Morning Commentary: Chegg convertible offering looks cheap; GOL Linhas notes on tap

By Abigail W. Adams

Portland, Me., March 21 – While new deal activity has been light compared to recent weeks, the convertibles primary market will price new paper before the week comes to a close.

Two deals totaling $800 million are slated to price after the market close on Thursday.

Chegg Inc. plans to price $500 million of six-year convertible notes, and GOL Linhas Aereas Inteligentes SA plans to price its offering of $300 million of five-year exchangeable notes.

Both deals look cheap, sources said.

Chegg’s new offering

Chegg plans to price $500 million of six-year convertible notes after the market close on Thursday with price talk for a coupon of 0.125% to 0.625% and an initial conversion premium of 27.5% to 32.5%.

Underwriters are marketing the deal with a credit spread of 275 basis points over Libor and a 40% vol., according to a market source.

Based on those assumptions, the deal models about 2.38 points cheap, a source said.

Using a more conservative vol. of 38%, the deal modeled about 1.3 points cheap, another source said.

The deal is coming as a “happy meal” in which approximately $50 million of the proceeds will be used to purchase common stock.

Chegg is a repeat issuer of convertible notes with its debut convertible notes offering pricing in March of 2018.

Chegg priced a $300 million issue of five-year convertible notes with a coupon of 0.25% and an initial conversion premium of 32.5% with the greenshoe lifting the total size of the deal to $345 million.

The 0.25% convertible notes have performed well since pricing with the notes already in-the-money.

The 0.25% notes due 2023 were among the most actively traded issues in the secondary space.

The notes were changing hands around 158.71 early in the session, a market source said. More than $5 million of the bonds were on the tape by the late afternoon.

Holders were most likely switching out of the old notes to take positions in the new offering, a market source said.

With Chegg’s 0.25% convertible notes essentially moving alongside equity, some holders, particularly outright accounts, may want more of a bond base, the source said.

GOL Linhas to price

After an extensive roadshow, GOL Linhas plans to price its offering of $300 million five-year exchangeable notes after the market close on Thursday.

Price talk is for a coupon of 3.75% to 4.25% and an initial exchange premium of 30% to 40%.

Timing on the Rule 144A and Regulation S deal was accelerated with the roadshow initially scheduled to run through March 25 with pricing to take place after the market close.

The deal was marketed with a credit spread of 575 bps over Libor and a 40% vol., which modeled about 8 points cheap, according to a market source.

However, the borrow on the Sao Paulo-based airline services operator is difficult. The deal is pricing concurrently with a borrow facility.

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