Sempra on tap; Palo Alto’s $1.5 billion deal hits the market; Depomed up on the week

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%.

The new notes were quiet for a $1.5 billion deal, a market source said. However, they still dominated trading activity in the secondary space with the notes largely holding at par on a dollar-neutral, or hedged, basis.

Palo Alto’s 0% convertible notes due 2019 were also active in the secondary space with the notes trading just below parity.

Despite the convertibles space entering into an earnings season blackout, new deals continue to come forward.

In a deal set to price shortly after it was launched, Sempra Energy plans to price $500 million of three-year par of $100 series B mandatory convertible preferred stock after the market close on Tuesday. The mandatory convertible preferreds offering is Sempra’s second in six months.

While Palo Alto’s convertible notes were the focus of the secondary space on Tuesday, Momo Inc.’s recently priced 1.25% convertible notes due 2025 continued to be actively traded.

While the notes traded as high as 101 on Monday, they were coming in on an outright and dollar-neutral basis on Tuesday.

Depomed Inc.’s 2.5% convertible notes due 2021 reached new levels over the past week after the company announced on Monday it was in settlement negotiations with Purdue Pharma LP over patent infringement litigation.

While some sources saw the notes expand 3 points dollar-neutral on the week, the expansion largely depended on the delta, other sources said.

Sempra on tap

Sempra Energy plans to sell $500 million of series B convertible preferred stock on Tuesday evening with price talk for a dividend of 6.5% to 7% and an initial conversion premium of 17.5% to 22.5%.

Concurrently with the mandatory convertible preferred stock offering, Sempra Energy plans to price $1.1 billion of common stock in a forward sales agreement.

Sempra “is a mandy factory,” a market source said.

In January, Sempra priced $1.5 billion of series A mandatory convertible preferred stock with a 6% dividend and an initial conversion premium of 22.5%.

Pricing of the series A mandatory convertible preferreds came at the rich end of talk for a dividend of 6% to 6.5% and an initial conversion premium of 17.5% to 22.5%.

The series A preferreds closed Tuesday at $103.59, an increase of 1.16%.

Palo Alto in focus

Palo Alto Networks 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.

Trading volume of the new notes reached $169 million shortly before market close, accounting for nearly one-third of the total $438 million in trading volume on the tape.

The 0.75% convertible notes were seen trading at 100.35 with stock up about $2.75 early in the session.

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 slightly contracted early in the session, the notes rallied on a dollar-neutral basis as stock came in.

The notes were seen at 100.375 bid, 100.625 offered later in the afternoon with stock up about 1%. The notes were largely flat dollar-neutral, a source said.

They were moving on about a 60% delta.

Palo Alto stock closed Tuesday at $210.70, an increase of 0.86%.

While Palo Alto’s new 0.75% convertible notes dominated trading activity, the company’s 0% convertible notes due 2019 were the second most active issue in the space with $14 million on the tape shortly before the market close.

The 0% convertible notes were trading about 0.85 point to 0.55 point below parity, a market source said. They were seen trading at 191.654 versus an equity price of $210.73.

While proceeds may be used for payments due upon the conversion, repurchase or maturity of the company’s 0% convertible notes due 2019, there did not appear to be any repurchases of the notes on Tuesday, a market source said.

Momo comes in

After breaking par and trading to their highest outright levels since pricing, Momo’s 1.25% convertible notes due 2025 were down again on an outright and dollar-neutral basis on Tuesday.

The notes were seen trading at 98.826 versus an equity price of $45.32 shortly before the market close with about $9 million of the bonds on the tape.

The notes were contracting about 0.25 point to 0.375 point dollar-neutral, a source said.

Momo stock closed Tuesday at $45.20, a decrease of 3.11%.

The notes traded to a high of 101 on Monday as stock jumped in intraday trading. Monday marked the highest outright price for the notes since they hit the market on June 27.

Momo’s 1.25% convertible notes had a drama-laced secondary market debut on June 27 with stock plummeting after Spruce Point Capital Management released a report with a sell recommendation for the company’s depositary shares.

Momo’s American Depositary Shares were $45.34 when the convertible notes priced. Stock has slowly recuperated since tanking on June 27 with share prices surpassing $46.00 on July 6 and Monday.

Depomed on the rise

Depomed’s 2.5% convertible notes due 2021 are on the rise with the notes reaching new levels amid speculation the company is in for a windfall from the settlement of its patent infringement case against Purdue Pharma.

The 2.5% notes were seen trading at 85.75 versus a stock price of $8.15 on Tuesday with about $4 million of the bonds on the tape.

The notes rose about 5 points outright on Monday with stock up more than 16% after news of the settlement negotiations broke.

The 2.5% notes expanded about 3 points on a dollar-neutral basis on the week, a market source said.

However, another source pegged the notes as moving in line dollar-neutral, depending on the delta used.

“The lower the delta the wider the variant will be,” the source said.

Depomed’s notes were trading at 81.5 prior to the stock spike on Monday.

At their previous level, the notes had a yield that was more than 9%, which attracted outright and high-yield buyers, a market source said.

With the yield on the decline, the notes may start to attract a different kind of buyer, the source said.

Depomed announced on Monday it is in settlement negotiations with Purdue over its patent infringement litigation.

There is speculation the company could receive up to $200 million cash to settle the claim, a market source said.

Mentioned in this article:

Depomed Inc. Nasdaq: DEPO

Momo Inc. Nasdaq: Momo

Palo Alto Networks Inc. NYSE: PANW

Sempra Energy NYSE: SRE

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.