Morning Commentary: Rapid7 convertible notes offering on deck

By Abigail W. Adams

Portland, Me., Sept. 5 – The convertibles primary market saw an active start to the week with one refinancing deal on deck.

Rapid7 Inc. plans to price a $250 million offering of convertible notes due March 15, 2029 after the market close on Tuesday with price talk for a coupon of 1.25% to 1.75% and an initial conversion premium of 27.5% to 32.5%.

The deal was heard to be in the market with assumptions of 350 basis points over SOFR and a 42% vol.

Using those assumptions, the deal looked about 2.4 points cheap at the midpoint of talk, a source said.

The deal is coming as a refinancing with proceeds to be used to repurchase a portion of the company’s 2.25% convertible notes due 2025 in privately negotiated transactions.

In contrast to the general theme in the market of wider coupon ranges, the coupon range of Rapid7’s new offering is tighter than its 2025 notes, which the company priced in April 2020.

However, the pricing of Rapid7’s latest offering is largely in line with the valuation of Rapid7’s outstanding convertible notes, a source said.

The 2.25% notes have been trading around 107 and carry about a 30% premium, a source said.

The conversion premium for the deal on deck will be roughly the same as the 2.25% notes.

The tighter coupon range is largely the result of the increased optionality from the vol. that will come with the longer duration of the new notes, the source said.

With the deal modeling cheap and the refinancing driving demand, the new offering is expected to do well.

While the primary market saw an active start to the week, the secondary space saw a slow return from the Labor Day weekend in the United States.

There was $39 million of convertibles trading on the tape about one hour into the session with no name seeing more than $3 million in reported volume.

Equity indexes were in the red early Tuesday after making strong gains the previous week.

The Dow Jones industrial average was down 53 points, or 0.16%, the S&P 500 index was down 0.23%, the Nasdaq Composite index was down 0.15% and the Russell 2000 index was down 1.77% shortly before 11 a.m. ET.

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