Morning Commentary: Palo Alto’s $1.5 billion convertible notes hit the market

By Abigail W. Adams

Portland, Me., July 10 – Tuesday opened with $1.5 billion in new paper hitting the convertibles secondary market, spurring trading activity, which had been sluggish over the past week.

Palo Alto Networks Inc. priced $1.5 billion of five-year convertible notes prior to the market open on Tuesday with a coupon of 0.75% and an initial conversion premium of 27.5%.

Pricing came at the midpoint of talk for a coupon of 0.5% to 1% and at the cheap end of talk for an initial conversion premium of 27.5% to 32.5%, according to a market source.

The pricing was aggressive, but it was appropriate, a market source said. The deal was a large capital raise.

While there was heavy demand from outright players, pricing also needed to attract hedge participants due to the call spread, the source said.

The allocation of the deal was split evenly between the two.

The new paper accounted for $90 million of the $136 million on the tape early in Tuesday’s session. The 0.75% convertible notes were wrapped around par in high-volume trading.

The notes were seen trading at 100.35 with stock up about $2.75.

With the coupon falling at the midpoint of talk and the initial conversion premium at the cheap end, the 0.75% notes priced fair value to “a tad expensive,” a market source said.

However, they were getting cheaper in the secondary space, a market source said. “They’re lagging a little versus where the stock is trading,” a market source said.

While Palo Alto’s new 0.75% convertible notes dominated trading activity, the company’s 0% convertible notes due 2019 were also active with $6 million of the bonds on the tape early in the session.

The 0% convertible notes were seen trading at 191.5, which is just about parity, a market source said.

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