Market eyes Rapid7, NII Holdings; Tesla dominates; Horizon on the rise

By Abigail W. Adams

Portland, Me., Aug. 8 – After seeing its busiest months in recent history in May and June, the convertibles primary market has slowed in July and August.

While the deals now are fewer with most of smaller size, they continue with two set to price after the market close Wednesday.

Rapid7, Inc. plans to price $175 million of five-year convertible notes after the market close on Wednesday. Sources pegged the deal fair value to cheap.

NII Holdings Inc. plans to price $75 million of five-year convertible notes.

While the deal was described as “clubby,” it appears decent with the company’s vol. “through the roof,” sources said.

With earnings season drawing to a close, the window of opportunity for new deals is open through next week, sources said.

While the primary market has been known to surprise, if no new deals are announced next Monday and Tuesday, new deal volume is expected to remain light through Labor Day. However, new issue activity in the third quarter is still up 13% year over year.

Meanwhile, Tesla Inc.’s convertible notes dominated trading activity in the secondary space after chief executive officer Elon Musk’s bombshell tweet on Tuesday about taking the company private.

Horizon Pharma plc’s 2.5% convertible notes due 2022 were on the rise on Wednesday after an earnings beat.

Rapid7 fair to cheap

Rapid7 plans to price $175 million of five-year convertible notes after the market close with price talk for a coupon of 0.75% to 1.25% and an initial conversion premium of 30% to 35%, according to a market source.

The deal is being marketed with a credit spread of 325 basis points over Libor and a 37% vol., a source said.

With those assumptions the deal models about 0.20 point cheap at the midpoint of talk, a market source said.

Another source pegged the deal 1.5 points cheap. The deal modeled out to about fair value, another source said.

“I wouldn’t be surprised if it priced on the cheap,” a source said.

NII Holdings ‘clubby’

NII Holdings plans to price $75 million of five-year convertible notes with a coupon of 3.75% to 4.25% and an initial conversion premium of 17.5% to 22.5%, according to a market source.

One source pegged assumptions as a credit spread of 1,300 bps over Libor and 45% vol.

As a telecommunications holding company and with proceeds to be used to help the cash flow of Nextel Brazil, the wide credit spread is called for, a market source said.

The company also has a small market cap at $516 million.

NII’s vol. “is through the roof,” a market source said. It is probably more like 75% but vol. is usually capped at 45%, the source said.

The company’s stock hit a 52-week low in December of 22 cents. Pricing of the notes comes a little more than one week after the company hit its 52-week high of $7.29.

However, the deal is small and “clubby,” another source said, and is not expected to trade much in the secondary space.

The convertible notes offering comes after NII Holdings confirmed on its earnings conference call that it is in the process of selling its Brazil unit.

Tesla dominates

Tesla’s convertible bonds were in focus on Wednesday in the aftermath to CEO Musk’s surprise tweet about taking the company private.

“Tesla’s the only thing trading,” a market source said.

Tesla’s 1.25% convertible notes due 2021 topped the volume chart with more than $25 million on the tape in the late afternoon. They were down about 1 point outright and were seen changing hands at 117.25 versus an equity price of $374.75.

Tesla’s 0.25% convertible notes due 2019 were a close second with $24 million on the tape. They were down about 1.5 points outright and were seen trading at 111.625 versus an equity price of $375.61.

Tesla’s 2.375% convertible notes due 2022 were slower to trade with $9 million on the tape. They were seen changing hands at 125.771 versus a stock price of $370.14.

The 2.375% notes were “in quite a bit,” a market source said. “For some reason they seem to be falling apart.” The notes were down almost 3 points on an outright basis.

The notes were seen coming in about 0.5 point dollar-neutral, a market source said.

Another source pegged the notes in-line dollar-neutral. They tightened last week after the stock surge post-earning and were trading on top of that, the source said.

The credit spread tightened but the vol. picked up in the bonds’ valuation.

The notes were moving more with the equity than on the possibility of a takeout, a market source said.

Tesla stock closed Wednesday at $370.38, a decrease of 2.42%.

Musk’s tweet that he would take the company private for $420 a share was highly unusual with many questioning whether it was sincere or an effort to squeeze out short-sellers.

If the tweet was a product of Musk’s ongoing war with short-sellers, “then he’s got an issue with the SEC. You can’t just say stuff to get the stock higher.”

Usually, there needs to be a high degree of confidence in the financing before a privatization announcement. While the buy-out deal would be “hefty, there’s got to be something to it,” a market source said.

Tesla’s board of directors confirmed that talks about taking the company private began last week.

Horizon rises

Horizon’s 2.5% convertible notes due 2022 were active and making gains on an outright basis in the secondary space after a second-quarter earnings beat.

The notes were quoted at par ¾ bid, 101½ offered versus a stock price of $20.20, a market source said.

They were seen trading at 101.125 versus a stock price of $20.

Horizon stock closed Wednesday at $20.12, an increase of 10.79%.

The 2.5% notes were wrapped around 97 in the run up to the company’s earnings announcement.

Horizon reported non-GAAP earnings per share of 48 cents for the second-quarter, beating analyst expectations for earnings per share of 29 cents.

Mentioned in this article:

Horizon Pharma plc Nasdaq: HZNP

NII Holdings Inc. Nasdaq: NIHD

Rapid7, Inc. Nasdaq: RPD

Tesla Inc. Nasdaq: TSLA

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