Convertible issuance heavy during week; Ligand dominates trading; AmTrust loses ground

By Abigail W. Adams

Portland, Me., May 18 – The convertibles space saw the heaviest volume week for new issuances to date this year with $3.1 billion pricing over eight deals.

“It’s been a great week for convertibles,” a market source said.

Despite the influx of new paper, the secondary market remained strong with accounts adding to their existing holdings and not selling to make room, a source said.

Ligand Pharmaceuticals Inc. rounded out the week with the pricing of a $650 million offering of five-year convertible notes before the market open on Friday. The notes dominated trading activity in the secondary space with the notes seen above par but largely flat on a dollar-neutral basis, sources said.

While trading paled in comparison to their debut on Thursday, Akamai Technologies Inc.’s new 0.125% convertible notes due 2025 were active with the notes largely trading in line dollar neutral, a market source said.

Twilio Inc.’s recently priced 0.25% convertible notes due 2023 remained active in the space with the notes also largely trading in line dollar neutral, a market source said.

New Relic Inc.’s recently priced 0.5% convertible notes due 2023 shot up alongside its stock on Friday with the notes now trading north of 106.

Alteryx Inc.’s 0.5% convertible notes due 2023 continued to struggle on Friday with the notes trading below their discounted issue price of 98.

While new paper has occupied the attention of convertibles space over the past week, AmTrust Financial Services Inc.’s 2.75% convertible notes due 2044 returned to focus on Friday.

The notes were down on an outright basis after activist investor Carl Icahn posed a challenge to the efforts of the primary owners to take the property and casualty insurance company private.

A good week for convertibles

The convertibles space saw its heaviest new deal volume week of the year this past week with $3.1 billion pricing over eight deals.

Despite the influx of new paper, the secondary market held strong with few names seen softer, a market source said.

“There’s so much money chasing the product, accounts aren’t making room,” the source said. Rather than selling existing holdings, accounts are adding to them.

Richer or liquid names may start to come in if the convertibles space sees another week with a large influx of new paper, the source said, but that did not happen over the past week.

The convertibles space typically sees more calls, redemptions or maturities than new issuances. That may not be the case in 2018 with new issuances poised to outpace convertible notes on the verge of retirement, the source said.

Ligand in focus

New paper from Ligand dominated the secondary market on Friday although the notes were largely flat in high-volume trading.

Ligand priced $650 million of the five-year convertible notes at the midpoint of talk with a coupon of 0.75% and an initial conversion premium of 30%.

Price talk had been for a coupon of 0.5% to 1% and an initial conversion premium of 27.5% to 32.5%, according to a market source.

The notes were marketed with a credit spread of 225 basis points over Libor and a 32% vol., a market source said. While some sources felt the credit spread was too tight, it was just wide of names on the double B health care index, the source said.

Ligand is non-rated. However, the pharmaceutical company’s outstanding convertible notes have more than doubled in price over the past year.

The company has been a great performer for investors with strong EBITDA, stable predictable cash flows and high margins, the source said, in explanation of the credit spread assumption.

“They’re getting to the point where they could be approaching a double B credit,” the source said.

The deal was “well oversubscribed” during bookbuilding with the majority of the allocation going to fundamental accounts and mutual funds, the source said.

The 0.75% notes dominated trading activity in the secondary space with $128 million of the bonds traded by mid-afternoon. They were seen trading between par and 100.75, a market source said.

Approximately $100 million of the new paper appeared to go up on swap and was moving with a 60% delta, a source said.

The notes were trading largely flat or slightly contracted by about 0.125 point dollar neutral, a market source said.

Ligand’s stock closed Friday at $194.99, an increase of 2.01%.

Akamai day two

While Ligand’s new 0.75% convertible notes were in the spotlight on Friday, the trading frenzy surrounding Akamai Technologies’ 0.125% convertible notes due 2025 simmered.

While trading activity paled in comparison to their Thursday debut, the notes remained one of the major volume movers during Friday’s session.

The notes were seen trading at 101.25 with stock down. They were largely unchanged dollar neutral, a market source said. Akamai’s stock closed Friday at $75.34, a decrease of 0.99%.

The notes were expanded about 0.5 point dollar neutral on Thursday.

New deal roundup

New Relic’s recently priced 0.5% convertible notes due 2023 shot up on Friday alongside its stock. While the notes were relatively unchanged dollar neutral, they reached new heights on an outright basis.

The notes were trading north of 106 with the stock up more than 4% on Friday.

New Relic stock closed Friday at $94.63, an increase of 4.99%. Of the deals that priced over the past week, New Relic’s 0.5% convertible notes have seen the strongest performance in the secondary space.

They were trading north of 102 on their market debut on Wednesday and were seen expanded about 1 point dollar neutral, although outright players were predominately interested in the notes, sources said.

Twilio’s 0.25% convertible notes also put in a solid performance in the secondary market. The notes were seen trading up to 102.5 with the stock up more than $1 on Friday.

The notes also remained relatively unchanged dollar neutral, a market source said.

“They’re moving with the stock,” the source said.

Alteryx’s recently priced 0.5% convertible notes due 2023 continued to struggle on Friday with the notes dropping below their discounted issue price of 98.

The notes traded down to 97.5 with the stock down $1.50. Alteryx stock closed Friday at $30.85, a decrease of 4.84%.

The notes struggled during bookbuilding with price talk revised to include the discounted issue price and have had a lackluster performance since hitting the secondary space on Wednesday.

While the notes were wrapped around 99 on Wednesday and Thursday, they were flat on a dollar-neutral basis, sources said.

AmTrust drops

While new paper has occupied the convertibles space over the past week, AmTrust Financial’s 2.75% convertible notes due 2044 returned to focus on Friday.

The notes were down on an outright basis after activist investor Carl Icahn posed a challenge to the efforts of the primary owners to take the property and casualty insurance company private.

The notes dropped 2 points outright to trade around 92.

AmTrust’s 2.75% convertible notes climbed more than 22 points outright to trade in the 94 range after the proposed takeout was announced in January.

“They were trading on M&A,” a market source said.

The notes “were in no man’s land” prior to the takeout announcement, another source said.

While AmTrust stock was up on Friday after Icahn announced he would challenge the effort to take the company private, it had little effect on the convertible notes, which move on a very low delta if they move on a delta at all, sources said.

AmTrust stock closed Friday at $13.78, an increase of 2.61%. The quick rise in the stock price is believed to be because Icahn “was out there buying it,” a market source said.

With a high premium and the investor put still a long way out, the notes are becoming less attractive, a source said.

However, the news is not “the worst thing in the world,” a source said. With Icahn’s backing, there is hope the company can refinance and stave off bankruptcy if the takeout does not occur, the source said.

However, based on the company’s balance sheets, the convertible bonds were previously trading in the 70 range, the source said.

Mentioned in this article:

Akamai Technologies Inc. Nasdaq: AKAM

Alteryx Inc. NYSE: AYX

AmTrust Financial Services Inc. Nasdaq: AFSI

Ligand Pharmaceuticals Inc. Nasdaq: LGND

New Relic Inc. NYSE: NEWR

Twilio Inc. NYSE: TWLO

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