Western Digital holds strong; recent deals still ‘licking wounds’; Shutterfly soars

By Abigail W. Adams

Portland, Me., Feb. 1 – The convertibles secondary market was quiet Thursday with limited trading activity after a flurry of action surrounding the influx of $1.65 billion in new paper on Wednesday.

Western Digital Corp.’s 1.5% convertible notes due 2024 were “hanging in there” and relatively unchanged from their 1.5 point dollar-neutral expansion at their market debut Wednesday, a market source said.

Trading of the new notes was subdued during Thursday’s session after dominating the secondary market on Wednesday. “It was a blow out yesterday,” a market source said, with bids for the new notes at 101 before the market opened.

As the landmark $1 billion deal from Western Digital holds strong, some recent deals “are still licking their wounds,” a market source said.

Alder BioPharmaceuticals Inc.’s recently priced 2.5% convertible notes due 2025 continued to struggle on Thursday. The notes, which priced after the market close on Monday, remained in the 97 to 98 range in scattered trading activity.

Insmed, Inc.’s recently priced 1.75% convertible notes due 2025 were contracted about 1.5 points on a dollar-neutral basis with outright trading prices as low as 95, a market source said.

JPMorgan Chase Financial Co. LLC’s 0.25% five-year cash-settled convertible notes linked to Voya Financial, Inc. continues to be a “head scratcher,” a market source said.

The 0.25% notes have seen little trading action since they debuted on Wednesday. When they did trade, they were at or just above par.

While some recent deals struggle, Shutterfly Inc.’s 0.25% convertible notes due 2018 jumped 10 points on an outright basis after a positive fourth-quarter report and a company announcement about its acquisition of Lifetouch.

The 0.25% convertible notes mature in May.

Western Digital simmers

After dominating the secondary market on their Wednesday debut, trading activity surrounding Western Digital’s new 1.5% notes settled down on Thursday.

The notes were down about a 1/8 point dollar-neutral in early trading Thursday after a 1.5 point expansion on their market debut Wednesday, a market source said.

The 1.5% notes were at 101.75 bid, 102.125 offer versus an equity price of $87.94 in early trades during Thursday’s session. The notes were at 102.5 later in the afternoon with their 1.5 point expansion relatively unchanged, a market source said.

Due to the size of the deal, “moving the market much one way or the other would be a herculean task,” the source said.

The new notes dominated trading activity on Wednesday with some hedge players flipping the notes to outright investors hungry for investment-grade convertible bonds.

However, trading activity was slow Thursday with only four trades on the tape early in the session, a market source said. There were only 12 completed trades by late afternoon.

Western Digital’s convertible bond offering “was done as a happy meal,” a market source said. Concurrently with the pricing of the 1.5% notes, Western Digital agreed to repurchase $153.5 million of company shares.

While the deal attracted both outright and hedge players, “because it’s investment grade a lot of outrights want to be involved and outright funds will pay up to fill up their coffers,” the source said.

Hedge players did turn some of their allocation over to the secondary market, but held on to some “to play with the stock,” a market source said.

The wounds

While Western Digital maintained their expansion, other recent deals continued to struggle.

Alder BioPharmaceuticals recently priced 2.5% notes due 2025 continued their struggle on Thursday, after contracting 0.75 point on a dollar-neutral basis at their market debut Tuesday.

The 2.5% notes remained in the 97 to 98 range in scattered trading Thursday, which is where they have traded since hitting the market.

Alder BioPharmaceuticals’ stock closed Thursday at $14.20, an increase 0.35%.

The new notes were in high demand during the bookbuilding process and priced on the rich end of revised price talk. However, they fell apart on their market debut as Alder BioPharmaceutical stock tanked.

Insmed’s 1.75% notes also continued to struggle on Thursday. The notes were contracted about 1.5 point on a dollar-neutral basis, a market source said.

Insmed was also in demand during the bookbuilding process, pricing an upsized $400 million at the rich end of talk for a coupon and richer than talk for an initial conversion premium on Jan. 24.

The greenshoe was also fully exercised, lifting the size of the deal to $450 million. The notes traded as high as 103 at their market debut and solidified around 101 their first few days in the market.

The 1.75% notes are now trading as low as 95, a source said. “That was touted as being a great deal,” a market source said.

The ‘head scratcher’

JPMorgan’s 0.25% cash-settled notes due 2023 linked to Voya Financial stock has some people scratching their heads.

JPMorgan priced $350 million of the 0.25% notes after the market close Tuesday; however, the notes have attracted little attention since their debut.

When they have traded, the 0.25% notes have been at or just above par, a market source said. While the initial conversion premium is 32.5%, the stock reference price will not be determined until next week.

The 0.25% notes, also, have no takeover protection and Voya Financial has long been rumored to be up for sale, a market source said.

Shutterfly soars

As trading activity around recently priced deals tempers, Shutterfly’s soon-to-mature 0.25% notes have been in focus since the online photo publishing company released positive fourth-quarter results and announced its acquisition of Lifetouch on Wednesday.

The 0.25% notes jumped more than 10 points to trade north of 115 during Thursday’s session, a market source said. Shutterfly stock closed Thursday at $73.80, an increase of 8.29%.

The 0.25% notes mature in May.

In 2017, Shutterfly entered into a credit agreement with Morgan Stanley Senior Funding, Inc. for a revolving loan facility for $200 million and delayed draw loan facility for $300 million.

Amongst other uses, proceeds from the loans could be used to settle the 0.25% notes due 2018, according to a company release at the time of the credit agreement.

The 0.25% notes still have $300 million outstanding, according to Trace data.

Shutterfly entered into a definitive agreement on Jan. 30 to acquire Lifetouch, a school photography company, for $825 million.

Morgan Stanley provided an $850 million incremental term loan facility to support the acquisition.

“With a volatility like that,” Shutterfly’s 0.25% notes are a prime candidate for refinancing with a new convertible bond issuance, a market source said.

Mentioned in this article:

Alder BioPharmaceuticals Inc. Nasdaq: ALDR

Insmed, Inc. Nasdaq: INSM

Shutterfly Inc. Nasdaq: SFLY

Voya Financial, Inc. NYSE: VOYA

Western Digital Corp. Nasdaq: WDC

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