Tesla’s new deal in focus, comes ‘under pressure’; ON’s recent deal does ‘OK’; Medicines falters

By Stephanie N. Rotondo

Seattle, March 17 – Tesla Inc.’s new $850 million of 2.375% convertible senior notes due 2022 easily dominated trading on Friday, according to market sources.

The source noted that of the nearly $281 million in convertibles traded as of mid-morning, the new Tesla issue made up over $155 million of the volume.

But while the upsized deal was busy, one source noted that it was “coming under some pressure” post-pricing.

The activity in Tesla continued to overshadow ON Semiconductor Corp.’s new 1.625% convertible notes due 2023, a $500 million deal that priced Tuesday with an initial conversion premium of 35%.

However, that name was still deemed one of the day’s more active credits.

In Friday trading, the ON convertibles were seen at 101.5, a gain of ½ point.

“It’s doing OK,” a sellside source said.

The company’s shares were also slightly higher on the day, rising a penny to $15.25.

Away from recent issues, Medicines Co.’s 2.5% convertible notes due 2022 and 2.75% convertible notes due 2023 were notable as the company’s shares dropped as much as 20% on the day.

The bonds were seen off as much as 28 points in early trading, though those losses were pared a bit by the bell.

The weakness in the equity was attributed to an announcement from Amgen on Friday regarding the efficacy of its cholesterol drug, Repatha, which disappointed the market.

Tesla comes cheap

Tesla’s new 2.375% convertibles – or the C convertibles – were “crunching a little,” a trader said, after the company grew the new issue to $850 million from $750 million.

In early trading Friday Tesla’s convertibles and stock had been better but those gains were given up as the session progressed.

The trader speculated that the deal was increased “out of greed,” as usually when deals are grown, there is “appropriate demand” and the bonds hold at or above the original issue price.

The trader also noted that “the entire complex is down,” seeing the 1.25% B convertible notes due 2021 coming in “about 1.25 points.

“I would think those would hold up better,” he said, given that the new notes and the Bs have “comparable yields.”

The trader saw the C convertibles trading at 99.25 bid, 99.75 offered.

Earlier in the day, a source pegged the 2.375% convertibles at 99.75 against a stock price of $263.29.

The 1.25% B convertible was initially seen ½ point better at 96 in Friday trading, though it ended about unchanged at 95.25. The 0.25% A convertibles due 2019 were also initially up about ½ point, trading near 98.5.

But those closed about unchanged as well, around 98.

As for the stock, it finished the day down 55 cents at $261.50. The equity was up $1.04 to $263.09 at mid-morning.

The new convertibles came with an initial conversion premium of 25%. Price talk was for a 1.875% to 2.375% yield and a conversion premium of 25% to 30%.

“I think the Tesla terms were good,” said one convertible market veteran.

“By today’s standards, 2.375% interest isn’t bad, and 25% is an attractive premium for a volatile stock. Moreover, this is a volatile stock with an exciting story that suggests huge upside price potential.

“The credit is enhanced by the large equity market cap relative to net debt – roughly 7 times net debt – which suggests Tesla can issue more convertibles if need be,” the veteran continued. “Default risk is far away, so there should be downside protection if the stock falters.”

Goldman Sachs & Co., Deutsche Bank Securities Inc., Citigroup Global Markets Inc., Morgan Stanley & Co. LLC, Barclays Capital, BofA Merrill Lynch and Credit Suisse Securities (USA) LLC were the bookrunners.

The deal includes a $127.5 million over-allotment option, increased from $112.5 million.

Conversions will be settled in cash, common stock or a combination, at the company’s option. The initial conversion price is $327.50 per share.

In parallel with the convertibles, Tesla also sold $347.4 million in common stock, upsized from $250 million. The equity offering includes a $52.2 million greenshoe.

Elon Musk, Tesla’s chief executive officer, plans to purchase $25 million of the stock.

Proceeds from both offerings will be used to strengthen the company’s balance sheet, to further reduce any risks associated with the rapid scaling of the business due to the launch of the Model 3 and for general corporate purposes.

Tesla is a Palo Alto-based car manufacturer.

Medicines’ meltdown

Medicines’ convertibles were the second largest trader of the day, a source said, as the market reacted poorly to Amgen’s announcement regarding its cholesterol drug.

At one desk, Medicines’ 2.75% convertibles were seen off 10 points at 118 while the 2.5% convertibles were called 10.25 points weaker at 157.5.

Another source said the 2.75% paper spent most of the day trading in the 109 to 110 area, though at the end of the day, the bonds were trading with a 114 handle. As for the 2.5% notes, they started the day around 146, but drifted down to close in the 140 area.

That compared to previous trades at 167.25, the source said.

The closing levels were better than mid-morning quotes, however.

At mid-morning, one sellsider pegged the 2.75% convertibles at 109, a loss of about 17 points on the day. The 2.5% convertibles were seen at 140.875, off over 28 points.

The Parsippany, N.J.-based pharmaceutical company’s shares meantime finished down $4.20, or 8.1%, at $48.38. Earlier in the day, the stock was down as much as 20%.

On Friday, Amgen said that its cholesterol drug Repatha cut the risk of heart attack, stroke and cardiovascular death by 20%, based on its latest study results.

But the market was disappointed with the results, as expectations were for a 24% reduction.

Amgen made the announcement at the American College of Cardiology annual meeting in Miami.

Medicines is developing its own anti-cholesterol drug inclirisan, which uses a similar mechanism to the Amgen product.

Medicines gave its own presentation at the meeting on Friday, announcing that Phase 2 results of inclisiran indicated that the product was safe and well tolerated.

Medicines is producing the drug in partnership with Alnylam.

That news likely had something to do with the stock paring its losses by the end of the session.

Mentioned in this article:

Medicines Co. Nasdaq: MDCO

ON Semiconductor Corp. Nasdaq: ON

Tesla Inc. Nasdaq: TSLA

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