Convertibles primary market ‘not shut’; Fortive improves; RingCentral notes active

By Abigail W. Adams

Portland, Me., March 30 – The convertibles primary market remained dormant on Monday with more than three weeks since the last deal priced.

While dormant, the primary market is not closed, with investors interested in new paper and negotiations with prospective convertible issuers ongoing, sources said.

The question is not if but when a new deal will surface.

Meanwhile, the secondary space launched the week with light trading volume as equity markets continued to recover.

There was $62 million in reported volume about one hour into Monday’s session and $355 million in the late afternoon.

RingCentral Inc.’s 0% convertible notes due 2025 were active with the notes ticking higher on an outright basis as stock wavered between gains and losses.

Fortive Corp.’s 0.875% convertible notes due 2022 continued to improve with the short-duration investment-grade notes looking cheap, a source said.

Primary

The convertibles primary market has not priced new paper since the wave of deals that cleared the market on March 4.

While the recent deals are all languishing below par, there is still investor appetite for new paper, sources said.

There was an active pipeline before capital markets felt the full impact of the coronavirus and several potential issuers are still interested in tapping the convertibles market.

However, it is a question of timing and pricing.

“It’s a strange situation,” a market source said.

While there are investors who will buy, companies that are in a decent financial position are reluctant to launch a deal at the current price, a market source said.

For companies that need to price due to liquidity issues, “there will be a price to pay,” the source said.

Pricing terms will be “materially wider” than what the market has previously seen. “We’re not going to see 0s, up 50% anytime soon,” the source said.

Several of those companies may also be able to tap funds through the $2 trillion stimulus package, reducing their need to raise capital through the convertibles market, the source said.

RingCentral was the last company to price a convertible deal with terms that included a 0% coupon and a 50% initial conversion premium.

Square Inc. was able to price $1 billion of five-year convertible notes with a coupon of 0.125% and an initial conversion premium of 50% on March 3.

Square stock was $80.67 when the convertible notes priced.

The 0.125% notes rose 2 points outright to 87 on Monday with stock closing the day at $55.00, an increase of 3.11%.

Enphase Energy Inc. – one of the last deals to clear the primary market – priced $320 million of five-year convertible notes with a coupon of 0.25% and an initial conversion premium of 52.5% on March 4.

Enphase Energy stock was $53.47 when the convertible notes priced.

The notes were trading just shy of 81 last Friday. Stock closed Monday at $32.00, a decrease of 1.17%.

With the earnings season blackout converging with what many have already labeled a global recession, future primary market activity is a question of pricing and timing, sources said.

RingCentral active

RingCentral’s 0% convertible notes due 2025 continued to gain on both an outright and dollar-neutral basis on Monday.

The 0% convertible notes traded up another 1.5 points outright to 97.5 with stock up about 3% early in Monday’s session.

However, activity in the notes tempered as stock cratered into the afternoon.

RingCentral stock traded as high as $256.60 and as low as $223.19 before closing the day at $228.03, a decrease of 4.58%.

The cloud-based communications and collaboration solutions company’s stock has been struggling to recoup its losses from the past few weeks.

While the notes have improved over the past few sessions, they remain contracted from the time they priced, a source said.

RingCentral priced $1 billion of the 0% convertible notes at par with a stock reference price of $240.28 on Feb. 27.

Fortive improves

Fortive’s 0.875% convertible notes due 2022 continued to improve on Monday.

The 0.875% notes gained another 1.5 points outright to trade as high as 92.75 in the late afternoon, a market source said.

The short-duration investment-grade notes were looking cheap, a market source said.

The notes have been major volume movers throughout the past few weeks.

They traded as low as 88 on March 20 but have slowly gained as the convertible market has firmed.

Mentioned in this article:

Enphase Energy Inc. Nasdaq: ENPH

Fortive Corp. NYSE: FTV

RingCentral Inc. NYSE: RNG

Square Inc. NYSE: SQ

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