Convertibles primary active: Insulet, Zillow, Okta, Aerie Pharma, Encore launch deals

By Rebecca Melvin

New York, Sept. 3 – The convertibles market reconvened on Tuesday for an active day in both the primary and secondary markets. The session began with focus on a new deal announced ahead of the open from Insulet Corp. This deal was joined later in the session by new offerings from Zillow Group Inc., Okta Inc., Aerie Pharmaceuticals Inc. and Encore Capital Group Inc.

Tuesday was the first trading day of the week after U.S. financial markets were closed on Monday in observance of the Labor Day holiday.

Pricing on some of the deals looks rich.

Insulet plans to price $660 million of seven-year convertible notes to yield 0.375% to 0.875% with an initial conversion premium of 30% to 35%, according to a market source.

A New York-based market source suggested valuation of the deal should be calculated using a credit spread of 400 basis points over Libor.

A second source said a credit spread of 300 bps over Libor and 35% vol. would make the deal worth 101.76 at the midpoint of talk, or 0.625% and 32.5%.

The proceeds of the new issue are earmarked to fund repurchases of the company’s existing 1.25% convertibles, which are due in 2021 and callable in September subject to a 130% price hurdle. Those notes, of which $345 million are outstanding, have an initial conversion price of $58.37. Insulet’s shares were last at $157.74, which was up $3.57, or 2.3%, on the day.

“The [300 bps over Libor] credit assumption is tight for a company not making money,” the New York-based source said.

Insulet is a Billerica, Mass.-based medical device company that is a leader in tubeless insulin pump technology.

Zillow on tap

Seattle-based real estate database company Zillow plans to price $1 billion of convertible senior notes in two tranches after the market close on Wednesday.

The $500 million tranche of five-year notes is talked to yield 0.5% to 1% with an initial conversion premium of 35% to 40%. And the $500 million tranche of seven-year notes is talked to yield 1% to 1.5% with an initial conversion premium of 35% to 40%.

Zillow intends to use a portion of the net proceeds from the offering to pay the cost of capped call transactions, with the remainder of proceeds for general corporate purposes, which may include working capital, sales and marketing activities, general and administrative matters and capital expenditures.

Additionally, Zillow may choose to expand its current business through acquisitions of, or investments in, other businesses, products or technologies, using cash or shares of common stock or capital stock. However, the company has no definitive agreements or commitments with respect to any such acquisitions or investments at this time.

Okta eyes market

Okta plans to price a large $1 billion offering of six-year convertible notes with price talk for a coupon of 0% to 0.5% and an initial conversion premium of 42.5% to 47.5%.

The Okta convertibles were heard to be worth 101.57 at the midpoint of price talk using a credit spread of 225 bps over Libor and 40% vol., according to a New York-based market source.

In connection with the pricing, Okta will enter into new capped call transactions. The proceeds will cover these costs as well as the repurchase of Okta’s existing 2023 notes and for general corporate purposes.

Okta is a San Francisco-based enterprise identity provider. The Okta Identity Cloud connects enterprises with their employees, partners and customers.

Aerie offers notes

Aerie plans to price $250 million of convertible senior notes due 2024, which were being talked to yield 1% to 1.5% with an initial conversion premium of 32.5% to 37.5%, according to a market source.

BofA Securities Inc., Citigroup Global Markets Inc. and Stifel Nicolaus & Co. Inc. are joint bookrunners for the Rule 144A deal, which has a $37.5 million greenshoe and which is expected to price after the market close on Wednesday.

The notes are non-callable for three years and then provisionally callable at a price hurdle of 130%. There are no puts.

The notes have contingent conversion at a price trigger of 130%.

There is full dividend protection via conversion ratio adjustment and a make-whole adjustment premium in the event of change of control.

Based in Durham, N.C., Aerie Pharmaceuticals develops and commercializes treatments for glaucoma and other eye diseases.

Encore Capital eyed

Encore Capital plans to price $100 million of convertible senior notes due 2025 to yield 2.75% to 3.25% with an initial conversion premium of 25% to 30%, according to a market source on Tuesday.

The notes are non-callable for three years and then provisionally callable for three years at a 130% price hurdle. There are no puts.

Encore intends to use proceeds from the offering for general corporate purposes, which may include working capital, capital expenditures, acquisitions or repayment or repurchase of outstanding debt, including its revolving credit facility, its existing convertible notes and its 2023 exchangeable notes.

Encore is a San Diego-based specialty finance company.

Edenred bonds on tap

In the European market, France’s Edenred SA announced a €500 million offering of five-year Oceanes, which are bonds convertible into and/or exchangeable for new and/or existing shares.

The paper was talked at a price range of 105.5% to 108% of par, which corresponds to a yield to maturity comprised between minus 1.06% and minus 1.53% and will not bear interest. The nominal unit value of the bonds will be set at a premium of 35% to 40% above Edenred’s reference share price on the regulated market of Euronext in Paris.

The final terms were expected to be announced late Tuesday with settlement-delivery to take place on Sept. 6.

Unless previously converted, exchanged, redeemed or purchased and cancelled, the bonds will be redeemed at par on Sept. 6, 2024.

The bonds may be redeemed prior to maturity at the option of the company under certain conditions from Sept. 6, 2022 until maturity.

Bondholders may put the bonds at par upon a change of control leading to a rating downgrade.

The net proceeds of the offering will be used by the company for general corporate purposes, including the financing of potential external growth operations.

The business services company is based in Malakoff, France.

Secondary active

In the secondary market, the trio of Medicines Co. convertibles was ultra active, with that paper moving up as much as 11 points for Medicines’ 2.5% notes due 2022. Those were last at 144.1. Shares also surged as positive trial data flows in.

Elsewhere, convertible issuer RAIT Financial Trust filed Chapter 11 bankruptcy on Friday in the U.S. Bankruptcy Court for the District of Delaware.

According to a company news release, RAIT entered into an equity and asset purchase agreement to sell substantially all of its assets to an entity owned by funds managed by affiliates of Fortress Investment Group LLC through a court-supervised sale process.

Under the agreement, the Fortress entity provided a binding bid of $174.4 million and will assume specified liabilities. The bid is subject to higher or better offers in the bidding process.

RAIT said it would seek court approval to continue operations in the ordinary course of business during the sale process.

The real estate investment trust is based in Philadelphia.

Mentioned in this article:

Aerie Pharmaceuticals Inc. Nasdaq: AERI

Encore Capital Group Inc. Nasdaq: ECPG

Insulet Corp. Nasdaq: PODD

Medicines Co. Nasdaq: CDCO

Okta Inc. Nasdaq: OKTA

RAIT Financial Trust OTC: RASF

Zillow Group Inc. Nasdaq: ZG

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