Morning Commentary: Dominion Energy, Vonage, Zynga convertible securities look ‘cheap’

By Abigail W. Adams

Portland, Me., June 11 – The convertibles primary market is slated to price some highly anticipated new paper after the market close on Tuesday.

Dominion Energy Inc. plans to price $1.25 billion of $100-par series A equity units, Vonage Holdings Corp. plans to price $300 million of five-year convertible notes and Zynga Inc. plans to price $600 million of five-year convertible notes.

Sources pegged the deals cheap based on underwriters’ assumptions.

Dominion’s equity units

Dominion Energy plans to price $1.25 billion of $100-par series A equity units with price talk for a dividend of 7.25% to 7.75% and a threshold appreciation premium of 17.5% to 22.5%.

Each unit will consist of a three-year common stock purchase contract and a 1/10th interest in perpetual convertible preferred stock.

Underwriters were marketing the deal with a credit spread of 75 basis points over Libor and a 17% vol., according to a market source.

Based on those assumptions, the deal modeled about 2.36 points cheap at the midpoint of talk, a source said.

The Richmond, Va.-based electric and natural gas energy company is investment grade and a repeat issuer of convertible preferreds, a source said.

With investment-grade paper and mandatory convertible preferreds in demand, the equity units are expected to do well.

Vonage comes cheap

Vonage Holdings plans to price $300 million of five-year convertible notes with price talk for a coupon of 1.5% to 2% and an initial conversion premium of 40% to 45%, according to a market source.

The deal is in the market with a credit spread of 300 bps over Libor and a 35% vol., according to a market source.

Using those assumptions, the deal modeled 2.33 points cheap at the midpoint of talk.

The deal is pricing as part of a “happy meal” with $10 million of proceeds to be used to repurchase common stock.

The share repurchase will enable a bigger hedge on the stock.

It will also attract more outright buyers because it will limit the downside risk from stock volatility, a source said.

Zynga eyed

Zynga plans to price $600 million of five-year convertible notes with price talk for a coupon of 0.25% to 0.75% and an initial conversion premium of 30% to 35%.

The deal is being marketed with a credit spread of 250 bps over Libor and a 34% vol., according to a market source.

Sources pegged the deal between 1 and 2 points cheap at the midpoint of talk.

However, some sources felt a tighter vol. was warranted, which would place the deal more at fair value.

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