Convertibles market eyes Redwood Trust, QTS; Intelsat in the money; Tesaro improves

By Abigail W. Adams

Portland, Me., June 20 – While the fast and furious pace of new deal activity in the convertible space is expected to slow in the final weeks of June, it has not stopped.

Two deals from real estate investment trusts were expected to price after the market close on Wednesday, and a deal from the tech sector is on tap for after the market close on Thursday.

Redwood Trust Inc. plans to sell $200 million of six-year convertible notes and QTS Realty Trust Inc. plans to price $225 million, or 2.25 million shares, of par of $100 series B perpetual cumulative convertible preferred stock after the market close on Wednesday.

While QTS’ deal was seen as more than 8 points cheap, Redwood’s deal was pegged between 0.5 point rich to 1 point cheap.

Wix.com Ltd. plans to price $350 million of five-year convertible notes after the market close on Thursday with price talk for a coupon of 0% to 0.5% and an initial conversion premium of 30% to 35%, according to a market source.

J.P. Morgan Securities LLC and BofA Merrill Lynch are joint bookrunners for the Rule 144A deal, which carries a greenshoe of $52.5 million.

New deal volume in the convertibles universe is at a decade high with $30.5 billion pricing over 80 deals, according to the Barclay’s report “Resurgence in Convert Issuance: The Tide is Turning.”

While new deal volume may be entering a momentary lull, new convertibles issuance is up 37% year over year. The pace is expected to continue with new deal volume predicted to reach $65 billion to $70 billion by year-end, according the Barclay’s report.

Meanwhile, Intelsat SA’s recently priced 4.5% convertible notes due 2025 continued to outperform with the company’s stock surpassing the conversion price of the notes a little over one week from pricing.

The notes climbed 16 points outright with outright sellers taking advantage of the strength of the stock, a market source said.

Tesaro Inc.’s 3% convertible notes due 2021 jumped about 15 points outright on Wednesday as stock spiked amid rumors the company may soon be the target of an acquisition.

Redwood in focus

Redwood plans to price $200 million of six-year convertible notes with price talk for a coupon of 5.125% to 5.625% and an initial conversion premium of 6% to 10%, according to a market source.

The deal “doesn’t scream cheap,” a market source said.

Underwriters are marketing the deal with a credit spread of 400 basis points over Libor and a 15% vol. The deal models about 0.55 point rich at the midpoint of talk, a market source said.

However, the deal modeled about 1 point cheap if pricing came toward the cheap end of coupon talk and the rich end of talk for an initial conversion premium, assuming the current 30 cent dividend and a 30 bps borrow on common stock, another source said.

With a higher vol., the deal modeled “a little cheap” and seemed to come right on top of Redwood’s 4.75% convertible notes due 2023, another source said.

Sources took note of the price talk for the conversion premium. “This is the first premium I’m seeing below 10%,” a source said.

Redwood is a repeat issuer of convertible notes. The company’s 4.75% convertible notes were last seen trading at 98.897 on Monday.

The company’s 5.625% convertible notes due 2019 last traded at 103.25 on June 14, according to Trace data.

QTS eyed

QTS Realty Trust plans to price $225 million, or 2.25 million shares, of par of $100 series B perpetual cumulative convertible preferred stock after the market close on Wednesday with price talk for a dividend of 6% to 6.5% and an initial conversion premium of 20% to 25%, according to a market source.

Deutsche Bank Securities Inc., Jefferies & Co. and Morgan Stanley & Co. LLC are joint bookrunners for the registered offering, which carries a greenshoe of $33.75 million.

The deal preliminarily looks several points cheap, a market source said.

Underwriters are marketing the deal with a credit spread of 450 bps over Libor and a 22% vol., which models almost 8.5 points cheap, the source said.

The convertible preferreds are of interest to portfolio managers with yield targets to balance out the typically lower coupons on convertible bonds, a market source said.

However, convertible preferreds “do horrible on the downside,” a market source said.

With “no light at the end of the tunnel,” for a return on the initial investment and a lower ranking in the capital structure, the higher yield of a perpetual convertible preferred comes with a greater risk, the source said.

Intelsat in-the-money

Intelsat’s 4.5% convertible notes continued to outperform on Wednesday with the notes in-the-money a little over one week after pricing.

The 4.5% notes climbed 16 points outright to trade north of 131. The majority of sellers were outright accounts “unwinding into the strength of the common,” a market source said.

The notes were contracting slightly dollar neutral, which is to be expected given the run of Intelsat’s common stock, the source said.

“Outright sellers want to take advantage, and there are more buyers than sellers,” the source said.

Intelsat stock closed Wednesday at $19.32, an increase of 20.3%.

The convertible notes, which priced on June 11, have a conversion price of $18.18.

The jump in stock was attributed to the Federal Communications Commission’s pending decision regarding Intelsat’s and Intel’s joint C-band spectrum proposal, which would accelerate the introduction of 5G services in the United States.

RBC Capital Markets raised Intelsat to outperform from neutral and upped its price target to $30 from $5 based on the pending approval and Intelsat’s improved balance sheets due to its recent convertible notes and common stock offering, Bloomberg reported.

Tesaro’s rumor mill

Tesaro’s 3% convertible notes due 2021 jumped about 18 points outright as stock shot up more than 16% as rumors circulate there may soon be a bid for the company.

The 3% convertible notes saw a flurry of late afternoon trading activity with the notes changing hands north of 152. They were quoted as high as 155, according to a market source.

Tesaro stock closed Wednesday at $46.49, an increase of 16.25%.

Stock soared amid rumors Roche may soon make a bid for the company.

The convertible notes were not seen trading early in the session with all eyes looking at the takeout table, a market source said.

Tesaro “is a rumor mill name,” when it comes to a potential acquisition, although there hasn’t been chatter for some time, the source said.

Mentioned in this article:

Intelsat SA NYSE: I

Redwood Trust Inc. NYSE: RWT

Tesaro Inc. Nasdaq: TSRO

QTS Realty Trust Inc. NYSE: QTS

Wix.com Ltd. Nasdaq: WIX

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