Convertibles primary market opens with offering from Carnival; Workday, Palo Alto active

By Abigail W. Adams

Portland, Me., March 31 – The question many have been asking – “When will the primary market resume operations?” – was answered on Tuesday.

Carnival Corp. announced plans to price $1.75 billion of three-year convertible notes after the market close on Wednesday alongside a $1.25 billion common stock offering and a $3 billion offering of three-year first priority senior secured notes.

The convertible notes offering modeled several points cheap and had extremely attractive terms, sources said.

However, it also implied some optimism about the economic impact of the coronavirus pandemic.

Meanwhile, trading activity in the convertibles secondary space was light with equities opening the day with gains but closing with losses.

There was $63 million in reported volume about one hour into Tuesday’s session and $351 million shortly before the market close.

Equity-sensitive tech names were among the most actively traded in the secondary space on Tuesday.

Workday Inc.’s 0.25% convertible notes due 2022 were trading down on an outright basis as stock gave back some of its gains over the past two weeks.

Palo Alto Networks Inc.’s 0.75% convertible notes due 2023 were also active although largely unchanged.

Carnival eyed

Carnival plans to price $1.75 billion of three-year convertible notes after the market close on Wednesday as part of a $6 billion capital raise that includes a secondary offering and straight debt.

Price talk for the convertible notes is for a coupon of 5.75% to 6.25% and an initial conversion premium of 17.5% to 22.5%, according to a market source.

Initial guidance for the $3 billion secured notes is for a coupon of 12½% with a discounted reoffer price of 98 to 99.

The convertible notes were heard to be marketed with assumptions of 1,400 basis points over Libor and 40% vol., according to a market source.

The convertible notes looked about 8.3 points cheap at the midpoint of talk, a market source said.

The deal is “rescue financing,” another source said.

The leisure travel company has been badly battered by the coronavirus pandemic, which caused the owner of cruise lines to temporarily cease operations.

However, the company is ineligible for Congress’ relief package because it is incorporated in Panama.

The convertibles primary market has been closed since the wave of deals that priced on March 4.

“There will be a price to pay” for the companies that attempt to launch deals in the current market climate, a source previously said.

And Carnival is paying a hefty price.

The deal is an “act of desperation,” a market source said.

However, the terms for the convertible notes are excellent with a high yield, a low premium and a short maturity.

The deal has “huge upside potential if Carnival merely survives,” the source said.

The company’s stock is also highly liquid, making it attractive for hedge players, another source said.

If the notes are set up with a heavy hedge, they will essentially carry themselves, a source said.

While the deal is optically very attractive, other sources were skeptical about the ability of the cruise ship operator to survive given the degree of uncertainty surrounding the coronavirus and the toll it will take on the industry.

The capital raise implies some optimism on the part of the company about the economic impact of the coronavirus pandemic, a source said.

However, the three-year piece of paper is a “good way to be optimistic while getting some protection,” the source said.

Tech trades

Equity-sensitive convertible notes from the tech sector were active on Tuesday.

Workday’s 0.25% convertible notes due 2022 were dropping on an outright basis as stock gave back some of its gains from the past week.

The 0.25% convertible notes were down 2 points outright.

They were changing hands at 112 versus a stock price of $131.17 in the mid-afternoon.

Workday stock traded to a high of $136.85 and a low of $128.20 before closing the day at $130.22, a decrease of 5.16%.

Stock jumped more than 7% last week as markets rebounded on optimism surrounding Congress’ stimulus bill.

Palo Alto’s 0.75% convertible notes due 2023 were also active although largely unchanged as stock wavered between gains and losses following another announced acquisition.

The 0.75% notes were change hands at 96.5 versus an equity price of $165.15 Tuesday afternoon.

Stock traded to a high of $168.70 and a low of $162.20 before closing the day at $163.96, a decrease of 1.51%.

The cybersecurity firm announced it was acquiring cloud-delivery provider CloudGenix, Inc. for $420 million prior to the market open on Tuesday.

Mentioned in this article:

Carnival Corp. NYSE: CCL

Palo Alto Networks Inc. NYSE: PANW

Workday Inc. Nasdaq: WDAY

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