Akamai’s $1 billion deal dominates market, expands on debut; Ligand eyed; WWE improves

By Abigail W. Adams

Portland, Me., May 17 – Akamai Technologies Inc.’s new 0.125% convertible notes due 2025 were the focus of the convertibles space on Thursday with the $1 billion in new paper accounting for more than 50% of the total trading volume.

“We don’t get that many billion-dollar deals,” a market source said. “Akamai’s trading.”

Despite being “priced to perfection,” the notes were making gains on both an outright and dollar-neutral basis in heavy-volume trading, sources said.

While trading activity focused on Akamai during Thursday’s session, sources were also watching Ligand Pharmaceuticals Inc.’s $650 million offering of five-year convertible notes, which was set to price after the market close.

The deal models 0.5 point cheap to fair value, market sources said.

The rich to fair value pricing of recent deals is a concern for some in the secondary market due to the lack of upside potential in aftermarket trading.

However, with credit spreads holding steady despite the increase in rates, “it’s the perfect environment” for companies to be issuing convertible notes, a market source said.

And companies are taking advantage. The week of May 14 is one of the heaviest weeks for new convertible deals to date this year.

While new paper has been the focus of the convertible space for most of the week, World Wrestling Entertainment Inc.’s 3.375% convertible notes due 2023 saw the largest gains during Thursday’s session.

The notes jumped above double par as stock soared on news the company’s program “Smackdown” may find a new network home.

Akamai in demand

Akamai priced $1 billion of seven-year convertible notes after the market close on Wednesday with a 0.125% coupon and an initial conversion premium of 27.5%.

Pricing came at the midpoint of talk for a coupon of 0% to 0.25% and at the cheap end of talk for an initial conversion premium of 27.5% to 32.5%.

“Good,” a source said of the pricing. “The market’s pushing back.”

Akamai’s deal was marketed with a credit spread of 100 basis points and a 34% vol., sources said. “No one believed the vol.,” the source said.

While the deal was “priced to perfection,” the new 0.125% notes were making gains on both an outright and dollar-neutral basis in heavy-volume trading, a market source said.

“There was good aftermarket buying,” another source said.

The notes were seen trading between par and 101.25 early in the session. They continued to climb throughout the day and were seen trading as high as 102 by mid-afternoon.

The daily graph of prices “is basically a straight line up,” a market source said.

Flippers seemed to be exiting around 100.5 with the notes experiencing the heaviest trading volume between 100.5 to 100.75, a source said.

Akamai’s new deal was put up on a 67% delta, a market source said. The notes were seen expanded 0.5 point to 1 point dollar neutral during the session, sources said.

Trading of the notes “was ferocious,” early in the session, a market source said. At one point, the notes accounted for almost 80% of the total trading volume.

More than $195 million of the bonds had traded shortly before the market close compared to the total $520 million in trading volume.

Akamai’s $1 billion deal was a large one for the convertibles space. Anyone concerned with an index benchmark will need to pay attention to the new 0.125% convertible notes, a market source said.

Older issue active

While Akamai’s new 0.125% convertible notes dominated trading activity in the secondary space, the Cambridge, Mass-based content delivery network and cloud service provider’s 0% notes due 2019 were second in terms of trading volume.

More than $27 million of the bonds had traded shortly before the market close. The notes were seen trading at 101.5 versus an equity price of $75.75.

They were seen slightly improved dollar neutral, a market source said. They were seen contracted on Wednesday as the primary market prepared the book for Akamai’s new deal.

Hedge players may be swapping out Akamai’s new notes for the older notes due to their short duration, a market source said.

Ligand on deck

While the secondary market works to digest new paper from Akamai, Ligand Pharmaceuticals’ $650 million offering is on deck.

Ligand plans to price $650 million of five-year convertible notes after the market close on Thursday with price talk for a coupon of 0.5% to 1% and an initial conversion premium of 27.5% to 32.5%, according to a market source.

According to some sources, the deal is being marketed with a credit spread of 250 bps over Libor and a 35% vol. Using those assumptions, the deal models a little more than 0.5-point cheap at the midpoint of talk, a source said.

However, sources questioned those assumptions. With a wider credit spread and less vol., the offering is not attractive, a source said.

“These guys are really pushing the vol.,” the source said.

Other sources pegged underwriters’ assumptions as a credit spread of 225 bps and a 32% vol. The credit assumption of 225 bps is tight, a market source said.

“I’m not sure what the right spread is, but it’s not 225 [bps],” the source said.

While the credit spread did seem tight for a biotech company, Ligand does make money and is a well-known name in the convertibles universe, another source said.

Ligand’s outstanding 0.75% convertible notes due 2019 are deep in the money, the source said.

Ligand’s new deal appeared to be fair value to some sources. “It models out to par. It’s nothing exciting but you don’t get exciting these days,” the source said.

The deal attracted a lot of outright interest, but on the cheap end of talk, a market source said.

Priced to perfection

Several of the recent deals that have hit the market have been “priced to perfection,” with little room for upside potential in aftermarket trading, sources said.

The rich and fair value paper that has priced in recent months is “just going to blow up in our faces. Leave some cheapness in the market,” a market source said.

However, the current environment is perfect for companies to price convertible notes, a market source said.

While rates are up 150 basis points, spreads have held steady with most names trading 25 bps to 50 bps tighter.

With tightening credit spreads, companies are still able to price with low coupons, despite rising interest rates. “A lot of companies are taking advantage,” a market source said.

WWE’s Smackdown

While trading of the notes paled in comparison to Akamai, World Wrestling Entertainment’s 3.375% convertible notes due 2023 were the largest gainers of Thursday’s session.

The notes jumped more than 23 points outright to trade above double par.

They were seen trading at 206 versus an equity price of $49.90. WWE’s stock closed Thursday at $50.35, an increase of 15.51%.

With a 95% delta, the convertible notes have expanded 3 points dollar neutral over the past two months, a market source said.

WWE stock has been on a steady incline over the past two months – a rise that was supported by a positive first-quarter earnings report in early May.

WWE stock surged on Thursday on news the Stamford, Conn.-based media and entertainment company is negotiating with networks to find a new home to air its program “Smackdown.”

Mentioned in this article:

Akamai Technologies Inc. Nasdaq: AKAM

Ligand Pharmaceuticals Inc. Nasdaq: LGND

World Wrestling Entertainment Inc. NYSE: WWE

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