Alder ‘getting smoked’; Western Digital deal a landmark; new paper adding pressure

By Abigail W. Adams

Portland, Me., Jan. 30 – An active convertibles primary market is creating some pressure in the secondary space, a market source said on Tuesday.

Three new deals are set to price after the market close on Tuesday, as the secondary market is still trying to digest the new paper from recently priced deals.

“We knew more deals were coming, but no one realized it would be a $1 billion deal,” a market source said.

The $1 billion deal from Western Digital Corp. will be “a landmark deal for the convertible space,” the source said.

Western Digital plans to price $1 billion of six-year convertible notes after the market close on Tuesday with price talk for a coupon of 1% to 1.5% and an initial conversion premium of 40% to 45%, according to a market source.

Endeavour Mining Corp. plans to price $300 million of five-year convertible notes after the market close on Tuesday with price talk for a coupon of 2.25% to 3% and an initial conversion premium of 32.5% to 37.5%, according to a market source.

JPMorgan Chase Financial Co. LLC plans to price $350 million of five-year cash-settled convertible notes linked to Voya Financial, Inc. stock after the market close on Tuesday with price talk for a coupon of 0% to 0.5% and an initial conversion premium of 32.5% to 37.5%, according to a market source.

As $1.65 billion in new paper is priced, Alder BioPharmaceuticals, Inc.’s new 2.5% convertible notes due 2025 were “getting smoked” on their market debut on Tuesday, according to a market source.

The notes were “offered at par or below right out of the gate,” another source said. They were contracted 0.75 point on a dollar-neutral basis toward the end of Tuesday’s session.

Several recent deals were also trading below par during Tuesday’s session. Insmed Inc.’s 1.75% convertible notes due 2025, Teekay Corp.’s 5% convertible notes due 2023 and Nutanix Inc.’s 0% convertible notes due 2023 were all down on an outright basis on Tuesday.

Western Digital’s deal

In one of the largest deals of 2018 so far, Western Digital plans to price $1 billion of six-year convertible notes after the market close on Tuesday.

The deal from the San Jose, Calif.-based large-cap computer data storage company is a throwback to the old days when large cap companies issued convertible bonds as part of share buyback programs.

Western Digital expects to repurchase up to $500 million of company shares concurrently with the pricing of the convertible notes, according to a company news release.

The new paper will have a significant impact on the convertibles space; however, sources were mixed on its attractiveness.

“I don’t think it’s that juicy,” a market source said. “The credit is tight and the volatility seems to be higher than some people think.”

BofA Merrill Lynch and J.P. Morgan Securities LLC are acting as lead bookrunners for the Rule 144A deal, which carries a greenshoe of $100 million.

The convertible notes are being offered alongside a $2.3 billion offering of senior notes due 2026. RBC Capital Markets LLC, Mizuho Securities USA Inc. and Wells Fargo Securities LLC are acting as bookrunning managers for the senior notes due 2026.

In connection with the offerings, Western Digital plans to obtain a $5.022 billion term loan A-1 facility maturing in 2023.

If the full amount of the convertible note offering is not completed, Western Digital may increase the size of the new term loan by up to $1 billion, according to a company news release.

Western Digital expects to reduce its outstanding debt by $1 billion with proceeds from the offering. After completion of the related transactions, cash on hand is expected to be reduced by $2.4 billion.

Alder contracts

While in high demand during the bookbuilding process, Alder BioPharmaceuticals’ 2.5% notes were trading down soon after hitting the market.

With a coupon of 2.5% and an initial conversion premium of 35%, Alder BioPharmaceuticals priced an upsized $250 million of seven-year notes at the rich end of revised price talk after the market close on Monday.

The revised price talk was for a coupon of 2.5% and an initial conversion premium of 30% to 35%, according to a market source.

The revised talk had in turn been moved richer from initial price talk for a coupon of 2.5% to 3% and an initial conversion premium of 27.5% to 32.5%.

The deal was “oversubscribed multiple times” during the bookbuilding process, a market source said.

The new notes were trading in a range of 97.75 to 98.5 with stock down about 5% early in Tuesday’s session. They were trading down dollar neutral in line with the stock move, a source said.

The notes traded as low as 97.25 during Tuesday’s session and were contracted 0.75 point on a dollar-neutral basis, a source said.

“The underwriters kind of pushed the envelope. The stock didn’t cooperate,” the source said.

Alder BioPharmaceuticals’ stock closed Tuesday at $14.40, a decrease of 4%. Alder stock also tanked Monday, ending the day down more than 10%, which was seen as a reaction to the convertible note offering.

Below par

As the secondary market absorbs the new paper entering the space, several recent deals lost some footing on Tuesday, sinking below or further below par.

Nutanix’s 0% convertible notes, which priced on Jan. 18, dropped about a point to the 97 range on Tuesday. Nutanix stock ended the day at $32.05, a decrease of 1.05%.

The 0% notes were trading north of 103 on an outright basis until last Thursday when the notes took a hit due to a JPMorgan downgrade.

Teekay’s 5% convertible notes, which priced on Jan. 24, dropped 2 points in scattered trades during Tuesday’s session to 96.5 versus a stock price of $8.43. Teekay stock closed Tuesday at $8.58, a decrease of 0.69%.

The 5% notes were wrapped around 101 their second day on the market but have traded below par since.

Insmed’s 1.75% notes, which priced on Jan. 23, dropped 3 points on an outright basis to the 97 range, as the company’s stock tanked. Insmed stock closed the day at $26.35, a decrease of 5.99%.

The notes also dipped below par in scattered trading on Monday but gained on an outright basis to end the day above par. The notes were also trading around 101 their first few days on the market.

Mentioned in this article:

Alder Biopharmaceuticals, Inc. Nasdaq: ALDR

Insmed Inc. Nasdaq: INSM

Nutanix Inc. Nasdaq: NTNX

Teekay Corp. NYSE: TK

Voya Financial, Inc. NYSE: VOYA

Western Digital Corp. Nasdaq: WDC

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