Morning Commentary: Splunk upsizes; Palo Alto Networks $1.75 billion offering eyed

By Abigail W. Adams

Portland, Me., June 3 – While the number of deals clearing the convertibles primary market may have slowed over the past week, the deal sizes remain substantial.

One offering is set to price after the market close on Wednesday as another offering makes its aftermarket debut.

Palo Alto Networks Inc. plans to price $1.75 billion of five-year convertible notes after the market close on Wednesday.

While the deal looked cheap based on underwriters’ assumptions, the credit spread was among the tightest seen since the March meltdown, sources said.

Meanwhile, Splunk Inc. priced an upsized offering.

Palo Alto on tap

Palo Alto plans to price $1.75 billion of five-year convertible notes after the market close on Wednesday with price talk for a coupon of 0.125% to 0.625% and an initial conversion premium of 27.5% to 32.5%, according to a market source.

The deal was heard to be marketed with assumptions of 350 basis points over Libor and a 33% vol.

Using those assumptions, the deal looked about 1.875 points cheap at the midpoint of talk, a source said.

The 350 bps credit spread was among the tightest seen since the March meltdown.

However, the spread was warranted for the cybersecurity company.

The company has about $2 billion of cash on its balance sheet and its market cap is $23 billion, a source said.

Proceeds were also earmarked for the repayment of the company’s 0.75% convertible notes due 2023, which is a credit positive for the company.

Palo Alto’s 0.75% convertible notes were changing hands at 110.5 early Wednesday with stock down about 0.5%.

Splunk upsizes

Splunk priced an upsized $1.1 billion seven-year convertible notes after the market close on Tuesday at par at the midpoint of talk with a coupon of 1.125% and an initial conversion premium of 35%.

Price talk was for a coupon of 0.875% to 1.375% and an initial conversion premium of 32.5% to 37.5%, according to a market source.

The greenshoe was also upsized to $165 million.

The initial size of the deal was $900 million with a greenshoe of $135 million.

Approximately $691.6 million of proceeds will be used to repurchase for cash $488.3 million of the principal amount of the company’s 0.5% convertible notes due 2023.

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