Tesla convertible offering talk of the town; outstanding notes expand; PROS trades up

By Abigail W. Adams

Portland, Me., May 2 – The convertibles primary and secondary market received a jolt of electricity on Thursday with both abuzz following the launch of Tesla Inc.’s $1.35 billion convertible notes offering and PROS Holdings Inc. pricing a new deal.

Tesla plans to price $1.35 billion of five-year convertible notes after the market close on Thursday.

The deal looked cheap and was a wise move on the part of the struggling electric car manufacturer, sources said.

As players eyed the new offering in the works, Tesla’s outstanding convertible notes jumped in active trading.

PROS Holdings’ newly priced 1% convertible notes due 2024 were also active in the secondary space with the notes expanding on their market debut.

Cree, Inc.’s 0.875% convertible notes due 2023 were volatile alongside stock following its third-quarter earnings report. However, the notes were expanding on a dollar-neutral basis.

Tesla’s new offering

Tesla plans to price $1.35 billion of five-year convertible notes after the market close on Thursday with price talk for a coupon of 1.5% to 2% and an initial conversion premium of 27.5% to 32.5%, according to a market source.

The deal is pricing concurrently with a $630 million, or 2,723,198 share, common stock offering.

The new offering was widely anticipated with many asking “when will they do it” as opposed to “will they do it.”

The deal was heard to be in the market with a credit spread of 575 basis points over Libor and a 40% vol.

Sources pegged the deal about 1.5 points cheap at the midpoint of talk using those assumptions.

It was priced to look attractive compared to Tesla’s outstanding issues, a market source said.

The capital raise was “a very wise move,” a market source said.

Tesla has struggled in recent weeks, hitting on a two-year low following its first-quarter earnings report.

While the stock price may have played a factor in Tesla raising more from its convertible offering than equity, the deal would most likely have looked similar regardless of the stock price, a source said.

The deal was heard to have done well during the subscription process with the books closed by the mid-afternoon.

Tesla in focus

While market players eyed the new offering in the works, the electric car manufacturer’s outstanding convertible bonds were making gains on both an outright and dollar-neutral basis.

Tesla’s 1.25% convertible notes due 2021 initially popped 2 points outright to trade as high as 100.5 only to come in and trade just south of par into the afternoon.

The notes were expanded 1.5 points dollar-neutral early in the session, a market source said.

Another source saw the notes expanded 0.75 point in the mid-afternoon.

The 2.375% convertible notes due 2022 also gained about 2 points outright to trade at 104.875. They were expanded about 0.75 point to 1 point dollar-neutral, sources said.

The convertible notes dominated activity in the secondary space, accounting for $65 million of the $546 million in reported volume by the late afternoon.

SolarCity Corp.’s 1.625% convertible notes due Nov. 1, 2019 also improved on the news, rising 1 point to 98.

The new offering lifted Tesla’s capital structure, with the credit spread tightening about 100 bps on anything with a four- to five-year duration, a source said.

Tesla stock traded as high as $247.13 and as low as $237.72 before closing the day at $244.10, an increase of 4.31%.

PROS at par

PROS Holdings priced $125 million of five-year convertible notes prior to the market open on Thursday at par with a coupon of 1% and an initial conversion premium of 30%.

Pricing came at the midpoint of talk for a coupon of 0.75% to 1.25% and an initial conversion premium of 27.5% to 32.5%, according to a market source.

The new paper was active in the secondary space for such a small issue, a market source said.

More than $14 million of the bonds were on the tape about one hour into Thursday’s session and $25 million of the bonds were in play by the late afternoon.

The 1% convertible notes traded as low as 99.75 and as high as 101.25 but were mostly hovering around par early in the session.

They were changing hands at 100.125 bid, 100.875 offered versus a stock price of $50.45 shortly before 11 a.m. ET, a market source said.

The notes improved as the session progressed.

They were changing hands at 101.5 by the mid-afternoon and were expanded about 0.5 point dollar-neutral, a source said.

PROS stock traded as high as $51.43 but closed the day at $50.64, a decrease of 0.33%.

Cree volatile

Cree’s 0.875% convertible notes due 2023 were volatile alongside stock following the manufacturer and marketer of LED products earnings report.

The convertible notes traded as low as 116.5 and as high as 125 during Thursday’s session. They were expanded about 0.5 point dollar-neutral.

Cree stock underwent “a huge reversal” during Thursday’s session, a market source said.

Stock traded as low as $57.00 but closed the day at $66.19, an increase of 2.18%.

Cree reported non-GAAP earnings per share of 20 cents compared to analyst expectations for earnings per share of 16 cents. Revenue was $274.1 million versus analyst expectations for earnings of $274.7 million.

Mentioned in this article:

Cree, Inc. Nasdaq: CREE

PROS Holdings Inc. NYSE: PRO

Tesla Inc. Nasdaq: TSLA

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