Morning Commentary: Tesaro convertibles add on debut; SolarCity stock jumps after deal launch

By Rebecca Melvin

New York, Sept. 24 – Tesaro Inc.’s newly priced 3% convertible bonds added in the early going Wednesday after the Waltham, Mass.-based biopharmaceutical oncology company priced an upsized $175 million of the seven-year notes at the cheap end of talk. Shares, which fell 9% on Tuesday after the deal was launched, were slightly weak early Wednesday.

The new Tesaro bonds were about 102 last with the stock around $26.00. That was up 1 point to 1.25 points on a dollar-neutral basis, a syndicate source said.

“There has been healthy, two-way flow, with better buying interest as the morning progressed,” the source said.

About $70 million of the bonds have traded so far.

Market players were also sizing up the planned SolarCity Corp. deal, which launched after the market close Tuesday. SolarCity’s $500 million offering of five-year convertible bonds was being valued by the underwriters using a credit spread of 465 basis points over Libor and a 42% vol.

SolarCity shares surged in the early going Wednesday, trading higher by $4.48, or 7.4%, to $64.92.

Stock borrow in the name was said to be difficult, which will hinder hedged players’ participation.

“It will be challenging, but the Elon Musk cult following is something you cannot model,” a New York-based trader said.

Musk is SolarCity’s chairman and also chief executive officer of Tesla Motors Inc. Both companies have become darlings with investors, attracted to the potential power houses of clean energy and battery power.

A second trader, based in Connecticut, noted that SolarCity despite its big market capitalization, “doesn’t feel like a sub 500 bps credit.” There’s no EBITDA expected until 2016, he said. Nevertheless he said he likes the 465 bps spread.

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