Morning Commentary: New KBR convertibles offering eyed; Lumentum notes drop outright

By Abigail W. Adams

Portland, Me., Nov. 12 – The week of Nov. 12 promises to be a busy one for the convertibles primary market after light new deal activity thus far in the fourth quarter.

KBR Inc. plans to price $350 million of five-year convertible notes after the market close on Monday with price talk for a coupon of 2% to 2.5% and an initial conversion premium of 27.5% to 32.5%, according to a market source.

Using a credit spread of 450 basis points over Libor and a 35% vol., the deal models out to fair value, a market source said.

The engineering, procurement and construction company has a solid EBITDA, which could be an argument for a tighter credit spread, the source said.

However, the company’s cash flow is “shaky.” While improved over the second quarter, cash flow was still negative in the third quarter, “ergo some of the caution,” the source said.

KBR also has $1.4 billion in secured debt in the form of term loans, revolvers and letters of credit.

The longer dated term loan due in 2025 has a credit spread of 375 bps over Libor, and the shorter dated term loan due 2023 has a credit spread of 300 bps over Libor, the source said.

Meanwhile, trading volume in the secondary space was light as equity markets opened in the red with the tech sector again weighing down markets as investors showed jitters over iPhone demand.

About $40 million was on the tape early in the session.

Lumentum Holdings Inc.’s 0.25% convertible notes due 2024 were in focus with the notes tumbling alongside stock.

The 0.25% notes dropped more than 18 points outright to trade just shy of 96 early Monday. Lumentum stock was down more than 28% early in Monday’s session.

Lumentum stock cratered on Monday after the optical components maker slashed its second-quarter guidance due to one of its largest customers asking it to reduce shipments.

Apple is responsible for 30% of Lumentum’s revenue, MarketWatch reported.

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