Planned U.S. Steel convertibles look cheap ahead of pricing; Workday drops outright

By Rebecca Melvin

New York, Oct. 16 – Convertibles market players were sizing up United States Steel Corp.’s proposed $300 million of seven-year convertibles on Wednesday after the deal was announced late Tuesday.

U.S. Steel planned to price $300 million of seven-year convertible notes (expected ratings: B3/B/B+) after the market close with a coupon of 4% to 4.5% and an initial conversion premium of 27.5% to 32.5%, according to market sources.

“That was the focus in the market today,” a New York-based market source said.

Also on Wednesday, a sharp drop in the underlying shares of Workday Inc. caused the convertibles to trade actively.

Workday’s stock dropped amid commentary among analysts covering the company, some of whom questioned the possibility of slowing growth for the Pleasanton, Calif.-based software company’s Human Capital Management software, which is a core business for the company.

Workday shares closed down $20.50, or 11.3%, to $160.46, paring a bit of its loss, which was as much as 13.3% earlier in the session.

The convertibles “traded a ton on the back of a solid down move in the stock,” a source said.

Workday’s 0.25% convertibles due 2022 traded last at 126.325 and actively around 126.5, which was down from 136 to 137 on Tuesday.

Trading also continued in Akamai Technologies Inc. after a busy Tuesday. Shares of the Cambridge, Mass.-based cloud computing company were down a negligible amount, and the price of the convertibles reflected that small move. The Akamai 0.125% convertibles due 2025 traded around 114.6 on Tuesday compared to 114.8 on Wednesday. Akamai shares closed at $90.93, which was off 40 cents, or 0.4%.

U.S. Steel looks cheap

The U.S. Steel deal, which was expected to price after the market close on Wednesday, looked about 3 points cheap at the midpoint of price talk, according to two market sources.

At a 4.25% coupon and a 30% premium, the deal looked to be worth 103.47, using a credit spread of 900 basis points over Libor and a 45% vol., according to one source.

A second market source said the deal looked 3 points cheap at the midpoint of talk, using a credit spread of 875 bps over Libor and 42% vol.

The company has a “piece of paper just ahead of this in 2026 that trades around plus 850 [bps],” a third source said, so that was the thinking going into the credit spread assumption. And the ballpark for vol. is 42% to 45%.

One source said that the deal was pricing at 5%, which was beyond the cheap end of price talk for the coupon, and at 27.5% premium, which is the cheap end of talk for the premium. A syndicate source could not confirm that U.S. Steel’s deal had priced by Prospect News’ deadline.

Another New York-based market source said via e-mail, “it has to be cheap because I can’t see outrights liking this name. Stock chart is awful, credit spreads are significantly wider versus earlier this year, and I don’t know what catalysts could be for rebound near term.”

This source said the safer vol. choice was 40% (stock borrow off top rate), which would shave at least a point off fair value. “Widen the spread 50 bps to 100 bps, and there goes all your cheapness.”

Payment on U.S. Steel’s last convertible issue was accelerated in March 2015 after U.S. Steel Canada Inc. filed for protection from creditors and may not have been able to make payments on a C$150.6 million note to the Province of Ontario. That convertible was upsized to $275 million from $250 million and came at the midpoint of talk for a 2.75% six-year convertible note pricing in March 2013.

The proceeds of U.S. Steel’s new convertibles are earmarked for general corporate purposes, including strategic investments. It is non-callable for four years and then provisionally callable if the stock price exceeds 130% of the conversion price, and there are no puts.

Mentioned in this article:

Akamai Technologies Inc. Nasdaq: AKAM

United States Steel Corp. NYSE: X

Workday Inc. Nasdaq: WDAY

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