By Abigail W. Adams
Portland, Me., March 9 – New paper was the focus of the convertible space on Friday with three deals totaling $960 million making their market debut.
Etsy, Inc. priced $300 million in five-year convertible notes after the close on Thursday at 99 with a fixed coupon of 0% and a fixed initial conversion premium of 37.5%, according to a market source.
The 0% convertible notes were trading up about 1.5 points on a dollar-neutral basis from their issue price of 99 early in Friday’s session and were higher pre-open, a market source said.
“It was set up as a 30% hedge happy meal,” a market source said.
Guidewire Software Inc. priced an upsized $360 million of seven-year convertible notes after the market close on Thursday with a coupon of 1.25% and an initial conversion premium of 30%.
“From a distance this deal has pretty much everything,” said Bill Feingold, co-founder of Hillside Advisors LLC. “Big market cap relative to the deal, new equity infusion underneath, high-flying stock that could pretty much go anywhere, up or down, but from a pretty solid company.”
The new 1.25% notes were seen up about 1.5 to 2 points dollar-neutral from their issue price, another market source said.
The market caps of the recent issuers “are fantastic,” a market source said, but the deals are pricing too rich. “It’s too bad you’re not getting paid to own converts.”
However, there was certainly strong demand for the new deals, the source said.
Etsy and Guidewire collectively accounted for almost half of the total trading volume in the secondary market by mid-afternoon.
While new deals from Guidewire and Etsy expanded on their market debut, Deutsche Bank AG, London Branch’s 1% cash-settled equity-linked notes linked to the common stock of Voya Financial, Inc. were not trading.
There was an offer at 101.75 in the afternoon but no bid, a market source said.
While Deutsche’s 1% notes due 2023 were not seen trading, JPMorgan Chase’s 0.25% cash-settled equity linked notes due 2023 tied to Voya Financial stock continued to trade around par during Friday’s session after dropping 4 points on Thursday when Deutsche announced its deal.
Etsy expands
Etsy’s 0% notes due 2023 were in high demand on Friday with good volume seen from both buyers and sellers, a market source said. Etsy priced shortly after announcing the launch of the offering after the market close Thursday.
Price talk for the bought deal had been for an issue price of 98.5 to 99.5, a fixed coupon of 0% and a fixed initial conversion premium of 37.5%.
The price range was expanded from 98.5 to 99 initially.
It was unclear if Etsy allowed the underwriters to price below par or if underwriters sacrificed some of their fees to price at a discount to “move the deal out the door,” a market source said
Net proceeds from the deal are expected to be $291 million, or $335 million if the $45 million greenshoe is exercised in full.
The notes were seen up 1.5 point dollar-neutral early in Friday’s session and up about 1 point dollar-neutral later in the afternoon, according to market sources.
The deal “was set up as a 30% hedge happy meal,” a market source said. Proceeds were used to repurchase up to $42 million of the company’s stock at a purchase price of $23.68.
The Etsy deal was almost a No No, a convertible bond with a 0% coupon and 0% yield to maturity, a structure common in the 1990s, a market source said.
Investors were willing to forgo interest payments to be able to participate in some of the upside of stock. Etsy stock closed Friday at 27.93, an increase of 5.88%.
Guidewire has everything
Guidewire’s offering of 1.25% convertible notes due 2025 appeared to have everything one was looking for in a convertible notes deal, including the infusion of new equity, and a high-flying stock, Feingold said.
“It has decent optics,” Feingold said.
Guidewire priced an upsized $360 million of seven-year convertible notes after the market close on Thursday with a coupon of 1.25% and an initial conversion premium of 30%.
Pricing came at the rich end of talk for a coupon of 1.25% to 1.75% and at the midpoint of talk for an initial conversion premium of 27.5% to 32.5%, according to a market source.
Concurrently with the pricing of the convertible notes, Guidewire priced $200 million, or 2,285,714 shares, of common stock at a public offering price of $87.50. The common stock offering carries a greenshoe of $30 million, or 342,857 shares.
“The size is big enough that funds can take a meaningful position without having so much that liquidity becomes a problem, yet there is still the potential for some scarcity value,” Feingold said.
The new 1.25% notes were seen up about 1.5 to 2 points dollar-neutral throughout the session, market sources said.
“There’s pretty good demand across the board,” a market source said. “The market is still looking for paper.”
Overseas buyers were getting involved in Guidewire, another market source said. “The premium was not too horrendous,” the source said. “Even though it’s a low volatility stock, if the volatility picked up you could monetize it.”
Guidewire stock closed Friday at $87.95, a decrease of 0.31%.
Deutsche doesn’t trade
While new deals from Guidewire and Etsy were in focus on Friday, Deutsche Bank’s 1% cash-settled equity-linked notes linked to the common stock of Voya Financial, Inc. were not seen on the tape early in the session.
Later in the afternoon, there was an offer of 101.75 but no bid, a market source said.
Deutsche Bank priced $300 million of cash-settled equity-linked notes linked to the common stock of Voya Financial with a 1% coupon and a 30% threshold price after the market close.
The deal came at the cheap end of talk for a coupon of 0.5% to 1% and the middle of talk for a threshold of 27.5% to 32.5%.
The threshold price will be set using a 30% premium to the initial price, which will be determined over a five-day averaging period of Voya common stock.
The terms of Deutsche Bank’s cash-settled equity-linked notes are similar to JPMorgan’s 0.25% cash-settled notes linked to Voya stock, which also waited until the end of a five-day averaging period to set the initial price.
While Deutsche’s 1% notes did not trade on Friday, JPMorgan’s 0.25% notes due 2023 did. The notes traded in the 100 to 101 range on Friday after dropping 4 points to trade at 100 on Thursday after Deutsche announced the deal.
“That was quite a drop,” a market source said. Voya Financial closed Friday at $52.94, an increase of 3.22%.
Mentioned in this report:
| Etsy, Inc.: | Nasdaq: ETSY
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| Guidewire Software Inc.: | NYSE: GWRE
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| Voya Financial, Inc.: | NYSE: VOYA
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