Morning Commentary: Chimera convertible offering eyed; Slack notes expand on debut

By Abigail W. Adams

Portland, Me., April 7 – New convertible paper was in focus on Tuesday with one new deal making its secondary market debut and one more set to price after the market close.

Chimera Investment Corp. plans to price $250 million of three-year convertible notes after the market close on Tuesday.

Several sources took note of the pricing of the deal, which carried a fixed conversion premium of 0%.

Meanwhile, Slack Technologies Inc.’s newly priced convertible notes made their secondary market debut on Tuesday and were making gains on an outright and dollar-neutral basis early in the session.

Chimera eyed

Chimera plans to price $250 million of three-year convertible notes after the market close on Tuesday with price talk for a coupon of 6% to 7% and an initial conversion premium of 0%, according to a market source.

Underwriters were marketing the deal with assumptions of 900 basis points over Libor and a 25% vol., according to a market source.

Using those assumptions, sources pegged the deal about 2.875 points cheap to 103.9 points cheap with a coupon of 6.5% and an initial conversion premium of 0%.

Several sources took note of the pricing of the deal. A fixed conversion premium of 0% is extremely rare for a convertible note, several sources said.

Chimera, a New York-based real estate investment trust, has had an extremely high dividend yield of 27%.

However, the company announced on Monday that it was reducing its dividend to $0.30 a quarter from $0.50 a quarter to increase liquidity.

REITs typically have low conversion premiums, a market source said.

Due to the fact that they have to distribute their earnings, “there’s little long-term appreciation potential” for the stock, a market source said.

With the dividend on the common stock considered unsafe for the time being, the convertible offers a safer opportunity to receive interest and a return on principal provided the company doesn’t default.

If and when the dividend on the common stock appears safe again, holders will convert the notes for the higher yield, a source said.

The deal was heard to be wall-crossed, sources said.

Slack upsizes

As market players eyed Chimera’s new offering, Slack’s newly priced convertible notes hit the secondary space on Tuesday.

Slack priced an upsized $750 million of five-year convertible notes after the market close on Monday at par with a coupon of 0.5% and an initial conversion premium of 27.5%, according to a company news release.

Pricing came on the rich end of talk for a coupon of 0.5% to 1% and at the midpoint of talk for an initial conversion premium of 25% to 30%, according to a market source.

The greenshoe was also upsized to $112.5 million.

The initial size of the offering was $600 million with a greenshoe of $90 million.

The 0.5% notes dominated activity in the secondary space and saw a large dollar-neutral expansion.

They were marked at 102.5 bid, 103 offered with stock unchanged prior to the opening bell.

The notes traded as high as 103.5 bid, 104 offered soon after the market open.

However, they were changing hands at 102.625 with stock down about 4% one hour into the session.

“They did well as everyone expected,” a source said.

Slack stock was changing hands at $23.41, a decrease of 3.66%, shortly before 11 a.m. ET.

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