II-VI mandatories on deck; American Airlines volatile; Zscaler, Palo Alto notes active

By Abigail W. Adams

Portland, Me., July 1 – While activity has been subdued in the convertibles market with the new issue pipeline slowing down, one deal is set to price after the market close.

II-VI Inc. will kick off the new month and the new quarter with its $400 million offering of series A mandatory convertible preferred stock.

The optoelectronics maker received a rating upgrade as a result of the offering.

Meanwhile, activity remained subdued in the convertibles secondary space with $34 million on the tape about one hour into the session and $433 million on the tape about one hour before the close.

With pre-holiday illiquidity setting in, large, liquid issues were in focus.

American Airlines Group Inc.’s 6.5% convertible notes due 2025 were volatile on Wednesday with the notes hitting par early in the session but returning to their lows heading into the market close.

While volatile on an outright basis, they were largely moving in line dollar-neutral.

The recently issued convertible notes of competing cybersecurity firms Zscaler Inc. and Palo Alto Networks Inc. were also active.

While the notes saw nominal gains outright, they were also largely unchanged dollar-neutral.

II-VI on deck

II-VI’s $400 million offering of three-year par of $200 series A mandatory convertible preferred stock is set to price after the market close on Wednesday.

Price talk is for a dividend of 5.75% to 6.25% and a threshold appreciation premium of 17.5% to 22.5%, according to a market source.

The deal was heard to be marketed with assumptions of 450 basis points over Libor and a 45% to 41% vol. skew, which modeled out to $208.42 at the midpoint of talk, a source said.

The deal is pricing concurrently to a $350 million common stock offering.

Proceeds from the concurrent offering will be used to pay off the optoelectronics maker’s senior secured term loan B.

Moody’s Investors Service upgraded II-VI’s corporate family credit rating to Ba3 from B1 due to the common stock and mandatory convertible preferred stock offering.

The offering will enable II-VI to reduce its reported debt by 31% and reduce its leverage to 4.9x EBITDA from 6.8x, the rating agency said in a press release.

The mandatory convertible preferred stock appears as equity on the balance sheet as opposed to debt, which is one of the benefits of issuing mandatory convertible preferred stock as opposed to a straight convertible, a source said.

The offering from II-VI may be a precursor to a straight debt offering with the company attempting to reduce its leverage, a source previously said.

American Airlines volatile

American Airlines’ 6.5% convertible notes due 2025 were volatile on Wednesday.

The notes traded up to par shortly after the opening bell. However, they returned to a 92-handle heading into the market close.

The notes were changing hands at 92.25 versus an equity price of $12.74 about an hour before the closing bell.

While the notes were volatile on an outright basis, they were largely moving in line dollar-neutral, a source said.

More than $19 million of the bonds were on the tape during Wednesday’s session.

American Airlines stock traded as high as $14.28 shortly after the opening bell.

However, it quickly came in and traded to a low of $12.63 before ending the day at $12.81, a decrease of 1.99%.

Stock popped early in the session after the company announced that flights would resume with seating at full capacity July 1.

However, the move to lift seating limitations was heavily criticized by health officials.

Cybersecurity firms active

With activity slowing down in the run-up to the truncated holiday week, large, liquid issues were in focus with the recently issued convertible notes of competing cybersecurity firms in focus.

Zscaler’s 0.125% convertible notes due 2025 were gaining on an outright basis.

The notes traded up about 1 point outright to a 103-handle heading into the market close.

However, the notes were largely unchanged dollar-neutral, a source said.

With more than $22 million in reported volume heading into the market close, the notes were the most actively traded during Wednesday’s session.

Zscaler stock traded to a low of $107.02 and a high of $111.80 before closing the day at $111.51, an increase of 1.84%.

Palo Alto’s 0.375% convertible notes due 2025 were also active.

After largely trading on a 99-handle for the past few sessions, the notes popped above par heading into Wednesday’s close, according to a market source.

However, they were also largely unchanged dollar-neutral.

The bonds saw more than $18 million in reported volume.

Palo Alto stock traded to a low of $227.72 and a high of $230.95 before closing the day at $229.36, an increase of 0.061%.

Mentioned in this article:

II-VI Inc. Nasdaq: IIVI

American Airlines Group Inc. Nasdaq: AAL

Palo Alto Networks Inc. NYSE: PANW

Zscaler Inc. Nasdaq: ZS

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