Palo Alto Networks $1.75 billion offering eyed; Splunk expands; Lyft gains outright

By Abigail W. Adams

Portland, Me., June 3 – While the number of deals clearing the convertibles primary market may have slowed over the past week, the deal sizes remain substantial.

Palo Alto Networks Inc. plans to price $1.75 billion of five-year convertible notes after the market close on Wednesday.

The deal looked cheap based on underwriters’ assumptions. However, the credit spread was among the tightest seen since the March meltdown, sources said.

While not the largest deal of the year, the size of the offering was an indication that convertibles were on their way to becoming a well-recognized asset class.

Meanwhile, Splunk Inc. priced an upsized $1.1 billion offering. The new paper dominated activity in the secondary space and was expanding on debut.

While Splunk was the focus of Wednesday’s session, Lyft Inc.’s recently priced convertible notes jumped on an outright basis as stock surged on updated guidance.

Palo Alto on tap

Palo Alto plans to price $1.75 billion of five-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 27.5% to 32.5%, according to a market source.

The deal was heard to be marketed with assumptions of 350 basis points over Libor and a 33% vol.

Using those assumptions, the deal looked about 1.875 points cheap at the midpoint of talk, a source said.

The 350 bps credit spread was among the tightest seen since the March meltdown.

However, the spread was warranted for the cybersecurity company.

The company has about $2 billion of cash on its balance sheet and its market cap is $23 billion, a source said.

Proceeds were also earmarked for the repayment of the company’s 0.75% convertible notes due 2023, which is a credit positive for the company.

The deal was heard to be well-received during bookbuilding. It is believed to be pricing at the midpoint of coupon talk and cheap end of premium talk.

The new notes are expected to trade up on debut, a source said.

The offering was not the largest of the year.

Southwest Airlines Co. holds that title with its $2.3 billion issue of 1.25% convertible notes due 2025.

However, the sizable deal from the large cap company may be “the true start of moving the convertible asset class from a relative backwater to a more widely recognized one,” a source said.

The sheer volume of issuance in May and attention the asset class has received recently is an indication that recognition is beginning.

While volume was light, Palo Alto’s 0.75% convertible notes due 2023 were changing hands at 110.5 Wednesday afternoon.

Palo Alto stock closed Wednesday at $233.41, a decrease of 2.69%.

Splunk upsizes

Splunk priced an upsized $1.1 billion of seven-year convertible notes after the market close on Tuesday at par at the midpoint of talk with a coupon of 1.125% and an initial conversion premium of 35%.

Price talk was for a coupon of 0.875% to 1.375% and an initial conversion premium of 32.5% to 37.5%, according to a market source.

The greenshoe was also upsized to $165 million.

The initial size of the deal was $900 million with a greenshoe of $135 million.

The new paper dominated activity in the secondary space and was trading up on an outright and dollar-neutral basis.

The new paper was changing hands at 103.5 early in the session with stock up about 1%.

They closed out the day at 103.5 even as stock came in.

Calculation of the dollar-neutral expansion was complicated by the fact the stock reference price was the VWAP on June 2.

However, sources pegged the notes 3.125 points to 3 points expanded dollar-neutral.

The new 1.125% notes dominated activity with more than $236 million in reported volume by the market close.

Approximately $691.6 million of proceeds will be used to repurchase for cash $488.3 million of the principal amount of the company’s 0.5% convertible notes due 2023.

The 0.5% notes were active on Wednesday.

There were several prints of the notes at 141.516, which appeared to be their repurchase price, a market source said.

The 0.5% notes remained active throughout Wednesday’s session and closed the day at 143.75.

The 0.5% notes saw more than $29 million in reported volume during the session.

Splunk’s 1.125% notes due 2025 were also active on Wednesday, closing the day at 139.625 with more than $26.5 million in reported volume.

Holders appeared to be switching between the tranches, a source said.

Splunk stock traded to a high of $192.75 and a low of $187.08 before closing the day at $188.98, an increase of 0.23%.

Lyft gains outright

Lyft’s recently priced 1.5% convertible notes due 2025 jumped on an outright basis as stock surged after the company updated its guidance.

The 1.5% notes were up more than 6 points to trade as high as 115 on Wednesday as stock surged more than 10%.

The notes closed Wednesday at 113.625 as stock came in. There was $14.5 million in reported volume during Wednesday’s session.

Lyft stock traded to a low of $33.50 and a high of $35.56 before closing the day at $34.44, an increase of 8.71%.

Stock surged after the ride-sharing company reported a 26% increase in rides in May and updated its second-quarter guidance.

With demand strong as lockdowns ease, Lyft trimmed its expected loss in the second quarter.

The company now expects its EBITDA loss to be no greater than $325 million, an improvement of 10% over its previous guidance, according to a company news release.

Lyft priced a $650 million issue of the 1.5% notes on May 13.

Mentioned in this article:

Lyft Inc. Nasdaq: LYFT

Palo Alto Networks Inc. NYSE: PANW

Splunk Inc. Nasdaq: SPLK

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