Chimera convertible offering eyed; Slack notes expand on debut; Carnival gains continue

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.

The deal looked cheap based on underwriters’ assumptions. However, the offering was wall-crossed, sources said.

Meanwhile, it was an active day in the secondary space with more than $230 million in reported volume about one hour into Tuesday’s session and $734 million in reported volume about one hour before the market close.

However, two names dominated trading activity – Slack Technologies Inc.’s newly priced convertible notes and Carnival Corp.’s recently priced 5.75% convertible notes due 2023.

Both were posting gains on an outright and dollar-neutral basis.

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 3.9 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, 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.

With REITs badly damaged in the coronavirus induced sell-off in March, determining the true book value for a company like Chimera is akin to playing “pin the tail on the donkey,” a source said.

The company was clearly in need of capital and pricing a secondary offering would have been too difficult, the source said.

While the pricing was unusual, the deal was wall-crossed, sources said.

Slack expands

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%.

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 were among the most actively traded in the secondary space with the notes seeing a large dollar-neutral expansion.

The 0.5% notes 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 dropped to 102.625 with stock down about 4% one hour into the session and sank back to a 101 handle with stock down more than 5% heading into the market close.

The notes expanded 3 points dollar-neutral, a source said.

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

The notes saw more than $96 million in reported volume during Tuesday’s session.

Slack stock traded to a high of $24.70 and a low of $22.92 before closing the day at $23.48, a decrease of 3.37%.

Carnival gains continue

After a volatile start in the secondary space, Carnival’s 5.75% convertible notes due 2023 continued to add to their gains in high-volume activity on Tuesday.

The 5.75% notes jumped as much as 18 points in intraday activity to trade as high as 136 with stock up over 20%.

However, the notes were changing hands at 126.875 as stock came in heading toward the market close.

The notes were seen expanded about 1 point dollar-neutral early Tuesday.

Outright accounts were banking their profits and selling the notes to hedge accounts, a market source said.

With more than $126 million in reported volume shortly before the market close, the notes remained the most actively traded by dollar amount in the secondary space.

Carnival stock traded to a high of $12.95 and a low of $11.05 before closing the day at $11.30, an increase of 10.68%.

While stock surged on Monday following news Saudi Arabia’s public investment fund had taken a minority stake in the cruise ship operator, sources were scratching their head about the continued surge in stock.

Mentioned in this article:

Carnival Corp. NYSE: CCL

Chimera Investment Corp. NYSE: CIM

Slack Technologies Inc. NYSE: WORK

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