Winnebago expands in first-day trading; Granite flat; DTE Energy mandatory trades well

By Rebecca Melvin

New York, Oct. 30 – Winnebago Industries Inc.’s newly priced 1.5% convertibles traded up on their debut in the convertible bond market on Wednesday after the RV maker priced $270 million of the 2025 paper at the tight end of talked terms.

The new Winnebago convertibles were seen up at 102.5 on an outright basis around midday. The underlying shares were about $48.60 at that time. The move was a 1.75-point gain on a dollar-neutral basis, a New York-based trader said.

The notes were seen trading on about a 60% delta, and the underlying shares closed up on the day by 2.5% at $49.29.

Granite Construction Inc. represented the day’s second convertible bond issue debut. The notes traded actively around par and were unchanged on a dollar-neutral basis.

The Granite 2.75% convertibles were seen changing hands at 100.23 with the stock at $24.05.

The Watsonville, Calif.-based construction and transportation company priced $200 million of the five-year notes at the cheap end of talked terms. It was also said to be trading on a 60% delta.

As for why it underperformed compared to Winnebago, “I think GVA was a bit on the riskier side as the stock has gotten destroyed recently over a terrible quarter from some major project over runs,” a New York-based market source said.

A second source said by way of explaining why it didn’t expand, “It’s a smaller issue. You could argue that the deals that price cheap trade cheaply, and the deals that price rich, trade that way.”

The new DTE Energy Co. 6.25% mandatories were seen higher by about 80 basis points on a dollar-neutral basis. With a $50 par, the units were up outright by 40 cents on the day around midday.

The Detroit-based energy company priced $1.15 billion of the equity units with a 25% initial conversion premium, which was the midpoint of coupon talk and the rich end of premium talk.

“There was a lot of trading in DTE, and it traded well,” a New York-based market source said.

The Winnebago and Granite deals were reminiscent of the United States Steel Corp. convertible, a $300 million issue that priced Oct. 17. That bond also priced on the cheap end. It is now up about 1.5 points on a dollar-neutral basis since issue, assuming a 77% delta hedge, a market source said.

In the international primary space, France’s Atos SE priced €500 million 0% five-year bonds exchangeable into shares of Worldline SA.

The Atos bonds were sold at 108.875 to yield of minus 1.7% and an initial conversion premium of 35%, according to a company news release on Wednesday.

Atos also completed an equity sale of about €780 million of Worldline shares.

The proceeds will be used primarily to repay medium- and long-term debt.

Atos is an information technology services company based in Paris. Worldline, formerly Atos Worldline SAS, is a French-based payments and transaction services company.

In the secondary market, Exact Sciences Corp.’s convertibles took a bit of a beating on Wednesday as the underlying stock fell after the genomic sciences company reported a third-quarter loss but revenue that exceeded estimates.

The Exact Sciences 0.375% convertible notes due 2027 were the next most traded bond after the new Winnebago and Granite convertibles with nearly $15 million of paper changing hands. The bonds lost more than 5 points to trade at 105 with the underlying shares down more than 7% to $84.00.

In the broader markets, the S&P 500 stock market closed at a record high after the U.S. central bank cut interest rates by another 25 basis points on Wednesday.

The S&P 500 rose 9.88 points, or 0.3%, to 3,046.77.

The Federal Reserve concluded its two-day policy-setting meeting with another rate cut move and signaled that the economy appears to be strong enough to not need further cuts in the near term. The Fed cuts the benchmark Fed Funds rate 25 bps to between 1.5% and 1.75%. The move was widely expected. The Fed statement pointed to inflation remaining below the Fed’s 2% target to support the move.

The Dow Jones industrial average rose 115.27 points, or 0.4%, to 27,186.69 and the Nasdaq stock market gained 27.12 points, or 0.3%, to 8,303.98.

New Winnebago expands

The new Winnebago 1.5% convertibles due 2025 were seen up at 102.5 on an outright basis around midday.

The underlying shares were about $48.60 at that time. The move was a 1.75-point gain on a dollar-neutral basis, a New York-based trader said.

Shares closed the day up $1.19, or 2.5%, at $49.29.

“The WGO has a great chart – plus revenue earnings, etc., and I think people were comfy with that spread, which is wide I think for the credit you are getting,” a market source commented.

A second source said, “To be honest, I’m puzzled by WGO. It’s a niche product in a niche market, and I didn’t expect it to price on the rich end, much less expand further. GVA I can understand as that stock has been in a multi-year downtrend.”

Winnebago priced $270 million of convertible senior notes due 2025 at par to yield 1.5% with an initial conversion premium of 32.5%, according to a syndicate source on Wednesday.

Pricing came at the tight end of talked terms, which were for 1.5% to 2% yield and 27.5% to 32.5% premium.

In connection with the notes offering, the company entered into privately negotiated convertible note hedge and warrant transactions with initial purchasers of the notes. The $96.20 warrant strike price represents an initial conversion premium of 100% from the issuer’s perspective.

The proceeds will be used to fund the cost of entering into the convertible note hedge transactions and for the company’s previously announced acquisition of Newmar Corp. If the Newmar acquisition is not consummated, the proceeds will be used for fees related to cancelation of the deal and for general corporate purposes.

Granite flat on debut

Granite Construction’s 2.75% convertibles traded around issue.

Pricing came at the cheap end of talked terms for a yield of 2.25% to 2.75% and an initial conversion premium of 32.5% to 37.5%.

There is a $30 million greenshoe for the Rule 144A deal, which is non-callable until Nov. 7, 2022 and then provisionally callable at par if shares exceed 130% of the conversion price. There are no puts.

The securities have change-of-control protection in the form of a make-whole adjustment premium delivered upon conversion as incremental shares, and full dividend protection via a conversion ratio adjustment above $0.13 per quarter.

In connection with the pricing of the notes, Granite entered into convertible note hedge and warrant transactions, or a call spread, with initial purchasers of the notes. The strike price on the warrant transactions is $53.4375, representing an initial conversion premium of 125% from the issuer’s perspective.

About $22.7 million of the proceeds will be used to purchase the call spread, $29.9 million will be used to repurchase common stock and the remaining proceeds will be used to repay a portion of the company’s revolving credit facility and for general corporate purposes.

New DTE unit adds

DTE Energy’s 6.25% mandatory convertibles were quoted $50.80 bid, $51.00 offered with the common stock at $127.50. That was “up about 45 cents on a dollar nuke from the new deal pricing,” a New York-based market source said.

DTE sold $1.15 billion of 6.25% equity units with a 25% initial conversion premium, and it was the top volume mandatory issue in trade on Wednesday.

The registered deal has a $150 million over-allotment option.

The company also sold $302 million of common stock.

The units deal came at the midpoint of 6% to 6.5% distribution talk and at the rich end of the 20% to 25% conversion premium talk.

Proceeds will be used for the purchase of midstream natural gas assets and for general corporate purposes.

Mentioned in this article:

DTE Energy Co. NYSE: DTE

Exact Sciences Inc. Nasdaq: EXAS

Granite Construction Inc. NYSE: GVA

Winnebago Industries Inc. NYSE: WGO

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