Greenlight Capital convertibles eyed; Tesla improves; Exact Sciences gets hammered

By Abigail W. Adams

Portland, Me., Aug. 2 – While convertibles primary market activity has slowed its pace in the heart of earnings season, it has not stopped, with one new deal in the works.

Greenlight Capital Re., Ltd. plans to price $100 million of five-year convertible notes after the market close on Thursday with price talk for a coupon of 3.5% to 4% and an initial conversion premium of 25% to 30%.

Sources pegged the deal between 1 and 3 points cheap based on the assumptions used.

The capital raise comes as founder David Einhorn announced an 18.5% year-to-date loss for hedge fund Greenlight Capital, which was partly fueled by the company’s short position in Tesla Inc.

As Einhorn and Tesla CEO Elon Musk exchange twitter jabs, their proposed and existing bonds were in focus in the convertible space.

Despite an earnings miss, Tesla stock went flying on Thursday with its convertible bonds, including SolarCity’s convertible notes, which have been pointed to as the straw that could break Tesla’s back, jumping on an outright basis.

While Tesla’s bonds were volume leaders on Thursday, Exact Sciences Corp.’s 1% convertible notes due 2025 were the most actively traded of the day.

The notes saw up to a 9-point drop on an outright basis as the company’s stock got hammered after reporting second-quarter earnings. The move was largely in line on a dollar-neutral basis, sources said.

GDS Holdings Ltd.’s 2% convertible notes due 2025 remained active and continued their recovery on Thursday with the notes regaining another 3 points dollar-neutral after tanking on both an outright and dollar-neutral basis on Tuesday.

Greenlight eyed

Greenlight Capital’s $100 million convertible note offering looks cheap, sources said, although some pegged the credit spread higher than what was in the market.

Underwriters are marketing the deal with a credit spread of 500 basis points over Libor and a 25% vol., a market source said. Using those assumptions, the deal models a little more than 3 points cheap.

The credit spread is aggressive, another source said, pegging it more like 550 bps over Libor. With a higher credit spread, the deal looked a little more than 1 point cheap.

The stock “fell off a cliff” in January and February, and the largest holders are “index people,” the source said.

Proceeds from the convertible notes offering will be used to help capitalize subsidiaries, which one source said gave them “the heebie geebies.”

However, the concurrent share buyback of 1 million shares is a plus and the borrow on the stock is decent.

The deal looked decent and would provide an opportunity to collect a higher-than-average coupon and ride the stock, the source said.

“I wouldn’t go hog wild (over the deal), but I wouldn’t puke on it either,” a market source said.

Tesla in focus

While Tesla reported an earnings miss after the market close on Wednesday, Musk’s composure on the earnings call, Tesla’s less-than-expected cash burn, ramped up production of Model S sedans and affirmation that it would be able to pay off its soon to mature SolarCity convertible bonds sent Tesla shares flying early Thursday with the company’s convertible notes following suit.

“They’re gangbusters,” a market source said.

Tesla’s 0.25% convertible notes due 2019 jumped more than 5 points outright.

They were seen trading at 109 versus an equity price of $344.82 with more than $23 million of the bonds on the tape by market close, according to a market source.

Tesla’s 1.25% convertible notes due 2021 jumped more than 8 points outright.

They were seen trading at 112.5 versus an equity price of $346.85 with more than $20 million of the bonds on the tape by market close.

Tesla’s 2.375% convertible notes due 2022 jumped more than 10 points outright.

They were seen trading at 120.6 versus an equity price of $341.28 with more than $18 million of the bonds on the tape by market close.

Much of the trading activity was from outright accounts with buyers moving from the short-dated 0.25% notes to the longer dated notes, a market source said.

Tesla stock closed Thursday at $349.54, an increase of 16.19%.

While the notes were slower to trade, the soon-to-mature 2.75% SolarCity bonds were also active.

They were seen trading Thursday at 99.25 with a 6% yield to maturity, according to a market source. The notes were trading with a 14% yield to maturity earlier in the week.

The 2.75% notes mature on Nov. 1, 2018 and have $230 million outstanding, according to Trace volume.

SolarCity’s 1.625% convertible bond due 2019 also saw its yield to maturity drop from almost 11% Wednesday to about 8% on Thursday with the notes creeping up to 92.5.

The 1.625% notes have $566 million outstanding, according to Trace data.

The soon-to-mature SolarCity notes have been pointed to as the straw that could break Tesla’s back and push the company into bankruptcy.

Musk reaffirmed on his earnings conference call that Tesla would be able to pay off the bonds without the need for an additional capital raise.

Exact Sciences pummeled

Exact Sciences’ 1% convertible notes and stock got pummeled on Thursday after the company reported second-quarter earnings.

The 1% convertible notes were down more than 9 points outright in high-volume trading. They were seen trading at 95.5 bid, 96.25 offered versus an equity price of $50.00, according to a market source.

The notes may have seen a modest 0.25 point expansion if stock was purchased at the open, a market source said, before the stock plummeted upwards of 19% in intra-day trading.

The large outright move in the 1% notes was largely in line on a dollar-neutral basis, another source said.

The notes “may be a touch better” dollar-neutral but it depends on the delta used, the source said.

More than $28.5 million of the bonds were on the tape by the market close.

While stock dropped as low as $47.85 on Thursday, it pared its losses and closed the day at $51.645, a decrease of 12.64%.

Exact Sciences reported second-quarter earnings after the market close on Wednesday.

The molecular diagnostics company beat analyst expectations with a loss per share of 30 cents versus expectations for a 33 cent loss per share.

However, Exact Sciences reported 215,000 Cologuard tests, the company’s flagship product which screens for colon cancer.

The completed tests in the second quarter fell short of Exact Sciences’ previous guidance of 220,000 to 230,000 completed tests.

Exact Sciences’ 1% notes have had a volatile existence with the notes plummeting to the low 90s shortly after hitting the market in January due to positive clinical results for a rival product from a Taiwanese competitor.

The notes regained their footing and traded as high as 112 on an outright basis before a $190 million add-on was priced at 106.5 in early June.

The 1% notes traded in the 103 range on Wednesday, according to Trace data.

GDS’ recovery

GDS Holdings’ 2% convertible notes due 2025 continued their recovery on Thursday with the notes continuing to gain on an outright and dollar-neutral basis in active trading in the secondary space.

The notes were seen trading at 82 versus an equity price of $28.27 with more than $15 million of the bonds on the tape.

They were up another 3 points dollar-neutral on Thursday after regaining about 2.5 points to 3 points dollar-neutral on Wednesday.

GDS stock closed Thursday at $27.89, an increase of 11.56%.

GDS’ convertible notes and stock plummeted on Tuesday after short-seller Blue Orca Capital valued the company’s shares at $0.

The notes were down more than 22 points outright and contracted 10 points dollar-neutral on Tuesday.

While sources were mixed about the validity of the report, people were lining up to defend GDS, a market source said.

Mentioned in this article:

Exact Sciences Corp. Nasdaq: EXAS

GDS Holdings Ltd. Nasdaq: GDS

Greenlight Capital Re., Ltd. Nasdaq: GLRE

Tesla Inc. Nasdaq: TSLA

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