Morning Commentary: Softbank/Alibaba mandatory looks cheap; heaviness hits secondary market

By Rebecca Melvin

New York, June 1 – Softbank Group Corp.’s planned $5 billion of mandatories exchangeable into Alibaba Group Holding Ltd. stock valued cheaply and were expected to do fine in the market after pricing late Wednesday, a New York-based trader said.

The Alibaba mandatory looked about 3% cheap, using a credit spread of 125 basis points over Libor and a 33% to 30% vol., the trader said.

There should be plenty of crossover demand, and it should do fine, the trader said. “It models cheap enough and gives guys exposure to a big, widely held tech name.”

Nevertheless, its ultra-large size and technicalities related to the structure as a mandatory and an exchangeable are strikes against it.

A second market source noted, “This is trouble for closet indexers who may not want so much exposure to Alibaba, China and a mandatory.”

Softbank, which is executing the deal via a new trust known as Mandatory Exchangeable Trust, which is incorporated in the United States, is planning to price the three-year paper with a 5.25% to 5.75% yield and a 17.5% to 22.5% initial exchange premium.

Back in the secondary market, convertible paper was generally “better for sale,” meaning that there were more offers to sell issues than bids to buy. Volume was light.

“Things are very heavy,” a trader said.

Micron Technology Inc.’s 3% convertibles traded about 0.5 point lower at 72.5 early Wednesday, according to Trace data. Shares of the Boise, Idaho-based chipmaker were last down 6 cents, or 0.5%, at $12.65.

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