Morning Commentary: Lumentum convertible offering eyed, outstanding notes active

By Abigail W. Adams

Portland, Me., June 13 – The convertibles primary market had one new offering on deck as markets digested the latest piece of inflationary data and awaited the Federal Open Market Committee’s Wednesday announcement.

Serial convertible issuer Lumentum Holdings Inc. plans to price $500 million of long six-year convertible notes after the market close on Tuesday in a refinancing of its 2024 notes.

While the deal modeled cheap based on underwriter’s assumptions, its real value will come from the buyback of its outstanding notes.

The new deal was being marketed against a continued strong equity backdrop with indexes extending their gains after the latest Consumer Price Index report.

The report was mixed with the annual core CPI continuing to accelerate at a faster-than-anticipated clip, while headline CPI decelerated more than expected.

Core CPI was 5.3% versus the 5.2% expected and CPI was 4% versus the 4.1% expected.

However, equities were strong with the Dow Jones industrial average up 149 points, or 0.44%, the S&P 500 index up 0.57%, the Nasdaq Composite index up 0.52% and the Russell 2000 index up 1.54% shortly before 11 a.m. ET.

The secondary space was active with $109 million in reported convertibles trading volume about one hour into the session.

Lumentum’s 0.5% convertible notes due 2028 were lower in active trade on the heels of the latest offering.

Lumentum on tap

Lumentum plans to price $500 million of long six-year convertible notes 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 400 basis points over SOFR and a 40% vol.

Using those assumptions, the deal looked 0.84 point cheap at the midpoint of talk, a source said.

While the deal did not scream cheapness, its real value comes from the use of proceeds.

Proceeds will be used to repurchase a portion of the company’s 0.25% convertible notes due 2024 and up to $150 million of its common stock in privately negotiated transactions.

Refinancing deals tend to come richer than stand-alone offerings because investors participating in the exchange get a kiss, a source said.

While Lumentum’s latest offering was in the works, the company’s 0.5% convertible notes due 2028 were lower in heavy volume.

The 0.5% notes shaved off 0.75 point outright with stock strong early in the session.

The 0.5% notes were trading at 77.625 versus a stock price of $53.18 early in the session, according to a market source.

There was $8 million in reported volume.

Lumentum’s stock was trading at $54.03, an increase of 1.39%, shortly before 11 a.m. ET.

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