Convertibles market eyes Hope Bancorp; EZCorp on tap; Teladoc expands; Gogo contracts

By Abigail W. Adams

Portland, Me., May 8 – The convertibles secondary space saw another day of light trading volume with $300 million on the tape less than an hour before the closing bell.

However, the primary market has been active with three new deals totaling $1.05 billion set to price in the next two days.

All three deals come from the financial sector, marking a shift away from the tech heavy “high vol., low coupon” new deals of the first quarter, a market source said.

Hope Bancorp Inc. planned to price $200 million of 20-year convertible notes after the market close on Tuesday with price talk for a coupon of 1.75% to 2.25% and an initial conversion premium of 22.5% to 27.5%.

The deal models out to par or 1 point cheap depending on the credit spread used, sources said.

Meanwhile, EZCorp Inc. plans to sell $100 million of seven-year convertible notes after the market close on Tuesday with price talk for a coupon of 2% to 2.5% and an initial conversion premium of 20% to 25%.

Morgan Stanley & Co. LLC is the bookrunner for the Rule 144A deal, which carries a greenshoe of $15 million.

The deal is EZCorp’s third offering of convertible notes.

AXA SA plans to price $750 million of three-year bonds mandatorily exchangeable for AXA Equitable Holdings, Inc. on Wednesday alongside AXA Equitable Holdings’ IPO, which is aiming to be the largest IPO since Alibaba went public.

Price talk is for a coupon of 6.75% to 7.25% and an initial exchange premium of 17.5% to 22.5%. AXA Equitable is targeting a $3.5 billion IPO with share prices between $24.00 and $27.00.

Meanwhile, new paper from Teladoc Inc. remained in focus in the secondary market with the 1.375% notes due 2025 continuing to improve outright and dollar neutral.

However, Gogo Inc.’s 3.75% convertible notes continued to drop on an outright and dollar-neutral basis with the inflight broadband connectivity service provider’s stock “getting crushed,” a market source said.

Eyeing Hope

Hope Bancorp’s $200 million offering is expected to do well although sources described the deal as “boring” and “not a thrill.”

The underwriters are marketing the deal with a credit spread of 125 bps and a 25% vol., which models 1 point cheap, a market source said.

The credit spread “seems a little aggressive though,” the source said. The credit spread looked to be more like 175 bps, according to the source.

The 175 bps credit spread was also the assumption used by other sources.

With a credit spread of 175 bps and a 25.5% vol., the deal models to just above par, another source said. “It’s another fair value,” the source said.

However, the new paper is bank paper and will attract investors interested in the financial sector and the name, sources said.

“It’s bank paper. These days bank paper is like an endangered species,” a market source said.

While the convertible notes are non-rated, Hope Bancorp “is as close to investment grade as it’s going to get,” the source said.

However, the yield on the common stock is 3%, which is far greater than the yield talk for the convertible bond.

“A lot of the hedge guys aren’t going to play this, especially with the upside-down coupon,” the source said.

While the difference between the coupon and the dividend is not as egregious as some other names in the financial sector, it does make the deal less attractive and difficult to hedge, a source said.

Hope Bancorp is the holding company for the Bank of Hope, the only regional Korean-American bank in the United States.

While the Bank of Hope is based in the United States, the name may attract the interest of some overseas players, a market source said.

With the offering small, one source said they would not be surprised if four or five investors end up holding the whole issue.

In connection with the offering, Hope Bancorp will repurchase up to $100 million of common stock.

Teladoc notes expand

Teladoc’s new 1.375% notes continued their upward momentum on Tuesday with the notes again climbing both outright and dollar neutral.

The 1.375% notes remained in focus in the convertible space, with the notes again the most actively traded of the day with about $20 million of the bonds on the tape.

The notes were seen trading up to 106 versus a stock price of $45.20. They were again expanded dollar neutral about 0.5 point, a market source said.

The 1.375% notes were also the volume leader on Monday and were trading just south of 103.5 late in the afternoon.

The notes have expanded about 1.5 points on a dollar-neutral basis since hitting the market on Friday.

Gogo’s contraction continues

Gogo’s 3.75% convertible notes due 2020 continued to lose ground on an outright and dollar-neutral basis on Tuesday as its stock dropped more than 20% to the $5.00 range.

The 3.75% convertible notes emerged as a volume leader late in the afternoon on Tuesday with the notes plummeting to the 82 to 83 range. They were seen trading at 82.7 versus an equity price of $5.51.

With a 25% delta, the convertible notes should have traded at 85, a market source said.

The notes were at 84.5 mid-afternoon “but the next transaction is going to be a contraction,” a market source said.

And it was.

In a flurry of late session trading action, the notes traded as low as 92.25. The notes were contracting “because people are getting nervous about the stock,” a market source said.

Gogo stock closed Tuesday at $5.54, a decrease of 29.56%.

Gogo’s stock has been in a freefall since the company pulled its forward guidance for adjusted EBITDA in its first-quarter earnings report, citing an ongoing business planning process.

The convertible notes dropped 4 points outright and were down about 1 point dollar neutral as Gogo stock slid 13% after the announcement on Friday.

Gogo was downgraded to Caa1 from B3 by Moody’s Investors Service on Tuesday.

Mentioned in this article:

EZCorp Inc. Nasdaq: EZPW

Gogo Inc. Nasdaq: GOGO

Hope Bancorp Inc. Nasdaq: HOPE

Teladoc Inc. NYSE: TDOC

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