Morning Commentary: Western Digital spinoff complicates convertible notes offering

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 continuing to destroy outstanding issues.

Equity markets were mixed early Tuesday with the Dow Jones industrial average down 15 points, or 0.05%, the S&P 500 index up 0.12%, the Nasdaq Composite index down 0.02% and the Russell 2000 index up 0.35% shortly before 11 a.m. ET.

There was $98 million in reported volume about one hour into the session with the explosion of Sarepta Therapeutics Inc.’s 1.25% convertible notes due 2027 one of the drivers of volume.

The 1.25% convertible notes tanked as the biotech’s stock led losses in equity markets on the heels of a failed clinical trial.

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.

Sarepta explodes

Sarepta’s 1.25% convertible notes due 2027 exploded on Tuesday with the notes sinking double digits as stock led losses in equity markets on the heels of a failed clinical trial.

The 1.25% notes sank 24 points outright with stock down more than 45%.

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

There was $23 million in reported volume.

Sarepta’s stock traded down to $60.87, a decrease of 43.28%, shortly before 11 a.m. ET.

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