K12 convertible offering eyed; Dick’s in focus post earnings; Liberty exchangeables gain

By Abigail W. Adams

Portland, Me., Aug. 26 – The convertibles primary market continued to churn out new deals heading into the final days of August with the summer doldrums short-lived in the convertibles universe.

K12 Inc.’s offering of $300 million of seven-year convertible senior notes is on deck for after the market close on Wednesday.

The deal from the online education company looked cheap based on underwriters’ assumptions and will appeal to hedge accounts given the volatility in the stock, sources said.

With no deals announced after the market close, the offering is expected to be the last new deal of the week.

Meanwhile, as market players eyed the new deal in the pipeline, Dick’s Sporting Goods Inc.’s 3.25% convertible notes due 2025 were in focus with the notes making gains on an outright and dollar-neutral basis as stock soared after a large earnings beat.

Several new deals also continued to improve.

Liberty Broadband Corp.’s 2.75% senior debentures exchangeable for Charter Communications, Inc. common stock continued to gain after a large dollar-neutral expansion on their secondary debut.

While NICE Ltd.’s 0% convertible notes due 2025 were posting gains on an outright basis, they continued to contract dollar-neutral.

K12 on tap

K12 plans to price $300 million of seven-year convertible senior notes after the market close on Wednesday with price talk for a coupon of 1.125% to 1.625% and an initial conversion premium of 30% to 35%.

The notes were heard to be marketed with assumptions of a credit spread of 550 basis points over Libor and a 40% vol., according to a market source.

Using those assumptions, the deal looked 2.875 points cheap at the midpoint of talk, a source said.

The Herndon, Va.-based for-profit online education company’s stock “certainly has volatility,” a source said.

Stock was trading around $25 in June but doubled in value in early August when it hit its 52-week high of $52.84.

Stock closed the previous session at $43.55. However, it was taking a hit on Wednesday on the heels of the convertible notes offering.

K12 stock traded to a low of $37.61 and a high of $41.09 before closing the day at $39.17, a decrease of 10.10%.

It would be possible to argue for a volatility of 45% for the stock, which would increase the cheapness of the deal to 4 points at the midpoint of talk, a source said.

However, “that would be aggressive,” the source said.

While underwriters have been getting aggressive with the vol. in some of the assumptions for recent deals, the 40% vol. was more than justified for K12, another source said.

Given the volatility in the stock, the deal, which comes with a call spread, will definitely appeal to hedge accounts, sources said.

Dick’s in focus

Dick’s 3.25% convertible notes due 2025 were in focus on Wednesday with the notes gaining on an outright and dollar-neutral basis as stock soared after a large earnings beat.

The 3.25% notes rose almost 19 points outright with stock up more than 15%.

The notes were changing hands at 168 early Wednesday and rose to 172 in the late afternoon.

They expanded 0.75 point dollar-neutral, a source said.

More than $30 million of the bonds were on the tape heading into the market close.

Dick’s stock traded to a high of $54.50 and a low of $50.47 before closing the day at $53.99, an increase of 15.68%.

The sporting goods retailer crushed analyst expectations for the second quarter.

The company reported earnings per share of $3.12 for the second quarter versus analyst expectations for earnings of $1.26.

Revenue was $2.71 billion versus analyst expectations for revenue of $2.46 billion.

Dick’s second-quarter results were the highest in the company’s history and were driven by new consumers working out at home and engaging in more outdoor activities as a result of the Covid-19 pandemic, Business Insider reported.

Day two

New paper remained better to buy on Wednesday with Liberty Broadband’s new exchangeables and NICE’s new convertible notes active their second day in the secondary space.

Following a large dollar-neutral expansion on their market debut, Liberty’s 2.75% exchangeable debentures due 2050 tied to Charter stock continued to post gains.

The 2.75% debentures traded up to 105 on an outright basis.

They expanded another 0.5 point dollar-neutral, a source said.

Charter stock traded to a low of $605.28 and a high of $618.49 before closing the day at $614.56, an increase of 0.79%.

Liberty’s debentures expanded 4.5 points dollar-neutral on their secondary market debut on Tuesday.

The large dollar-neutral expansion was a surprise to some sources, who did not find the offering particularly attractive.

NICE’s new 0% convertible notes due 2025 were making gains on an outright basis as stock soared their second day in the secondary space.

However, the notes continued to contract dollar-neutral, a source said.

The 0% convertible notes rose to 102.5 late Wednesday afternoon with stock up more than 6%.

However, they were contracted about 0.75 point dollar-neutral.

NICE stock traded to a low of $224.39 and a high of $237.10 before closing the day at $236.02, an increase of 6.35%.

The notes were changing hands between par and 101.25 on their market debut on Tuesday.

Mentioned in this article:

Charter Communications, Inc. Nasdaq: CHTR

Dick’s Sporting Goods Inc. NYSE: DKS

K12 Inc. NYSE: LRN

NICE Ltd. Nasdaq: NICE

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