Convertibles quiet, weaker; Ryland under pressure; Cornerstone OnDemand, Workday on tap

By Rebecca Melvin

New York, June 10 - The convertible bond market was quiet and weaker on Monday in light volume, market players said.

Shifts related to higher interest rates and some indigestion of recent new issuance were cited for the malaise.

It was weaker "on the margin," a New York-based trader said. A second source said buyers stepped in "at the margin."

"It was very, very quiet today. It feels like an August Friday, volume wise," a New York-based trader said.

Tesla Motors Inc.'s $660 million of 1.5% convertibles, which priced May 16, traded down slightly, in line with the underlying shares of the Palo Alto, Calif.-based electric car maker. Pressure was in reaction to an article in the latest Barron's that said that the company needs a better, cheaper battery to sustain a position as a competitive car maker.

Lennar Corp. was another name under pressure after a downgrade to "neutral" from "overweight" of the Miami-based home builder's shares by JPMorgan. The weight on those shares was felt in the broader homebuilder sector. Ryland Group Inc.'s $250 million of 0.25% convertibles due 2019, which priced May 14, changed hands at 91 on Monday, which was down another point outright, according to Trace data.

Since issue, Ryland has lost 1.5 points to 2 points on a dollar-neutral, or hedged, basis, a New York-based analyst said, making it the worst-performing new issue in the convertibles space recently. The new Priceline.com Inc. 0.35% convertibles due 2020, a $1 billion issue that priced on May 30, is another poor performer.

Salix Pharmaceuticals Inc.'s 1.5% convertible senior notes due 2019 were higher outright as shares in the Raleigh, N.C.-based drug maker hit a new 52-week high. The bonds, which priced initially in March 2012, were seen at 117 with the shares up just about a dollar, or 1.6%, at $62.29. Those bonds have been tracking on a 75% to 80% delta, a trader said.

After the market close, Cornerstone OnDemand Inc. launched an offering of $220 million of five-year convertibles that was seen pricing after the market close Tuesday and was talked to yield 1.25% to 1.75% with an initial conversion premium of 32.5% to 37.5%; and Workday Inc. launched a $440 million offering of convertibles, including a $220 million tranche of five-year convertibles and a $220 million of seven-year paper.

The market was not affected by Standard & Poor's move to raise its U.S. sovereign credit outlook to "stable" from "negative," a convertibles trader said. The S&P also said the likelihood of a near-term downgrade of the rating at less than one in three. The agency downgraded the U.S. to AA+ from the top-rated AAA in August 2011.

Stocks ended narrowly mixed or essentially flat. The Dow Jones industrial average slipped 9.53 points to 15,238.59; the S&P 500 stock index ended down less than a point to 1,642.81; and the Nasdaq stock market added 4.55 points, to 3,473.77.

Workday to price $440 million

Workday launched a deal for $440 million of convertibles bonds, including a $60 million greenshoe. Workday is a cloud-based human resources and finance company based in California.

The $220 million tranche of five-year convertibles was talked with a 0.5% to 1% coupon and 32.5% to 37.5% initial conversion premium.

The $220 million of seven-year convertible notes were talked at the same premium but with a higher coupon range of 1% to 1.5%.

Each tranche is being sold under Rule 144A via Morgan Stanley & Co. LLC, Goldman Sachs & Co. and Barclays as joint bookrunners.

Pricing is expected to occur Tuesday after the market close. Both issues are non-callable with no puts. They have contingent conversion at a price hurdle of 130% and dividend protection.

In connection with the pricing of the notes, Workday plans to enter into a call spread with initial purchasers of the bonds.

Proceeds will be used for general corporate purposes, with a portion retained to pay the cost of the call spread.

Cornerstone on tap

Cornerstone OnDemand, a Santa Monica, Calif.-based cloud talent management firm, plans to price $220 million of five-year convertibles after the market close Tuesday. The deal was talked to yield 1.25% to 1.75% with an initial conversion premium of 32.5% to 37.5%, according to a market source.

The Rule 144A offering has an over-allotment option for an addition $33 million of notes and was being marketed by Goldman Sachs and Credit Suisse Securities (USA) LLC.

Upon conversion, the notes will be settled in cash and, if applicable, in shares.

In connection with the pricing of the notes, Cornerstone plans to enter into a call spread with initial purchasers of the notes.

Proceeds will be used for general corporate purposes, with a portion reserved to pay the cost of the call spread.

The notes will be non-call for life with no puts.

Mentioned in this article:

Cornerstone OnDemand Inc. Nasdaq: CSOD

Lennar Corp. NYSE: LEN

Micron Technology Inc. NYSE: MU

Priceline.com Inc. Nasdaq: PCLN

Ryland Group Inc. NYSE: RYL

Salix Pharmaceuticals Inc. Nasdaq: SLXP

Workday Inc. Nasdaq: WDAY

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