Evolent convertibles eyed; Caesars notes drop dollar-neutral; Cree, Herbalife active

By Abigail W. Adams

Portland, Me., Oct. 17 – While primary market activity is expected to remain subdued throughout earnings season, one new convertibles deal is in the works.

Market players were eyeing Evolent Health Inc.’s $125 million offering of seven-year convertible notes, which was expected to price after the market close on Wednesday.

Sources pegged the deal between fair value and ½ point cheap at the midpoint of talk based on underwriters’ assumptions, which sources said were more conservative than some of the deals seen over the past year.

With several of the low coupon tech deals that have priced in 2018 now trading well below par, there is good reason for the caution, a source said.

Cree Inc.’s 0.875% convertible notes due 2023 were described as a “perfect example” of a convertible that has “gotten chopped up in the last couple of months,” the source said.

The 0.875% convertible notes were active on Wednesday after reporting a large earnings beat.

While the notes saw nominal gains on an outright basis, they were still trading well below par.

Herbalife Nutrition Ltd.’s 2% convertible notes due Aug. 15, 2019 also saw heavy trading volume in the secondary space.

However, Caesars Entertainment Corp.’s 5% convertible notes due 2024 were in focus and dropping dollar-neutral amid rumors about a potential buyout of the company.

Evolent Health eyed

Evolent Health plans to price $125 million of seven-year convertible notes after the market close on Wednesday with price talk for a coupon of 1.25% to 1.75% and an initial conversion premium of 30% to 35%.

Underwriters are marketing the deal with a credit spread of 400 basis points over Libor and 40% vol., a market source said.

Sources pegged the deal between fair value and 0.65 point cheap at the midpoint of talk.

The credit spread for the health care services technology provider is wider than many of the deals seen from the tech sector.

“People lost a lot of money in software in the last couple of months,” a market source said, particularly in the low coupon convertible notes whose underlying equity tanked.

The coupons help the bond hold its value on the downside. “This one has a little more of a legitimate coupon,” the source said.

Sources saw the higher coupon as a product of a cautious market saturated with tech paper and increased borrowing costs due to the Federal Reserve rate hikes.

The notes are non-callable for four years and then are callable subject to a 130% hurdle with a make-whole.

Sources questioned the four years of hard call protection, which one source said did not seem to fit with the rest of the terms.

Evolent Health’s stock was down 4.47% early in Wednesday’s session. Stock closed the day at $25.23, a decrease of 3.7%.

The downdraft was most likely the result of hedging activity in preparation for the deal, a market source said.

Cree active

Cree’s 0.875% convertible notes due 2023 were “a perfect example” of a low coupon convertible note from the tech sector that has lost value in the past couple of months, a market source said.

The notes were active on Wednesday after the semiconductor manufacturer for lighting and radio frequency products reported a large earnings beat.

They were up slightly on an outright basis but unchanged dollar-neutral, a market source said.

The notes traded up 2 points outright to 94.25. However, they were moving in line dollar-neutral, a market source said.

Cree stock closed Wednesday at $39.46, an increase of 5.11%.

The jump came after Cree announced a large earnings beat for the fiscal first quarter of 2019 after the market close on Tuesday.

Cree reported non-GAAP earnings per share of 22 cents for the first-quarter, versus analyst expectations of earnings per share of 12 cents.

Cree, which priced $575 million of the 0.875% notes in late August, has traded below par since early September.

Cree’s stock was $45.78 when the notes priced.

Herbalife sees volume

Herbalife’s 2% convertible notes due Aug. 15, 2019 were major volume movers in the secondary space on Wednesday.

The notes were largely moving sideways on an outright basis with most trades around 130.5.

Herbalife stock closed Wednesday at $54.82, an increase of 1.09%.

While the 2% notes were active, Herbalife’s 2.625% convertible notes due 2024 were dormant.

Herbalife priced $550 million of the 2.625% notes in March with proceeds used to repurchase a portion of the 2% notes.

Caesars merger

Caesars Entertainment’s 5% convertible notes due 2024 saw a significant dollar-neutral decline as the convertible notes rose alongside stock in active trading on Wednesday.

The notes were down 2 points dollar-neutral, a market source said.

They were seen at 158 bid, 159 offered versus a stock price of $10.00 in the mid-afternoon.

Caesars stock closed the day at $10.20, an increase of 12.21%.

The notes were active after news broke that the gaming company is in talks with Golden Nugget and Landry’s Restaurant owner Tilman Fertitta about a potential merger.

Golden Nugget’s bid for Caesars in a cash and stock deal values Caesars at $13.00 a share, CNBC reported.

“The bonds are coming in significantly on the news,” a market source said.

There were whispers in previous months about a potential exchange deal in the works for the 5% convertible notes.

It is unclear where the exchange stands given the current news, a market source said.

Mentioned in this article:

Caesars Entertainment Corp. Nasdaq: CZR

Cree Inc. Nasdaq: CREE

Evolent Health Inc. NYSE: EVH

Herbalife Nutrition Ltd. NYSE: HLF

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