Morning Commentary: K12 convertible offering eyed; Dick’s in focus post earnings

By Abigail W. Adams

Portland, Me., Aug. 26 – The convertibles primary market continued to churn out new deals heading into the final days of August with the summer doldrums short-lived in the convertibles universe.

K12 Inc.’s offering $300 million of seven-year convertible senior notes is on deck for after the market close on Wednesday.

The deal from the online education company looked cheap based on underwriters’ assumptions and will appeal to hedge accounts given the volatility in the stock, sources said.

Meanwhile, as market players eyed the new deal in the pipeline, Dick’s Sporting Goods Inc.’s 3.25% convertible notes due 2025 were in focus with the notes jumping on an outright basis alongside stock after a large earnings beat.

K12 eyed

K-12 plans to price $300 million of seven-year convertible senior notes after the market close on Wednesday with price talk for a coupon of 1.125% to 1.625% and an initial conversion premium of 30% to 35%.

The notes were heard to be marketed with assumptions of a credit spread of 550 basis points over Libor and a 40% vol., according to a market source.

Using those assumptions, the deal looked about 2.875 points cheap at the midpoint of talk, a source said.

The Herndon, Va.-based for-profit online education company’s stock “certainly has volatility,” a source said.

Stock was trading around $25 in June but doubled in value in early August when it hit its 52-week high of $52.84.

Stock closed the previous session at $43.55. However, it was taking a hit on Wednesday on the heels of the convertible notes offering.

K-12 stock was down to $39.40, a decrease of 9.53%, shortly before 11 a.m. ET.

It would be possible to argue for a volatility of 45% for the stock, which would increase the cheapness of the deal to 4 points at the midpoint of talk, a source said.

However, “that would be aggressive,” the source said.

Given the volatility in the stock, the deal, which comes with a call spread, will definitely appeal to hedge accounts.

Dick’s in focus

Dick’s 3.25% convertible notes due 2025 were in focus early Wednesday with the notes gaining outright as stock soared after a large earnings beat.

The 3.25% notes rose 15 points outright with stock up more than 15%.

The notes were changing hands at 168 early Wednesday, a source said. More than $17 million of the bonds were on the tape less than one hour into the session.

Dick’s stock was changing hands at $53.76, an increase of 15.19%, shortly before 11 a.m. ET.

The sporting goods retailer crushed analyst expectations and reported earnings per share of $3.12 for the second quarter versus analyst expectations for earnings of $1.26.

Revenue was $2.71 billion versus analyst expectations for revenue of $2.46 billion.

Dick’s second-quarter results were the highest in the company’s history and were driven by new consumers working out at home and engaging in more outdoor activities as a result of the Covid-19 pandemic, Business Insider reported.

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