Proofpoint’s planned convertible looks positive; Western Asset trades well on reopening

By Rebecca Melvin

New York, Aug. 20 – Convertible players thought price talk for Proofpoint Inc.’s planned $750 million of five-year convertibles looked favorable for investors, and Western Asset Mortgage Capital Corp., which priced an additional $40 million of its 6.75% convertibles due 2022, traded up on Tuesday, according to market sources.

Proofpoint’s Rule 144A deal was announced ahead of the market open and talked at a coupon of 0.25% to 0.75% and initial conversion premium of 35% to 40%. It was expected to price after the market close on Tuesday.

The company’s shares tanked in early trading and closed down $6.24, or 5.3%, to $111.99 on the heels of the convertibles offering announcement.

Also on Tuesday, Pasadena, Calif.-based real estate investment trust, Western Asset announced that it priced $40 million of 6.75% convertibles due 2022 at par in a reopening of an existing $115 million of notes priced in October. 2017. The new notes, which were sold with an initial conversion premium of 24%, will form one series with the existing notes for a new size for this issue of $155 million.

JMP Securities was the bookrunner for the deal that was made under an effective registration statement filed by the company with the Securities and Exchange Commission.

The Western Asset notes were said to have traded up, with a round lot reported to have traded at 100.875 from par, the source said. Although given the size of the deal, there wasn’t a lot of volume.

In addition, there were no other new deals heard to be announced Tuesday afternoon, but there was expected to be further issuance in the next day or two.

“We might see something tomorrow night, but after that I doubt if we see something before Labor Day. We’ll see though, we haven’t had a bad deal yet. When we have a bad deal, then we’ll know [that new issues will tail off],” the source said.

Back in secondary market action, Akamai Technologies Inc.’s new paper continued to trade actively. They were not moving price-wise, but a good deal of volume was changing hands.

The newly priced 0.375% convertible notes due 2027 again dominated activity in the secondary space.

Akamai stock traded down 42 cents, or 0.5%, to $86.65.

Akamai’s $1 billion issue of the 0.375% notes hit the secondary space on the day equities saw their worst sell-off of the year, holding in on hedge but sinking on an outright basis to a 97 handle their initial days in the market.

“There was no real movement, but it was busy,” a source said of the Akamai convertible. Another busy name was Avaya Holdings Corp. as the underlying shares surged $1.52, or 12%, to $13.95 on continuing action tied to news that rival Mitel Networks is considering a bid that could create a telecommunications equipment vendor worth more than $5 billion, including debt.

Avaya sold $300 million of 2.25% convertible notes due 2023 a year ago in June, and those bonds were trading around 92.5 to 92.7 on Tuesday.

Proofpoint looks cheap

At the midpoint of price talk, the valuation for Proofpoint’s proposed five-year convertibles came to about 101.87, a New York-based source said, using a credit spread of 250 basis points over Libor and 36% vol.

A second New York-based source might have argued the spread was a tad tight. “But either way 250 to 300, the deal should do well. That space trades pretty tight and it looks like guys are probably going to be getting loaded up in software.”

Proofpoint is a former convertible issuer, with two previous deals that were subsequently redeemed. The new deal is being sold via joint bookrunners Morgan Stanley & Co. LLC, BofA Securities Inc., Citigroup Global Markets Inc. and Wells Fargo Securities LLC.

The notes will be non-callable until Aug. 20, 2022 and then provisionally callable at par if shares rise to 130% of the conversion price for at least 20 out of 30 consecutive trading days.

The bonds will be settled in cash, shares or a combination of cash and shares.

The proceeds are expected to be used for general corporate purposes, including potential acquisitions and strategic transactions.

A portion of the proceeds will be used to pay the cost of capped call transactions that Proofpoint expects to enter into with one or more initial purchasers of the notes or their affiliates. The capped call transactions are expected to reduce the potential dilution upon any conversion of the notes and/or offset any cash payments in excess of the principal amount of the notes.

The bonds mature on Aug. 15, 2024.

Mentioned in this article:

Akamai Technologies Inc. Nasdaq: AKAM

Avaya Holdings Corp. Nasdaq: AVYA

Proofpoint Inc. Nasdaq: PFPT

Western Asset Mortgage Capital Corp. NYSE: WMC

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