Convertibles market eyes CenterPoint Energy offering; Chesapeake Energy, Novavax active

By Abigail W. Adams

Portland, Me., Sept. 25 – The primary market was preparing to price a new mandatory convertible preferred deal after the market close on Tuesday with the paper expected to be in demand, in part, due to the amount that will soon be leaving the space.

CenterPoint Energy Inc. plans to price $750 million of three-year series B mandatory convertible preferred stock after the market close on Tuesday.

The deal models out to fair value, but the true valuation will largely depend on the pricing of the concurrent common stock offering, a market source said.

Meanwhile, the secondary space was heavy on Tuesday, which sources attributed to a weaker bond market, an anticipated rate hike from the Federal Reserve, and selling pressure as accounts make room for new convertible paper.

While few names saw concentrated trading activity, there was a wide breadth to it with more than $410 million in trading volume by late afternoon.

Names not normally seen on the tape were active during Tuesday’s session, including Chesapeake Energy Corp.’s 5.5% convertible notes due 2026 and Novavax, Inc.’s 3.75% convertible notes due 2023.

NXP Semiconductors NV’s 1% convertible notes due 2019 and Cypress Semiconductor Corp.’s 2% convertible notes due 2023 were also moving in the secondary space as their equity took a hit after another analyst warned of a cyclical downturn in the semiconductor sector.

CenterPoint Energy eyed

CenterPoint Energy plans to price $750 million of three-year series B mandatory convertible preferred stock after the market close on Tuesday.

Price talk is for a dividend of 6.75% to 7.25% and an initial conversion premium of 17.5% to 22.5%, according to a market source.

The offering consists of 15 million $50-par depositary shares representing a 1/20th interest in the series B preferreds.

With a credit spread of 100 basis points over Libor and a 18% vol., the deal models out to fair value at the midpoint of talk, a market source said.

However, the valuation of the deal will largely be driven by the pricing of the concurrent stock offering.

The mandatory convertible preferred stock is being offered concurrently with a $1.5 billion offering of common stock.

“You have to factor in how much of a discount on the stock,” a market source said.

The deal was heard to be doing well during bookbuilding, sources said. It attracted cross-over buyers involved in the equity subscription, a source said.

Investors liked the deal at the midpoint or cheap end of talk, another source said.

The new mandatory convertible paper comes as three mandatory convertible preferred issues enter their final weeks before maturity.

The issues that will soon be leaving the space include Black Hills Corp.’s $300 million issue of 7.5% mandatory convertible equity units due Nov. 1, 2018, Kinder Morgan, Inc.’s $1.57 billion issue of 9.75% mandatory convertible preferred stock due Oct. 26, 2018 and Teva Pharmaceutical Industries Ltd.’s $3.375 billion issue of 7% mandatory convertible preferred stock due Dec. 15, 2018.

Novavax in focus

Novavax’s 3.75% convertible notes due 2023 were active in the secondary space as stock shot upwards of 13% in intraday trading. The notes were up about 3 points on an outright basis.

They were trading at 61 versus a stock price of $1.95, a market source said. The yield on the notes is about 16.5%.

Novavax’s convertible notes are a special situation. While the conversion premium on the notes is enormous, they do trade on a delta, a market source said.

However, the borrow on the stock is at times difficult and there is a lot of stock tied to the bonds, the source said.

The bonds appeared to be lagging the move in stock, another source said.

Novavax stock traded to a high of $2.18 and a low of $1.90 before closing the day at $1.9883, an increase of 7.48%.

The stock surge came after Novavax announced the initiation of a phase 2 confirmation clinical trial for its product NanoFlu on Tuesday.

The biotech company expects positive results in the first quarter of 2019 when it will meet with the FDA to discuss a phase 3 clinical trial and licensure through an accelerated approval process, according to a company news release.

Chesapeake active

Chesapeake Energy’s 5.5% convertible notes due 2026 were active on Tuesday with investors rolling out of the convertible notes in favor of the company’s new offering of high-yield bonds.

The notes were seen trading around 99.5 with about $7 million of the bonds on the tape by late afternoon, sources said.

They gained 0.5 point on an outright basis in the trading activity with the yield about 5.75%.

With a premium of over 80%, the notes are a yield to maturity play, a market source said. Holders were selling the convertibles to participate in Chesapeake Energy’s high-yield bond offering.

The Oklahoma City-based petroleum and natural gas exploration and production company plans to price a $1.25 billion dual-tranche offering of senior notes on Tuesday.

The tranche of six-year notes is talked to yield 7% to 7.25% and the tranche of eight-year notes is talked to yield 7.25% to 7.5%.

“The converts trade on a yield basis,” a market source said. Chesapeake’s straight debt offering is an opportunity to move up the capital structure and pick up about 200 bps on the yield, the source said.

Semiconductors downturn

NXP Semiconductors’ 1% convertible notes due 2019 were a major volume mover during Tuesday’s session.

The notes dropped to their lowest outright price since 2016 in the high-volume trading.

They were seen changing hands at 105 versus an equity price of $86.81 in the late afternoon, according to a market source.

About $17 million of the bonds were on the tape by late afternoon. NXP stock closed the day at $86.51, a decrease of 5.03%.

The outright price is the lowest for the 1% notes since 2016, according to Trace data.

The notes cratered on an outright and hedged basis after the semiconductor company’s merger with Qualcomm fell through in July, a casualty of the U.S.-China trade war.

Cypress Semiconductor’s 2% convertible notes due 2023 also dropped to their lowest outright price since hitting the market in November 2017. The notes dropped more than 5 points outright.

They were seen trading at 99.61 versus an equity price of $14.50.

Cypress stock closed the day at $14.57, a decrease of 6.12%.

NXP and Cypress led the decline in the Philadelphia Semiconductor Index on Tuesday, which closed the day down 1.7%.

The down day for the sector came after a Raymond James analyst joined the chorus of analysts warning about a downturn in the sector.

Mentioned in this article:

CenterPoint Energy Inc. NYSE: CNP

Chesapeake Energy Corp. NYSE: CHK

Cypress Semiconductor Corp. Nasdaq: CY

Novavax, Inc. Nasdaq: NVAX

NXP Semiconductors NV Nasdaq: NXPI

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