Morning Commentary: Convertibles primary to price $1.3 billion; market eyes Twitter, Avaya deals

By Abigail W. Adams

Portland, Me., June 6 – Many in the convertibles secondary space have been looking to the primary market and questioning what the week will bring for new deals. The answer came on Wednesday with $1.3 billion in two deals set to price after the market close.

Twitter, Inc. plans to price $1 billion of six-year convertible notes after the market close on Wednesday with price talk for a coupon of 0.125% to 0.625% and an initial conversion premium of 40% to 45%, according to a market source.

The deal is being marketed with a credit spread of 150 basis points over Libor and a 40% vol., according to a market source. “Nothing exciting there,” a market source said.

Sources pegged the deal at fair value or about 0.25 point cheap at the midpoint of talk.

Twitter’s 1% convertible notes due 2021 and 0.25% convertible notes due 2019 were active early in Wednesday’s session.

The 0.25% notes have a low delta and trade cheap for a paper with one and half years until maturity, a market source said. The notes had been trading in the 96 range with the yield north of 3%. They traded up to 97 early in Wednesday’s session.

Twitter’s 1% convertible notes due 2021 have a higher delta but still carry a large premium, a market source said. The 1% notes were down about 0.25 point outright to trade at 95.25 early in Wednesday’s session with stock up about 35 cents.

With both the 0.25% and 1% notes carrying a premium of almost 95%, equity accounts will be moving out of the old convertible notes to take advantage of the lower premium on the new ones, a market source said.

The pricing of the convertible notes comes just before Twitter joins the S&P 500 on Thursday. Twitter stock broke out to a new 52-week high on Tuesday after the announcement.

Avaya Holdings Corp. plans to price $300 million of five-year convertible notes after the market close on Wednesday 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.

The deal is being marketed with a credit spread of 450 bps over Libor and a 32% vol., a market source said. Sources pegged the deal between fair value and 0.86 point cheap.

“That spread looks a little tight,” a market source said. Avaya Holdings emerged from reorganization about one year ago and has a $3 billion term loan that they are trying to refinance, the source said.

However, the equity of companies that emerge from bankruptcy is typically cheap. “They may be selling the cheap equity story,” a market source said.

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