Morning Commentary: DexCom convertibles in focus, jump on debut; CMS, FirstEnergy gain

By Abigail W. Adams

Portland, Me., May 3 – While the week remains young with more deals heard to be in the pipeline, the convertibles primary market has already cinched the first week of May as the second-highest volume week for new deal activity in 2023.

DexCom Inc. priced an upsized $1.1 billion of five-year convertible notes after the market close on Tuesday, raising the primary market’s weekly tally to $3.1 billion.

The pricing of the notes was extremely aggressive, sources said, with the coupon and premium range harkening from the convertibles market of yesteryear.

However, the deal played to strong demand during bookbuilding and was making large gains on an outright and dollar-neutral basis early in the session.

The new paper hit the secondary space with equities volatile ahead of the Federal Open Market Committee’s rate hike announcement.

Equity indexes launched the day with gains but turned mixed as the session progressed with the Dow Jones industrial average down 57 points, or 0.17%, the S&P 500 index down 0.05%, the Nasdaq Composite index up 0.19% and the Russell 2000 index up 0.9% shortly before 11 a.m. ET.

There was $233 million in reported convertibles trading volume about one hour into the session with new and recent deals accounting for more than half of the total activity in the space.

CMS Energy Corp.’s new 3.375% convertible notes due 2028 (Baa2) and FirstEnergy Corp.’s 4% convertible notes due 2026 continued to add to the strong gains made on their aftermarket debut the previous session.

DexCom jumps

DexCom priced an upsized $1.1 billion, from $1 billion, of five-year convertible notes after the market close on Tuesday at par with a coupon of 0.375% and an initial conversion premium of 37.5%.

Pricing came at the midpoint of talk for a coupon of 0.25% to 0.5% and at the cheap end of talk for an initial conversion premium of 37.5% to 42.5%, according to a market source.

The pricing of the notes was aggressive with the deal modeling out to fair value at the midpoint of talk based on underwriters’ assumptions of 200 basis points over SOFR and 42% vol., a source said.

“They got away with murder,” a source said.

Despite the richness of the offering, the deal played to strong demand with DexCom a well-known and well-liked name in the market with a track record of success.

The medical device company’s stock also had a high vol., which has been lacking in the investment-grade issuance that has dominated the space, a source said.

DexCom’s new notes were off to a strong start in the aftermarket with stock in positive territory.

The 0.375% notes were changing hands at 102.125 versus a stock price of $119.19 early in the session.

They expanded about 1 to 1.5 points dollar-neutral.

There was $77 million in reported volume.

DexCom’s stock launched the day with gains but turned negative as the session progressed.

Stock was trading at $117.08, a decrease of 0.87%, shortly before 11 a.m. ET.

Day 2

CMS Energy’s new 3.375% convertible notes due 2028 and FirstEnergy’s 4% convertible notes due 2026 continued to add to the strong gains made on their aftermarket debut the previous session.

CMS’ 3.375% convertible notes added another 0.5 point outright with stock lower early in the session.

The notes were changing hands at 101.625 versus a stock price of $61.45.

There was $88 million in reported volume.

CMS’ stock was $61.22, a decrease of 0.44%, shortly before 11 a.m. ET.

FirstEnergy’s 4% convertible notes due 2026 gained about 0.375 point outright with stock either side of unchanged.

The 4% notes were trading just shy of 101 versus a stock price of $38.60 early in the session, according to a market source.

There was $12 million in reported volume.

FirstEnergy’s stock was $38.72, a decrease of 0.077%, shortly before 11 a.m. ET.

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