Tesla, SolarCity convertibles in retreat as doubts about merger deal increase; Whiting up

By Stephanie N. Rotondo

Seattle, June 23 – Tesla Motors Inc. and SolarCity Corp. were trading actively in the convertible bond market on Thursday, as there was “considerable doubt this thing gets done,” a trader said.

The trader was referring to Tesla’s offer to buy SolarCity – both companies are helmed by Elon Musk – in a stock deal valued at $2.5 billion.

“Everybody hates the deal except Elon Musk,” a trader said.

That is because for its part, Tesla itself has been struggling to ramp up production of its Model 3 so it can be mass-marketed at the end of next year. Tesla has already sold additional equity to fund that project and buying up SolarCity only increases the possibility of more dilution.

With concerns about the deal increasing, SolarCity’s convertible debt was retreating from the previous day’s highs.

Toward the close, the 1.625% convertible notes due 2019 were deemed down 1.5 points at 67.875. Earlier in the session, a trader said the 1.625% convertible notes due 2019 were off 2.5 points at 67.5 bid, 67.75 offered.

That issue had added about 15 points in midweek trading.

As for the equity (Nasdaq: SCTY), it was initially down 30 cents, or 1.74%, at $21.58 in early trading. However, it recovered from its lows, ultimately ending a dime better at $21.98.

Tesla’s equity (Nasdaq: TSLA) was also getting beaten down, and a downgrade from Morgan Stanley was not helping matters. A subsequent upgrade from S&P did help to pare the losses, however.

The stock was down $2.46, or 1.25%, at $194.20 at mid-morning. It ended off just 26 cents at $196.40.

A trader noted that the 1.25% convertible notes due 2021 were “still following the stock lower,” losing a “couple points,” while the 0.25% convertible notes due 2019 were “holding in.”

The 1.25% notes waned nearly 3 points to 87.75, according to a market source. The 0.25% notes slipped just a touch to straddle 89.

Morgan Stanley dropped its equity ratings on both SolarCity and Tesla on Thursday to “equal weight” from “overweight.”

In a note regarding SolarCity, the analysts said that “we still see upside to our [discounted cash flow]-driven price target and the potential acquisition price... However, deal approval is uncertain and we see several fundamental risks that could be magnified should the deal not close.”

In a Tesla-centric note, the analysts wrote that “given the uncertainty as to whether [Tesla] and [SolarCity] shareholders will approve the proposal, we have not made changes to our operational assumptions, and have not, at this stage, modeled in an acquisition.”

In its report, S&P’s Efraim Levy said he raised his 12-month target on Telsa’s stock by $15 to $200 a share. He said the upgrade was due to the expectation of “rapid automotive profit growth.” The upgrade did not, however, include the possible acquisition of SolarCity, which he viewed negatively.

“We see a possible withdrawal of the offer, which we think would boost the volatile and risky shares,” he said.

Whiting up on exchange

Whiting Petroleum Corp.’s 1.25% convertible notes due 2020 got a boost Thursday as the Denver-based oil and gas company said it had completed a $1.06 billion exchange of notes for mandatory convertible notes.

The paper popped 5 points to 83.5, a market source reported.

The equity did not fare as well, dropping 78 cents, or 6.45%, to $11.32.

All told, the company exchanged $377 million of nonconvertible notes and $687.9 million of convertible notes for the new mandatory convertible notes maturing 2018 through 2023. (See related story elsewhere in this newsletter.)

Cypress greenshoe exercised

Cypress Semiconductor Corp.’s 4.5% convertible senior notes due 2022 – a $250 million issue priced on Tuesday – were trading upward on Thursday, according to a market source.

The source pegged the issue at 105.375, up about 3.5 points.

The stock underlying the notes was also better, rising 60 cents, or 6.07%, to $10.49.

On Thursday, the company said its $37.5 million greenshoe had been fully exercised, lifting total issuance to $287.5 million.

The initial conversion price is $30.25.

BofA Merrill Lynch and Credit Suisse Securities (USA) LLC acted as joint bookrunners.

The notes are non-callable with no puts. Interest is payable semiannually on Jan. 15 and July 15.

The convertible bonds are convertible into common stock at an initial conversion rate of 74.1372 shares per $1,000 of notes. That equates to $13.49 per share, an initial conversion premium of 32.5%.

The deal was initially talked at a coupon of 4.5% to 5% and an initial conversion premium of 27.5% to 32.5%, according to a syndicate source.

Proceeds from the offering, together with an additional $450 million term loan under the company’s existing credit facility, will be used to finance the previously announced acquisition of Broadcom Corp.’s Wireless Internet of Things business and certain related assets, to repay about $107 million of revolving loans under Cypress’ existing credit facility and to pay related fees and expenses.

Proceeds will also be used to pay the net cost of capped call transactions with one or more of the initial purchasers of the notes. The transactions are intended to reduce potential dilution of the common shares upon conversion of the notes and to offset cash payments that may be required.

Cypress is a San Jose, Calif.-based semiconductor manufacturer.

Mentioned in this article:

Cypress Semiconductor Corp. Nasdaq: CY

SolarCity Corp. Nasdaq: SCTY

Tesla Motors Inc. Nasdaq: TSLA

Whiting Petroleum Inc. NYSE: WLL

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