Morning Commentary: Royal Caribbean, Varex convertibles eyed; Palo Alto expands on debut

By Abigail W. Adams

Portland, Me., June 4 – The convertibles primary market stood poised to end the first week of June with a bang with two deals totaling $1.15 billion on deck.

Royal Caribbean Cruises Ltd. plans to price $1 billion of three-year convertible notes and Varex Imaging Corp. plans to sell $150 million of five-year convertible notes after the market close on Thursday.

The deals looked cheap, sources said. However, Varex’s offering was heard to be wall-crossed.

Royal Caribbean was hoping to piggy back off the success of Carnival Corp.’s convertible notes offering.

As market players eyed the new deals in the pipeline, Palo Alto Networks Inc.’s megadeal hit the secondary space with the new paper expanding on debut.

Royal Caribbean eyed

Royal Caribbean plans to price $1 billion of three-year convertible notes after the market close on Thursday with price talk for a coupon of 5% to 5.5% and an initial conversion premium of 20% to 25%, according to a market source.

The deal was heard to be marketed with assumptions of 1,400 basis points over Libor and a 45% vol.

Using those assumptions, the deal looked about 7.4 points cheap at the midpoint of talk, a source said.

The notes are pricing concurrently with a $1 billion senior notes offering, which is being talked with a yield in the high 9% to 10% area.

Royal Caribbean’s offering is “deja vu all over again,” a market source said.

The terms are very similar to the terms for Carnival’s offering, the source said.

Carnival priced a $2.01 billion issue of its 5.75% convertible notes due 2023 in April.

It was the first deal to price since the primary market was sidelined by the March meltdown.

Carnival’s deal was marketed with assumptions of 1,400 bps over Libor and a 40% vol.

Talk was initially for a coupon of 5.75% to 6.25% and an initial conversion premium of 17.5% to 22.5% but was tightened during bookbuilding to a coupon of 5.5% to 5.75% and an initial conversion premium of 22.5% to 25%.

The notes skyrocketed in the aftermarket and were changing hands on a 177-handle on Wednesday.

Varex looks cheap

Varex imaging plans to price $150 million of five-year convertible notes after the market close on Thursday with price talk for a coupon of 3.5% to 4% and an initial conversion premium of 25% to 30%.

The deal is being marketed with assumptions of 1,000 bps over Libor and a 40% vol., according to a market source.

Using those assumptions, the deal looked about 4.875 points cheap at the midpoint of talk.

However, the deal was heard to be wall-crossed and already mostly spoken for, a source said.

Palo Alto expands

Palo Alto priced $1.75 billion of five-year convertible notes after the market close on Wednesday at par with a coupon of 0.375% and an initial conversion premium of 27.5%.

Pricing came at the midpoint of talk for a coupon of 0.125% to 0.625% and at the cheap end of talk for an initial conversion premium of 27.5% to 32.5%, according to a market source.

The notes were expanding on their secondary market debut.

The notes were up 0.75 point dollar-neutral early Thursday, a source said.

Palo Alto stock was changing hands at $230.38, a decrease of 1.3% shortly before 11 a.m. ET.

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