New Renewable Energy adds on hedge in active trade; old bond gains; Palo Alto down as shares drop

By Rebecca Melvin

New York, May 27 – U.S. convertibles were fairly active on Friday, boosted by the week’s new convertible issuance, company-specific news and higher equity markets.

The action was despite the fact that it was the last session before the Memorial Day weekend, when activity is usually diminished by early exits to make the most of an extra day off. Financial markets will be closed on Monday in observance of the holiday.

Renewable Energy Group Inc.’s newly priced 4% convertibles added on both an outright and dollar-neutral, or hedged, basis after the Ames, Iowa-based biodiesel producer priced an upsized $132 million of the 20-year senior notes at the cheap end of talked terms.

The new Renewable Energy convertibles were at 103 on an outright basis with the company’s shares a little higher, a market source said. On a dollar-neutral basis, the new bonds were at 101 versus a stock price of $8.62, which was Thursday’s closing stock price.

“They are trading well. They have been active and there’s a lot of interest in the deal,” the market source said.

Renewable Energy’s older notes, the 2.75% convertibles due 2019 – a portion of which will be bought back with proceeds of the new deal – were also higher. They traded at 96.25, which was up 7.7 points from their previous level, according to Trace data.

WebMD Health Corp.’s new 2.625% convertibles, which debuted in the market on Thursday, remained active for a second day, gaining another almost 2 points, and changing hands late in the day at 104.33. The shares of the online medical information company added 2% to $65.32.

Back in established issues, Palo Alto Networks Inc.’s 0% convertibles due 2019 dropped in active trade as its stock plunged following the Santa Clara, Calif.-based cyber security company’s disappointing guidance for the current quarter.

The convertibles of cyber security competitor FireEye Inc. were also pulled into trading, but didn’t appear to have moved much in price. The FireEye 1.625% convertibles due 2035 traded at 82.15 to 82.5, according to Trace data.

Cobalt International Energy Inc.’s two convertible bonds fell in active trading along with the underlying shares, which plunged 33 cents, or 14%, to $2.07. The Cobalt 2.625% convertibles due 2019 traded down to 40.625 bid, 40.875 offered, off from 45.125 to 45.25 previously.

The Cobalt 3.125% convertibles due 2024 traded last at 34, down from 37.5 previously.

Equities ended higher, recovering from a blip lower that occurred Friday afternoon after comments from Federal Reserve Chairwoman Janet Yellen suggested another rise in interest rates is likely sooner rather than later given the health of the economy. Yellen said that a rate move may be “appropriate in the coming months.” The next meeting of Federal Reserve policy makers is slated for June 14-15.

The S&P 500 stock index ended up 8.96 points, or 0.4%, to 2,099.06 on Friday and was up 2.4% for the week. The Dow Jones industrial average was up 44.93 points, or 0.25%, to 17,873.22 on Friday, and the Nasdaq composite index closed up 31.74 points, or 0.65%, to 4,933.50.

New Renewable Energy expands

Renewable Energy 4% convertibles due 2036 traded up to 103 on an outright basis and were seen late in the session changing hands at 102.4.

On a swap basis, the new bonds expanded about a point assuming a delta of about 80%, and were quoted at 101 versus $8.62, which was Thursday’s closing stock price.

Renewable Energy shares closed up 34 cents or 4%, at $8.96.

The company priced an upsized $132 million of 20-year convertible senior notes after the market close Thursday to yield 4% with an initial conversion premium of 25%.

The deal was initially talked at $125 million in size. The greenshoe was upsized to $20 million from $18.75 million.

Piper Jaffray & Co. was the bookrunner for the Rule 144a offering.

Like the market’s other new deals in the last few weeks, pricing came at the cheap end of talked terms.

Referring to the pricing trend, a trader said: “The market is a little cautious right now, but at the same time people want new paper, so I think people are really happy with the allocations.”

“People think the deal is pretty cheap and it was positively received,” the market source said.

The notes are non-callable for five years until June 15, 2021 and then they are freely callable. Investors may put the bonds on June 15, 2021, June 15, 2026 and June 15, 2031.

There is standard takeover and dividend protection, and the company also entered into capped call transactions with the underwriters or their affiliates.

The notes are convertible if the shares trade above 130% of the conversion price for at least 20 trading days during a 30-day period.

About $62 million of the proceeds will be used to repurchase $63.9 million principal amount of Renewable Energy’s outstanding 2.75% convertible senior notes due 2019, and about $35 million will be used to repurchase 4.1 million of shares of common stock concurrently with the pricing of the notes, which will establish the capped call.

Remaining proceeds will be used for working capital and general corporate purposes, which may include additional repurchases of the 2019 notes and shares of common stock and to finance potential strategic transactions.

Palo Alto drops

Palo Alto’s 0% convertibles due 2019 traded down to 132.8. The bonds had been in the mid to upper 140s on Wednesday, according to Trace data. The company’s stock fell $18.33, or 12.4%, to $129.85 on Friday.

Deutsche Bank followed up the company’s release with a downgrade of the equity.

For the period ended April 30, Palo Alto Networks reported a wider loss of $70.2 million, or 80 cents a share, compared with a year-earlier loss of $45.9 million, or 56 cents a share. Excluding certain items, earnings were up to 42 cents per share from 23 cents per share in the year-earlier period.

Revenue rose 48% to $345.8 million.

Looking ahead, the company said that adjusted fiscal fourth-quarter earnings would be between 48 cents to 50 cents per share and that revenue would come in at $386 million to $390 million. Both of those ranges were low compared to some analysts’ estimates.

Mentioned in this article:

Cobalt International Energy Inc. NYSE: CIE

FireEye Inc. Nasdaq: FEYE

Palo Alto Networks Inc. Nasdaq: PANW

Renewable Energy Group Inc. Nasdaq: REGI

WebMD Health Corp. Nasdaq: WBMD

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