Western Digital spinoff complicates convertibles offering; Sarepta, Spirit, JetBlue drop

By Abigail W. Adams

Portland, Me., Oct. 31 – The convertibles primary and secondary markets were active on Tuesday with one large deal set to price after the market close and topical news sparking outsized moves in outstanding issues.

Western Digital Corp. plans to price $1.3 billion of five-year convertible notes after the market close on Tuesday in the latest refinancing deal to come to market.

However, the deal was not clear cut with the company simultaneously announcing that it was splitting into two independent publicly traded companies.

Meanwhile, the secondary space was active with topical news destroying outstanding issues amid continued indecision in broader markets.

Equity indices wavered at the open but closed the day with gains while Treasuries were largely flat ahead of the Federal Open Market Committee’s Wednesday announcement.

The Dow Jones industrial average closed Tuesday up 124 points, or 0.38%, the S&P 500 index closed up 0.65%, the Nasdaq Composite index closed up 0.48% and the Russell 2000 index closed up 0.91%.

There was $98 million in reported volume about one hour into the session and $462 million on the tape in the late afternoon.

Sarepta Therapeutics Inc.’s 1.25% convertible notes due 2027 were in focus with the notes plunging outright and contracted dollar-neutral as the biotech’s stock led losses in equity markets on the heels of a failed clinical trial.

Spirit Airlines Inc.’s 1% convertible notes due 2026 and JetBlue Airways Corp.’s 0.5% convertible notes due 2026 continued to nosedive with JetBlue posting an earnings miss as the Department of Justice attempts to block its acquisition of Spirit.

Western Digital eyed

Western Digital plans to price $1.3 billion of five-year convertible notes after the market close on Tuesday with price talk for a coupon of 3% to 3.5% and an initial conversion premium of 25% to 30%.

The refinancing deal was heard to be in the market with assumptions of 400 basis points over SOFR and a 35% vol.

However, valuation of the deal was not so clear cut with Western Digital simultaneously announcing it would split into two publicly traded companies.

“This is a funky deal,” a source said. “This is not a vanilla offering.”

Following failed merger talks with Kioxia, Western Digital announced its plan to split its HDD and Flash businesses into two publicly traded companies.

The new convertible notes offering will be guaranteed by each of Western Digital’s subsidiaries that also guarantee the company’s 4.75% senior notes due 2026 or guarantee refinancing debt incurred with respect to the 2026 notes, the company wrote in a press release.

The guarantees will be particularly important in evaluating the offering.

“I’d be hesitant to walk in unless I had a full and complete understanding of the indenture,” a source said.

The intent is for the convertible notes to track the stock of the HDD company when split, a source said.

However, the split is an uncertain future event.

While there is still much to be determined about Western Digital’s split, it did not affect demand for the new offering which was heard to be strong with the offering coming as a refinancing.

Proceeds will be used, in part, to fund the repurchase of Western Digital’s 1.5% convertible notes due Feb. 1, 2024 (Baa3).

Western Digital is a “darling” in the convertibles market with its 1.5% convertible notes investment grade, a source said.

However, what the company will look like post-split is unclear, the source said.

Sarepta plunges

Sarepta’s 1.25% convertible notes due 2027 plunged outright and contracted dollar-neutral as stock led losses in equity markets.

The 1.25% notes sank 22 points outright with stock off more than 40% in intraday activity.

The 1.25% notes were trading at 83.5 versus a stock price of $61.40 early in the session, according to a market source.

They traded at 84.75 versus a stock price of $66.06 in the late afternoon.

The notes contracted a little more than 1 point on the move down, a source said.

There was $39 million in reported volume.

Sarepta’s stock traded to a low of $55.25 and a high of $68 before closing the day at $67.31, a decrease of 37.47%.

Stock plunged after the company released disappointing clinical results for its gene therapy treatment for Duchenne muscular dystrophy.

The treatment had already received Food and Drug Administration approval, but Sarepta had hoped to expand the population served.

Sarepta’s convertible notes have been volatile surrounding the FDA approval process for its gene therapy treatment.

The notes were wrapped around 107 heading into Tuesday’s session.

Spirit, JetBlue nosedive

Spirit Airlines’ 1% convertible notes due 2026 and JetBlue’s 0.5% convertible notes due 2026 continued their nosedive as negative news mounts for the discount airlines.

JetBlue’s 0.5% convertible notes due 2026 sank another 4 points after a 3 point drop the previous session.

The notes traded as low as a 62-handle in intraday activity.

They were changing hands at 63 versus a stock price of $3.72 in the late afternoon, according to a market source.

The yield jumped to 20.75%.

There was $36 million in reported volume.

JetBlue’s stock cratered to a multi-year low after reporting a large earnings miss.

Stock traded to a low of $3.42 and a high of $3.86 before closing at $3.76, a decrease of 10.48%.

JetBlue reported losses per share of 39 cents versus the losses per share of 25 cents expected and revenue of $2.35 billion versus the $2.38 billion expected.

The airline forecast losses per share of 35 to 55 cents for the current quarter versus the 15 cents expected.

The dismal earnings come as JetBlue and Spirit battle the Department of Justice to complete their merger.

Market expectations for the completion of the merger remain bleak with the sell-off in Spirit Airlines’ 1% convertible notes due 2026 accelerating.

The notes launched the day down 3 points on a 65-handle.

And the bottom continued to drop.

The 1% notes sank 10 points in a single session.

They were trading at 58.25 in the late afternoon, a source said.

The yield jumped to 23.875%.

There was $14 million in reported volume.

Spirit’s stock continued to drop and traded to a low of $10.73 and a high of $13.10 before closing at $11.48, a decrease of 12.10%.

Stock has plunged more than 30% over the past five trading sessions.

If the merger is not consummated, the market expects Spirit’s stock to continue to plunge.

Mentioned in this article:

JetBlue Airways Corp. Nasdaq: JBLU

Sarepta Therapeutics Inc. Nasdaq: SRPT

Spirit Airlines Inc. NYSE: SAVE

Western Digital Corp. Nasdaq: WDC

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.