ConMed convertible notes come upsized after price talk tightened; semiconductors active

By Abigail W. Adams

Portland, Me., Jan. 24 – With the year starting off lightly for new issuance, all eyes were on a new convertible bond deal, which came upsized and priced after the market close.

ConMed Corp. sold an upsized $300 million of five-year convertible notes at par to yield 2.625% with an initial conversion premium of 27.5%, according to a company news release. The deal size was increased from a planned $275 million.

At the original size, the deal was heard to be in demand during bookbuilding with price talk tightened.

The ongoing government shutdown and continued volatility in the equity markets is keeping potential issuers at bay, a market source said.

Many are waiting for continued positive momentum in equities as opposed to the give and take seen in the early weeks of 2019.

Meanwhile, it was another mixed day for equities with the Dow Jones industrial average closing the day down 22.38 points but the Nasdaq closing the day up 0.68%.

It was a strong day for the tech sector in the convertibles secondary space with earnings beats from three large semiconductor companies buoying the overall space.

Microchip Technology Inc.’s 1.625% convertible notes due 2025 were among the top volume movers in the space with the notes making gains on an outright basis alongside stock.

Teradyne Inc.’s 1.25% convertible notes due 2023 also jumped on an outright basis alongside stock after an earnings beat.

Western Digital Corp.’s 1.5% convertible notes due 2024 were also actively traded with the company slated to report earnings after the market close.

ConMed prices

ConMed sold an upsized $300 million of five-year convertible notes after the market close on Thursday at par with a coupon of 2.625% and an initial conversion premium of 27.5%.

Price talk was tightened during bookbuilding to a coupon of 2.625% to 2.875% and an initial conversion premium of 27.5%, according to a market source.

Initial price talk was for a coupon of 2.875% to 3.375% and an initial conversion premium of 22.5% to 27.5%.

Underwriters were marketing the deal with assumptions of 400 basis points over Libor and a 25% vol., according to a market source.

Using those assumptions, the deal modeled cheap at the midpoint of original price talk, source said.

However, the revised price talk took the cheapness out of the notes, a market source said.

Sources initially pegged the notes 2 to 2.5 points cheap at the midpoint of talk.

However, underwriters were being conservative with the credit spread, a source opined, which was most likely due to the market conditions in the fourth quarter.

The credit spread could easily be tightened to 350 bps over Libor, which would make the deal about 3.25 points cheap at the midpoint of initial talk, the source said.

ConMed is a repeat issuer of convertible notes and a solid company, sources said.

While companies in the health care sector are known for their cash burn, ConMed has positive cash flow and solid EBITDA, a market source said.

The deal was heard to be in demand during bookbuilding with most in agreement the terms were attractive.

The cheapness of the deal was a surprise to some, given the shortage of new paper in the market.

However, with the revised pricing, the deal was seen as fair value at the midpoint of talk, another source said.

Microchip dominates

Microchip’s 1.625% convertible notes due 2025 were the most actively traded issue in the secondary space on Thursday as stock surged on the strength of the semiconductor sector.

The 1.625% notes rose 6.5 points outright to 153 in active trading early in the session, according to a market source. They topped 155 later in the afternoon.

More than $17 million of the bonds had changed hands during Thursday’s session.

Microchip stock traded as high as $79.58 before closing Thursday at $78.34, an increase of 5.49%.

The momentum in the stock was giving people a reason to get involved in the name and set up a heavier hedge, a market source said.

Teradyne’s earnings

Teradyne’s 1.25% convertible notes due 2023 were also among the most actively traded issues in the secondary space after the developer of automatic test equipment reported an earnings beat.

The 1.25% convertible notes rose almost 9 points outright to close the day at 130, according to a market source.

Teradyne stock traded as high as $37.47 before closing the day at $36.04, an increase of 12.87%.

Stock soared following Teradyne’s fourth-quarter earnings announcement.

Teradyne beat on both the top and bottom lines with earnings per share of 63 cents, which beat analyst expectations of earnings per share of 13 cents.

Teradyne also beat with reported revenue of $519.6 million versus analyst expectations for revenue of $496 million.

Western Digital earnings eyed

Western Digital’s 1.5% convertible notes due 2024 were also large volume movers on Thursday with the notes improving slightly in the run up to its earnings report.

The 1.5% convertible notes were changing hands at 84.375 in the mid-afternoon. The semiconductor space in general was better bid on Thursday, a market source said.

Western Digital stock closed Thursday at $40.14, an increase of 6.7%.

While there were high hopes for Western Digital’s second-quarter earnings report, following large earnings beats from other names in the sector, the data storage company fell short.

Western Digital reported non-GAAP earnings per share of $1.45, which fell short of analyst expectations for earnings per share of $1.49.

Revenue also missed with a reported $4.23 billion in the second quarter versus analyst expectations for revenue of $4.25 billion.

The earnings miss spells trouble for the already struggling 1.5% convertible notes.

If the earnings miss results in a credit downgrade, the 1.5% convertible notes will suffer with many holders currently involved due to the notes’ investment-grade status, a market source said.

Mentioned in this article:

ConMed Corp. Nasdaq: CNMD

Microchip Technology Inc. Nasdaq: MCHP

Teradyne Inc. Nasdaq: TER

Western Digital Corp. Nasdaq: WDC

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