Tesla dominates trading after new deal announced; ON new issue steady; Walter remains in retreat

By Stephanie N. Rotondo

Seattle, March 16 – Tesla Inc. was the nom du jour on Thursday as the market reacted to the company’s announcement of a $750 million sale of new convertible debt.

“Outside of that, it’s another lackluster session,” the trader said.

A market source saw the company’s 1.25% B convertibles due 2021 at 95 bid, 96 offered, unchanged on the day. The 0.25% A convertible notes due 2019 were meantime deemed up a shade at 97.875 bid, 98.375 offered.

Earlier in the session, a trader saw Tesla’s 1.25% convertibles at 95.5 to 96, while the 0.25% convertibles were pegged at 97.625 to 98.

The convertibles of Tesla’s SolarCity Corp. subsidiary were also trading actively.

That paper “trades on yield and looks largely unchanged to me,” a trader remarked.

SolarCity’s 1.625% convertibles notes due 2019 moved up slightly to 89, which compared to 88.75 previously, a source said. The 2.75% convertible notes due 2018 were called unchanged at 98.875.

At mid-morning, the 1.625% convertibles were in an 88.75 to 89 context, according to a trader. The 2.75% convertible notes were at 96.125 to 96.375.

As for Tesla’s stock, it was up $6.32, or 2.47%, at $262.05. The gain in the equity was somewhat surprising, given that most of the time, stocks falter after capital raises are announced – especially when the deal size is so big.

After the market closed on Wednesday, Tesla said it was selling $750 million of five-year convertible notes and $250 million of common stock.

The convertibles are talked in a 1.875% to 2.375% range with an initial conversion premium of 25% to 30%.

Pricing was expected after Thursday’s close, but details were not available at press time.

“The new Tesla Cs are cheap,” one sellside source commented. “They will do well.”

“It’s nice to see a household name coming in size with good terms on a registered deal,” said another convertible market veteran.

“Tesla is a classic convertible issuer,” the veteran continued. “It’s a fast-growing tech company that needs capital. For investors/traders/speculators, the convertible will provide huge upside capture if the stock soars, while on the downside, the company is years away from financial distress – even if it fails to meet its goals. This situation is akin to the steam railroad convertibles that were issued in the 19th century – the hot technology of the day.”

Both the stock and the convertible issues include a 15% over-allotment option.

Proceeds will be used to strengthen the company’s balance sheet, to further reduce any risks associated with the rapid scaling of the business due to the launch of the Model 3 and for general corporate purposes.

Goldman Sachs & Co., Deutsche Bank Securities Inc., Citigroup Global Markets Inc. and Morgan Stanley & Co. LLC are the lead bookrunners. Barclays Capital, BofA Merrill Lynch and Credit Suisse Securities (USA) LLC are also participating.

Meanwhile, ON Semiconductor Corp.’s $500 million of 1.625% convertible senior notes due 2023 were little changed in Thursday trading.

A trader quoted the issue at 100.875 bid, 101 offered.

The company’s shares were meantime rebounding from the previous day’s lows, adding 2 cents to close at $15.24.

The deal priced late Tuesday and dominated the midweek session.

Morgan Stanley, BofA, Deutsche Bank Securities Inc., BMO Capital Markets and HSBC ran the Rule 144A deal.

Walter remains weak

Walter Investment Management Corp.’s 4.5% convertible notes due 2019 continued to retreat on Thursday, after losing ground in the last couple of sessions due to earnings that failed to impress.

One market source saw the issue opening around 40, hitting a low of 32.75 and ending at 33.875.

Another source deemed the debt down 6.5 points at 45.

On Tuesday, the Tampa-based mortgage lender and servicer reported a $529 million loss for the year on Tuesday, equal to a loss of $14.71 per share.

Revenue was $995.7 million.

For the quarter, the loss was $22.2 million, or 61 cents per share, on revenue of $444.1 million.

The company noted that it took an $8.2 million goodwill impairment charge for the quarter.

In the earnings statement, Anthony Renzi, chief executive officer since August, said the results were “not acceptable.”

As such, Renzi said the company was taking steps to address its issues. A shake-up on the leadership team has already been done, he noted.

The company has also hired Weil, Gotshal & Manges LLP and Houlihan Lokey to look into de-leveraging options.

Mentioned in this article:

ON Semiconductor Corp. Nasdaq:

Tesla Inc. Nasdaq: TSLA

Walter Investment Management Corp. NYSE: WAC

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