is being marketed with assumptions of 1,000 bps over Libor and a 40% vol., according to a market source.

Using those assumptions, the deal looked about 4.875 points cheap at the midpoint of talk, sources said.

However, the deal was heard to be wall-crossed and already mostly spoken for, a source said.

Proceeds from the offering will be used to partially repay debt under Varex’s credit agreement.

Varex’s lenders were also the underwriters for the convertible offering.

“Looks like they’re bailing themselves out,” a source said.

Palo Alto below par

Palo Alto priced $1.75 billion of five-year convertible notes after the market close on Wednesday at par with a coupon of 0.375% and an initial conversion premium of 27.5%.

Pricing came at the midpoint of talk for a coupon of 0.125% to 0.625% and at the cheap end of talk for an initial conversion premium of 27.5% to 32.5%, according to a market source.

While the notes traded down on an outright basis, they were expanding dollar-neutral.

The notes traded as low as 97.75 on Thursday but rebounded and were wrapped around 99 headed into the market close, a source said.

While one source saw the notes contracted in intraday trading, they firmed into the close.

Another source pegged the notes up 0.75 point dollar-neutral.

The notes saw more than $110 million in reported volume during Thursday’s session.

Palo Alto stock traded to a high of $231.92 and a low of $224.84 before closing the day at $226.69, a decrease of 2.88%.

Mentioned in this article:

Carnival Corp. NYSE: CCL

Palo Alto Networks Inc. NYSE: PANW

Royal Caribbean Cruises Ltd. NYSE: RCL

Varex Imaging Corp. Nasdaq: VREX

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