Avalara, Cloudflare convertible notes eyed; SmileDirectClub contracts; RealReal mixed

By Abigail W. Adams

Portland, Me., Aug. 10 – The convertibles primary market returned to action in full force with two large offerings set to price after the market close.

Cloudflare Inc. plans to price $1 billion of five-year convertible notes and Avalara Inc. plans to sell $850 million of five-year convertible notes after the market close on Tuesday.

While the terms for the deals were aggressive, they still modeled cheap based on underwriters’ assumptions, sources said.

Meanwhile, the secondary market was active on Tuesday with several large price movements in the space due to earnings-related volatility.

SmileDirectClub Inc.’s 0% convertible notes due 2026 tanked on an outright and dollar-neutral basis as stock got pummeled post-earnings.

The RealReal Inc.’s convertible notes were mixed as stock dropped down double digits.

Cloudflare in focus

Cloudflare plans to price $1 billion of five-year convertible notes after the market close on Tuesday with price talk for a coupon of 0% to 0.5% and an initial conversion premium of 47.5% to 52.5%.

The deal was heard to be in the market with assumptions of 250 basis points over Libor and a 42% vol., according to a market source.

Using those assumptions, the deal looked 1.625 points cheap at the midpoint of talk.

Proceeds will be used, in part, to exchange up to $400 million of the principal amount of the company’s 0.75% convertible notes due 2025 for cash and stock.

The 0.75% convertible notes are deep-in-the-money and trade at triple par.

While the exchange was helping to drive demand for the new offering, several sources found the terms to be aggressive.

High premiums have been a contributing factor to the poor performance of the convertibles market over the past year, a source said.

Cloudflare’s stock has been trending upward since May and set a new 52-week high of $127.70 early in Tuesday’s session.

Avalara on tap

Avalara plans to price $850 million of five-year convertible notes after the market close on Tuesday with price talk for a coupon of 0% to 0.5% and an initial conversion premium of 42.5% to 47.5%.

The deal was heard to be in the market with assumptions of 250 bps over Libor and a 39% vol., according to a market source.

Using those assumptions, the deal looked 1.5 points cheap at the midpoint of talk. Another source saw the deal as much as 3 points cheap.

The company is “an interesting new name to the convertibles market,” a source said.

While the credit spread seemed a little tight to some sources, Avalara does have solid financials with cash on hand.

The company’s stock has also been flat over the past year.

Some sources felt the company’s stock trajectory made it less attractive than Cloudflare, which has been on an upward trend.

However, others felt it was a positive and gave the stock more room to run.

SmileDirectClub tanks

SmileDirectClub’s 0% convertible notes due 2026 tanked on an outright and dollar-neutral basis on Tuesday following the company’s earnings report.

The 0% convertible notes dropped almost 10 points outright.

They were changing hands at 69.5 in the late afternoon.

The notes contracted 2 points dollar-neutral.

SmileDirectClub’s stock traded to a high of $5.46 and a new 52-week low of $4.93 before closing the day at $5.08, a decrease of 24.18%.

The teledentistry company reported a loss per share of 14 cents versus analyst expectations for a loss per share of 10 cents.

Revenue was $174.18 million versus analyst expectations for revenue of $198.45 million.

SmileDirectClub’s convertible notes have struggled since shortly after pricing in early February with the pull-back in equities and negative news driving the notes into busted territory.

In April, the company was the victim of a cyberattack which contributed to its poor performance in the second-quarter.

The company’s stock was downgraded by analysts from JPMorgan, Stephens & Co. and William Blair following its earnings report.

RealReal trades mixed

The RealReal’s convertible notes were mixed as stock dropped double digits following the company’s earnings report.

The company’s 3% convertible notes due 2025 dropped more than 12 points outright.

They were changing hands at 109.25 in the late afternoon.

However, the notes expanded 0.5 point dollar-neutral on the move down, a source said.

RealReal’s 1% convertible notes due 2028 sank about 5 points outright.

They were changing hands at 81.75 in the late afternoon.

However, the notes were moving in line with stock and were unchanged dollar-neutral.

RealReal’s stock traded to a high of $14.69 and a low of $13.22 before closing the day at $13.31, a decrease of 17.99%.

While the luxury consignment retailer beat on the bottom line, it missed top line estimates.

The company reported a loss per share of 50 cents versus analyst expectations for a loss per share of 55 cents.

Revenue was $104.91 million versus analyst expectations for revenue of $108.27 million.

Mentioned in this article:

Avalara Inc. NYSE: AVLR

Cloudflare Inc. NYSE: NET

RealReal Inc. Nasdaq: REAL

SmileDirectClub Inc. Nasdaq: SDC

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