Barclays synthetic on tap; BofA synthetic tied to Charter, Elanco equity units eyed

By Abigail W. Adams

Portland, Me., Jan. 22 – After a week-long hiatus, the convertibles primary market returned to action with two deals set to price after the market close on Wednesday and one more joining the forward calendar.

Barclays became the latest bank to step forward with a synthetic convertible offering.

Barclays Bank plc plans to price $250 million five-year cash-settled equity-linked notes tied to Microsoft Corp. with price talk for a fixed coupon of 0%, a fixed conversion premium of 20% and a reoffer price of 104 to 104.5, a market source said.

BofA Finance LLC plans to price $500 million 2.6-year cash-settled notes tied to Charter Communications Inc., and Elanco Animal Health Inc. plans to sell $550 million, or 11 million, three-year par of $50 tangible equity units after the market close on Wednesday.

While sources were lukewarm on BofA’s synthetic offering, Elanco’s mandatory offering looked reasonably priced, sources said.

Meanwhile, the secondary space remained active with the heavy trading volume continuing.

There was $75.5 million in reported volume less than one hour into Wednesday’s session and $459 million in reported volume heading into the market close.

Tesla Inc.’s convertible notes and Luckin Coffee Inc.’s 0.75% convertible notes due 2025 continued to top the volume charts.

While Tesla’s convertibles continued their upward run as the electric car manufacturer’s market cap surpassed $100 billion, Luckin’s convertible notes were soft heading into the market close.

Novavax Inc.’s 3.75% convertible notes due 2023 saw renewed attention in the secondary space with the long-busted notes gaining strength as the company works on developing a vaccine for the coronavirus.

BofA’s synthetic

BofA Finance plans to price $500 million of 2.6-year cash-settled notes tied to Charter Communications after the market close with price talk for a reoffer price of 104, a coupon of 0% to 0.125% and an initial conversion premium of 22.5% to 25%, according to market sources.

Sources were less than enthusiastic about more cash-settled equity linked notes entering the convertibles space.

“This is exactly the type of issuance the market does not want to see,” a market source said.

The paper will be rated investment grade.

With assumptions of 25 basis points over Libor and a 27% vol., the deal modeled out to fair value, a market source said.

While the coupon is negligible and the reoffer price is a concern, the premium talk would have been interesting had it not been for the short duration of the notes, a source said.

With the paper only two years, the 25% premium – which would have been attractive in a longer dated piece of paper – was problematic with only a limited amount of time for the stock price to appreciate, the source said.

However, the paper may lend itself to some portfolios that might want to restrict downside exposure to the stock.

Elanco eyed

After a banner year for mandatory convertible issuance and performance, the first mandatory deal of 2020 is on deck.

Elanco Animal Health plans to price $550 million, or 11 million, three-year par of $50 tangible equity units after the market close on Wednesday with price talk for a fixed dividend of 5% and a fixed threshold appreciation premium of 20%, according to a market source.

The equity units are pricing concurrently with a common stock offering of 19,159,866 shares. The common stock offering carries a greenshoe of 1,915,987 shares.

The deal looked reasonably priced and was a fairly standard mandatory offering, a market source said.

Proceeds from the offering will be used to fund a portion of the previously announced acquisition of Bayer AG’s animal health business.

The animal health industry is an interesting and growing sector in the health care space, sources said.

$100 billion

Tesla’s convertible notes were again in focus and continuing their upward momentum as the once struggling electric car manufacturer became a $100 billion market cap company.

The 2% convertible notes due 2024 topped double par on Wednesday. They were changing hands just north of 200.25 in the late afternoon with more than $17 billion in reported volume, according to a market source.

The 1.25% convertible notes were changing hands at 164.25 versus a stock price of $579.69 with reported volume of $13.8 million.

The 2.375% convertible notes due 2022 were changing hands at 184 versus a stock price of $575.14 with more than $12 million in reported volume.

Tesla stock traded as high as $594.50 and as low as $559.10 before closing the day at $569.56, an increase of 4.09%.

Luckin weakens

Luckin Coffee’s 0.75% convertible notes due 2025 continued to dominate activity in the secondary space.

While the notes initially popped up about 0.25 point dollar-neutral as stock gained early in the session, they quickly came in as stock whipsawed in the other direction.

The 0.75% notes stood poised to close the day with a 0.125 to 0.25 point contraction, a market source said.

The notes were down more than 3.5 points outright to 107 in the late afternoon. They were trading as high as 115 at the close of last week.

With the notes starting to trade rich after a massive run, some outright selling was dragging the notes down, the source said.

Luckin’s ADS were volatile during Wednesday’s session. The equity traded as high as $49.59 shortly after the market open but steadily sank as the session progressed.

Equity traded to a low of $43.58 before closing the day at $43.75, a decrease of 8.20%.

Novavax gains

Novavax’s 3.75% convertible notes due 2023 saw renewed attention in the secondary space with the notes gaining over the past two trading sessions.

The 3.75% notes rose another 3 points on Wednesday to 54.5. They gained more than 10 points on Tuesday.

The notes were changing hands in the low 40s about two weeks ago.

The 3.75% notes returned to focus following news the clinical-stage vaccine maker was working on a vaccine for the coronavirus that has been shaking markets.

Mentioned in this article:

Charter Communications Inc. Nasdaq: CHTR

Elanco Animal Health Inc. NYSE: ELAN

Luckin Coffee Inc. Nasdaq: LK

Microsoft Corp. Nasdaq: MSFT

Novavax Inc. Nasdaq: NVAX

Tesla Inc. Nasdaq: TSLA

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