Workday, Cornerstone OnDemand deals eyed ahead of pricing; Navistar drops after earnings

By Rebecca Melvin

New York, June 11 -Workday Inc.'s $440 million, dual-tranche offering of convertibles was not looking overly cheap Tuesday ahead of the deal's final terms being fixed after the market close, but the convertible bond market was pretty interested anyway as new issuance continues to trickle through at a decent rate that is more than double last year's pace.

Both the five-year and seven-year tranches of Workday and the planned Cornerstone OnDemand Inc. $220 million of five-year convertibles were seen in the gray market at about 100.25 offered, with no bid, a New York-based trader said Tuesday afternoon.

"People are just fishing around to determine where the bid might be," he said.

Valuations on the Cornerstone convertibles varied depending on the credit spread used. At a spread of 500 basis points over Libor, the Cornerstone converts were seen about 2% rich; but using the underwriters' 350 bps spread, they looked fair value, sources said.

The Workday convertibles were also seen 1% to 2% rich, but without a 75 bps for borrow cost, the tranches looked slightly cheap.

The similarities between the deals did not stop there. The three tranches are all $220 million in size, and two- are five-year bullets, while the third is a seven-year bullet. Workday is a cloud-based human resources, payroll and financial management company based in California. Cornerstone is a Santa Monica, Calif.-based cloud learning and talent management software provider. But Workday is much larger, with a market capitalization of $11.6 billion and Cornerstone is a smaller, $2.1 billion company.

Elsewhere, Navistar International Corp.'s 3% convertibles due 2014 traded down about 1.5 points to 99.75 bid, 100.25 offered in conjunction with shares of the Lisle, Ill.-based heavy-duty truck maker, which slumped after the company posted a wider second-quarter loss.

Issuance 'engine running'

With two new deals for $660 million in the market so far this week, following last week's $1.37 billion of new paper in three deals, and with issuance running at a good clip before that, one trader said, "I think the convert issuance engine, after many false starts, has started running again."

For the year to date, there has been $18.96 billion in new U.S. convertible issuance in 57 deals, which is up compared to $9.04 billion in 30 deals for the same period of 2012, according to data compiled by Prospect News.

"I think people want to lock in financing, and we are going to start to see longer paper, like seven years," the trader said.

"Four years of constantly decreasing interest rates are at the end and the market is going to turn the other way," he said. "We are coming out of this incredibly long-term secular bull market in bonds, and we're going to see plenty of convertibles issuance, especially given where stocks are."

Stocks ended sharply lower amid uncertainty about tapering of the Federal Reserve's easy money policies. The Dow Jones industrial average fell 116.57 points, or 0.8%, to 15,122.02; the S&P 500 stock index ended down 16.68 points, or 1%, to 1,626.13; and the Nasdaq stock market lost 36.82 points, or 1.1%, to 3,436.95.

Workday looks rich

The $440 million of Workday convertibles were seen mostly rich at the midpoint of talk. Using a credit spread of 280 bps over Libor and a 30% vol. with 75 bps for stock borrow, the five-year deal modeled 1% rich at the midpoint of talk, a Connecticut-based trader said. Without the stock borrow input, the deal modeled just slightly cheap, or 0.5% cheap.

Using a credit spread of 320 bps over Libor, 30% vol. and 75 bps for borrow cost, the seven-year paper modeled 2.3% rich at the midpoint of talk. Without the stock borrow it modeled 0.3% cheap, the trader said.

The $220 million tranche of five-year convertibles was talked with a 0.5% to 1% coupon and 32.5% to 37.5% initial conversion premium.

The $220 million of seven-year convertible notes were talked at the same premium but with a higher coupon range of 1% to 1.5%.

"It's not cheap," a New York-based trader said. Nevertheless, the deal was of interest to outright and hedged players.

Each tranche is being sold under Rule 144A via Morgan Stanley & Co. LLC, Goldman Sachs & Co. and Barclays as joint bookrunners.

Pricing was expected to occur Tuesday after the market close. Both issues are non-callable with no puts. They have contingent conversion at a price hurdle of 130% and dividend protection.

In connection with the pricing of the notes, Workday plans to enter into a call spread with initial purchasers of the bonds.

Proceeds will be used for general corporate purposes, with a portion retained to pay the cost of the call spread.

Cornerstone looks rich, fair

Using a credit spread of 500 bps over Libor and a 30% vol. makes the Cornerstone OnDemand $220 million of five-year convertibles about 2% cheap, an East Coast-based buysider said.

Using a tighter credit spread of about 350 bps, which was what the underwriter was heard to have been using, the deal modeled fair, a Connecticut-based trader said.

The Cornerstone deal was talked to yield 1.25% to 1.75% with an initial conversion premium of 32.5% to 37.5%, according to a market source.

The Rule 144A offering has an over-allotment option for an addition $33 million of notes and was being marketed by Goldman Sachs and Credit Suisse Securities (USA) LLC.

Upon conversion, the notes will be settled in cash and, if applicable, in shares.

In connection with the pricing of the notes, Cornerstone plans to enter into a call spread with initial purchasers of the notes.

Proceeds will be used for general corporate purposes, with a portion reserved to pay the cost of the call spread.

The notes will be non-callable for life with no puts.

Navistar drops on earnings

Navistar's 3% convertibles due 2014 traded down to 99.75 bid, 100.25 offered on Tuesday from 101.5 on Monday.

It was seen as a significant move even though Navistar shares slid by a seemingly greater magnitude, down $3.11, or 9%, to $31.20 by the end of the session.

Nevertheless, the Navistar bonds weren't expected to slide much more.

"It has a big premium; it's going to move down, but it's not going back down to 92," a New York-based trader said. He didn't think the bonds would slide because he didn't see "a tremendous amount of risk" like there had been previously with the bonds of this company.

Spurring Tuesday's dip was the company's second-quarter earnings report, released after the market close on Monday. The company posted a fiscal second-quarter loss of $374 million, compared with a loss of $172 million in the year-earlier period. Excluding discontinued operations, the loss widened to $4.39 per share from $2.01 a share in the year-earlier period. Analysts were expecting a loss of $1.20 per share.

Revenue fell 23% to $2.53 billion. The truck company cited lower sales and higher warranty costs for the poor quarter.

Mentioned in this article:

Cornerstone OnDemand Inc. Nasdaq: CSOD

Navistar International Corp. NYSE: NAV

Workday Inc. Nasdaq: WDAY

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