Morning Commentary: Tetra Tech convertible notes price, gain on secondary market debut

By Abigail W. Adams

Portland, Me., Aug. 18 – The convertibles primary market rounded out another active week with a $500 million offering clearing the market.

Tetra Tech Inc. priced $500 million of five-year convertible notes after the market close on Thursday at par with a coupon of 2.25% and an initial conversion premium of 25%.

Pricing came toward the rich end of talk for a coupon of 2.125% to 2.625% and at the midpoint of talk for an initial conversion premium of 22.5% to 27.5%.

The deal was slightly more attractive than Workiva Inc.’s 1.25% convertible notes due 2028 and Akamai Technologies Inc.’s 1.125% convertible notes due 2029, which priced earlier in the week.

Tetra Tech’s offering modeled about 2.9 points cheap at the midpoint of talk based on underwriters’ assumptions of a credit spread of 200 basis points over SOFR and a 28% vol.

“They gave a little on the coupon but it’s nothing exciting,” a source said.

The majority of deals to clear the primary market in the flurry of activity over the last two weeks were “not exciting,” the source said.

Several sources felt underwriters were pushing the terms of the deals to clear the primary market in the last two weeks, utilizing the pricing power that came from the issuance drought in July.

However, sources expect pricing to cheapen with investors pushing back especially after the poor aftermarket performance of several recent deals.

“It’ll be a buyers’ market soon,” a source said.

While the terms of Tetra Tech’s deal did not generate much enthusiasm, the more attractive terms did seem to help their aftermarket performance with the new paper notching some outright and dollar-neutral gains.

Equity indexes were holding early Friday after the heavy selling of the previous two sessions.

The Dow Jones industrial average was down 52 points, or 0.15%, the S&P 500 index was down 0.42%, the Nasdaq Composite index was down 0.81% and the Russell 2000 index was up 0.19% shortly before 11 a.m. ET.

Tetra Tech’s new 2.25% convertible notes traded up to 101 out of the gate before settling at 100.5 with stock flat, a source said.

They gained about 0.5 point dollar-neutral.

Tetra Tech’s stock was changing hands at $156.84, a decrease of 0.30%, shortly before 11 a.m. ET.

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