Twitter’s $1.3 billion offering around issue in gray market; WellPoint drops; Tesla slips

By Rebecca Melvin

New York, Sept. 11 – Twitter Inc.’s $1.3 billion convertibles offering was seen at 99.875 bid, 100.125 offered in the gray market on Thursday ahead of final terms expected to be set after the market close.

“They were bid at issue less 0.125 point and offered par plus 0.125 point, so basically wrapped around issue,” a New York-based trader said of both Twitter tranches.

A second source said the two Twitter tranches for $650 million each of five-year and seven-year paper looked about fair value at the midpoint of talk, using 200 basis points to 250 bps over Libor and a 40% vol.

Back in the secondary market, paper was described as heavy, marked by selling that has persisted all week.

One notable loser was WellPoint Inc.’s 2.75% convertible due 2042, which has lost 0.25 point to 0.375 point over the last two days. Shares of the health care benefits company ended little changed for the same period.

Tesla Motors Inc.’s convertibles were also weaker on Thursday, with the Tesla A and B tranches “in” about 0.25 point on the day and 0.5 point for the week. Acorda Therapeutics Inc. was also seen to have contracted by about a point. But Yandex NV was seen lower outright, but better on a dollar-neutral, or hedged, basis by about 0.125 point.

The market for in-the-money and at-the-money names dropped 0.5 point to 0.75 point across the board for the week, a New York-based trader said.

There was some debate about the impact that the large Twitter issue and the potential for others like it were having on the market.

One New York-based trader said, “It’s not big enough to force selling. I bet people expected like a $4 billion issue.”

A second trader said that the pullback was marked by two-way flow among outright players and selling into recent strength by hedged players. He chalked up the weakness to simple profit-taking that was to be expected.

“This week has seen better sellers; some are making room, but some are taking profits amid chatter about accelerating rate increases, and people are asking themselves are the in-the-money names funding appropriately. If not, they are trimming,” the New York-based trader said.

He said it is not the first time this year that convertibles have sold off over the course of a week, and that there was nothing unusual about the week’s move.

“You have had outrights adding selectively and hedged players, who care about relative strength, selling into strength,” the trader said.

“We’ve had other moves this year when stuff has come in by close to a point. This week is not necessarily a standout,” he said.

A second market source said “converts have been overvalued for a while,” and that the current selling includes investment-grade names because the market is starting to see a return of investment-grade issuers to the primary market, affording more choice to investors.

“IG companies are seeing that they can sell their equity up 40% to 50% and that’s compelling especially for accretive M&A type situations,” an East Coast-based buysider said.

Twitter at issue in the gray

Twitter’s deal was trading right around issue in the gray market ahead of final terms being fixed.

The San Francisco-based social media web company launched the offering of $1.3 billion of convertible senior notes in two tranches after the market close on Wednesday.

The company is a high premium company, one trader commented, with similar growing pains as those of Facebook.

“They need to provide positive user experience and advertisers have to make money, and last quarter it seemed they were figuring that out,” an East Coast-based buysider said.

The buysider put a credit spread of about 250 bps over Libor on the issue and a 40% vol. Others might go tighter on the credit spread, the buysider said.

The deal was expected to price at a pretty fair valuation. That opinion was based on the solid reputation of the underwriters and the fact that investors are going to get involved not because the deal is cheap but because it’s a growth story and a high vol. stock, he said. “Hopefully it’s not too tight.”

“Generically speaking, this is exactly the type of company that should come to the convertibles market. It’s volatile, it’s a growth story with the likelihood of high cash flow down the road. So it’s good for investors and it’s good for the company,” the buysider said.

Tranche A was talked with a 0% to 0.5% coupon and tranche B was talked with a 0.75% to 1.25% coupon, both with a 45% to 50% initial conversion premium.

Joint bookrunners are Morgan Stanley & Co. LLC, Goldman Sachs & Co. and J.P. Morgan Securities LLC, with BofA Merrill Lynch and Deutsche Bank Securities Inc. acting as co-managers of the Rule 144A deal, which has a $200 million greenshoe, or $100 million per tranche.

The notes are non-callable with no puts.

There is contingent conversion if shares exceed 130% of the conversion price and net share settlement.

Proceeds are earmarked for general corporate purposes and also to pay the net cost of a call spread.

WellPoint drops

WellPoint’s 2.75% convertibles due 2042 closed at 167 bid, 167.5 offered versus an underlying share price of $119.95 on Thursday.

The long dated paper has come in 0.25 point to 0.375 point in the last two days against a flat share price, according to a New York-based trader, and lower by 0.75 point since last week, a second New York-based trader said.

“A lot of it has to do with a crack in the long end of the rates curve,” the second trader said.

It was slightly rich before but it is the fact that people are starting to think about higher rates and that long-dated issue is one of the first names that they will start to lighten up on.”

The trader thought that the contraction was justified. “They shouldn’t have been where they were.” He said.

WellPoint and others like it such as Priceline Group Inc. and Citrix Systems Inc. have been held by market players who are trying to replicate an index and that demand has helped inflate the price, sources said.

The recent San Francisco Fed paper discussed the idea that the investing community believes that rates will be lower for longer than the Fed actually sees as the future path of short-term interest rtes. The crack in Treasuries was also spurring some big moves in emerging markets foreign exchange markets, and it also has something to do with the weakness in equities. But “all in all the rate picture is unclear and the reasons for the sell-off also had to do with reallocation of assets to newer, more balanced paper.

Mentioned in this article:

Acorn Inc. Nasdaq: ACOR

Citrix Systems Inc. Nasdaq: CTRX

Priceline Group Inc. Nasdaq: PCLN

Tesla Motors Inc. Nasdaq: TSLA

Twitter Inc. Nasdaq: TWTR

WellPoint Inc. NYSE: WLP

Yandex NV Nasdaq: YNDX

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