Morning Commentary: Apollo mandatories upsized, trades up on debut; RingCentral taps junk market

By Abigail W. Adams

Portland, Me., Aug. 9 – The convertible primary market stood poised for one of the busiest weeks of the year after Apollo Global Management Inc. priced an upsized $1.25 billion offer of three-year $50-par series A mandatory convertible preferred stock (Baa1/BBB/BBB) after the market close on Tuesday.

While the window for additional new deal activity remains open, the Aug. 7 week already claims the title of the fourth busiest week of the year for new deal activity.

The deals to price in the past week included a crossover refinancing deal with Fluor Corp. tapping the convertible market to take out its high-yield debt.

While the convertible market had anticipated an influx of high-yield issuers tapping convertibles to refinance their straight debt, the trend has not been as strong as predicted with the majority of issuers coming from the investment-grade market.

The road between the high-yield and convertibles markets has been a two-way street with some convertible issuers turning to the straight debt market to refinance their convertible debt.

In a move that left many scratching their heads, RingCentral Inc. announced a $400 million offering of seven-year, non-call three senior notes to refinance its outstanding convertible debt.

“Why would they do this?” a source said.

Meanwhile, earnings-related and topical news combined with an uptick of volatility in equity markets continued to spark large price movements in the secondary space.

Equity indexes were mixed ahead of Thursday’s release of the Consumer Price Index report with the Dow Jones industrial average up 7 points, or 0.02%, the S&P 500 index down 0.22%, the Nasdaq Composite index down 0.76% and the Russell 2000 index down 0.53% shortly before 11 a.m. ET.

Apollo’s new mandatory preferred stock was putting in a strong aftermarket performance with the new paper trading up with stock in the red.

Apollo’s mandatories

Apollo priced an upsized $1.25 billion offer of three-year $50-par series A mandatory convertible preferred stock (Baa1/BBB/BBB) after the market close on Tuesday at par at the midpoint of talk with a dividend of 6.75% and a threshold appreciation premium of 20%.

Price talk was for a dividend of 6.5% to 7% and a threshold appreciation premium of 17.5% to 22.5%.

The greenshoe was also upsized to $187.5 million.

The initial size of the offering was $1 billion with a greenshoe of $150 million.

The deal marked the first completed mandatory convertible offering of the year.

It played to strong demand during bookbuilding and was putting in a solid performance in the aftermarket. The preferred stock traded up to $50.50 early in the session with common stock in the red.

Apollo stock was trading at $81.84, a decrease of 0.78%, shortly before 11 a.m. ET.

RingCentral goes junk

In a move that was a surprise to many sources, serial convertible issuer RingCentral announced that it would be making its debut appearance in a junk bond offering to refinance its convertible debt.

RingCentral announced a $400 million offering of seven-year, non-call three senior notes (with final terms to come later) on Wednesday with initial price talk for a yield of 8½% to 8¾%, a source said.

Proceeds from the offering will be used to refinance its convertible debt.

RingCentral currently has $539 million outstanding of its 0% convertible notes due 2025.

The company repurchased $461 million of the $1 billion issue for $425 million in cash in May.

The previous buyback was funded by a drawdown of its term loan facility and cash on hand.

The company’s decision to issue straight debt to refinance its convertible debt left many scratching their heads.

“That’s weird,” a source said. “Why would they take out a 0% coupon with straight debt?”

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