New MercadoLibre, Scorpio Tankers expand 2 points plus on hedge; Palo Alto better on debut

By Rebecca Melvin

New York, June 25 – The convertibles market’s three new deals all added on an outright basis and expanded on a dollar-neutral, or hedged, basis on their debuts in secondary dealings on Wednesday, market sources said.

MercadoLibre Inc.’s newly priced 2.25% convertibles due 2019 traded up to as high as 103.5 bid, 104.5 offered versus an underlying share price of $90.25 and expanded on a dollar-neutral, or hedged, basis, by as much as 3.25 points after the Latin American e-commerce company priced $300 million of the senior notes at the tight end of talk, market sources said.

The new MercadoLibre bond pulled back slightly from those levels to end the day 102 bid, 102.5 offered, representing a 2-point expansion dollar neutral, a syndicate source said.

Scorpio Tankers Inc.’s new 2.375% convertibles due 2019 traded up to 103.625 bid, 104.125 offered versus an underlying share price of $9.65 and also expanded on a dollar-neutral basis, after the Monaco-based tanker concern priced an upsized $300 million of the senior notes at the midpoint of talk.

The Scorpio Tankers deal was initially talked at $250 million in size. At the end of the session, it was called up 2.25 points to 2.5 points.

Palo Alto Networks Inc.’s newly priced $500 million of 0% five-year convertibles traded up to as high as 100.75 bid, 101 offered versus a share price of $78.55 in the early going and expanded on a dollar-neutral basis after the network security company priced the senior notes at the rich end of talk late Tuesday.

The new Palo Alto 0% bonds were quoted at 101 bid, 101.5 offered at the end of the session versus the closing stock price of $79.75, which represented an expansion of 0.5 point on a dollar-neutral basis, a syndicate source said.

Back in established issues, trading was light. One trader said that things were slightly weaker on the back of new paper, but not dramatically so. NetSuite Inc.’s 0.25% convertibles due 2018 hit the Trace tape, trading down a point or less to 102.25 and 102.375 with shares turning stronger to end at $85.30 after early weakness. The San Mateo, Calif.-based e-commerce company priced $310 million of the convertibles in May 2013.

The market was watching for Dominion Resources Inc.’s $900 million of three-year mandatory convertible equity units, which was expected to price after the market close.

Dominion’s existing convertibles, the 6.125% convertible A tranche and the 6% convertible B tranche, were down 0.6% and 0.8%, respectively, at the end of the session, which was in line with action in the common shares.

MercadoLibre in demand

MercadoLibre’s new 2.25% convertibles due 2019 ended the session Wednesday at 102 bid, 102.5 offered versus the closing share price of $89.67.

MercadoLibre shares slipped $1.98, or 2%, on Wednesday.

The bonds expanded about 2 points on a delta in the mid-60% range, a syndicate source said.

Earlier the bonds traded up to 104 or a little more. Then they were quoted at 103 bid, 103.5 offered with the underlying shares at about $90.22, which was down 1.6%.

At late morning, the bonds were said to have expanded on a dollar-neutral basis by a greater amount of 3.25 points.

MercadoLibre priced $300 million of the five-year convertible senior notes at par after the market close on Tuesday to yield 2.25% with an initial conversion premium of 37.5%.

The Rule 144A notes priced at the tight end of talk, which was for a 2.25% to 2.75% coupon and a 32.5% to 37.5% premium.

There is an over-allotment option for up to an additional $30 million of notes.

The deal was sold via J.P. Morgan Securities LLC, Deutsche Bank Securities Inc., Goldman Sachs & Co., BofA Merrill Lynch and Citigroup Global Markets Inc.

The notes are non-callable. They are convertible under certain conditions. Upon conversion, holders will receive shares, cash or a combination of shares and cash at the company’s election.

In connection with the pricing of the notes, MercadoLibre entered into privately negotiated capped call transactions with initial purchasers of the notes.

A portion of the proceeds will be used to pay the cost of the capped call transactions. Remaining proceeds will be for general corporate purposes.

Buenos Aires-based MercadoLibre hosts online commerce platforms in Latin America.

Scorpio puts in strong debut

Scorpio Tankers’ 2.375% convertibles jumped up to around 104 in early trade and were quoted at 103.625 bid, 104.125 offered with the underlying shares at $9.65. That was up on a dollar-neutral basis by about 2.25 points, a New York-based trader said in the early going.

Shares performed well on Wednesday ending up 47 cents, or 5%, to $9.85.

At the end of the session, the bonds were still called better by 2.25 points to 2.5 points on a hedged basis.

Scorpio priced $300 million of five-year convertible senior notes, which represented an upsizing of $50 million. They had an initial conversion premium of 30%.

Pricing came at the midpoint of talk, which was for a 2.125% to 2.625% coupon and a 27.5% to 32.5% premium.

The notes were sold via by BofA Merrill Lynch and UBS Securities LLC.

The bonds are non-callable for three years and then are provisionally callable after that if shares exceed 130% of the conversion price.

Proceeds will be used for a concurrent share repurchase of up to $150 million and for general corporate purposes, including additional potential repurchases of its common stock.

Monaco-based Scorpio is an oil tanker business.

Palo Alto adds 0.5 point

Palo Alto’s new 0% convertibles were quoted at 101 bid, 101.5 offered versus the closing stock price of $79.75.

That was a 0.5 point expansion assuming a 55% delta, a syndicate source said.

Palo Alto shares recouped early losses and continued to gain strength, ending higher by 98 cents, or 1.2%, after slipping lower in early action.

Palo Alto priced the day’s biggest deal, which was $500 million. The notes priced at the rich end of talk for a 0% to 0.5% coupon and 35% to 40% premium.

The deal has a $75 million greenshoe and was priced via bookrunners JPMorgan, RBC Capital Markets LLC, Citigroup, Credit Suisse Securities (USA) Inc., Goldman Sachs, Morgan Stanley & Co. LLC, UBS Securities and Raymond James & Associates Inc. There were no co-managers.

In connection with the notes offering, Palo Alto entered into privately negotiated convertible note hedge and warrant transactions, or a call spread, with initial purchasers of the notes or their affiliates.

The strike on the warrants is $137.8475, which lifts the effective initial conversion premium from the issuer’s perspective to 75%.

A portion of the proceeds will pay the cost of the call spread, with remaining proceeds for general corporate purposes, which may include working capital, capital expenditures, potential acquisitions and strategic transactions. But Palo Alto Networks does not currently have any agreements or understandings with respect to any acquisitions or strategic transactions.

Santa Clara, Calif.-based Palo Alto Networks is a network security company.

Mentioned in this article:

Dominion Resources Inc. NYSE: D

MercadoLibre Inc. Nasdaq: MELI

NetSuite Inc. NYSE: N

Palo Alto Networks Inc. Nasdaq: PANW

Scorpio Tankers Inc. Nasdaq: STNG

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