Market awaits Splunk’s upsized $1.75 billion two-part convertibles; tech sees selling

By Abigail W. Adams

Portland, Me., Sept. 18 – The convertibles primary market plans to price the largest deal of the year after the market close on Tuesday – an upsized $1.75 billion two-tranche convertible notes offering from software company Splunk Inc.

The offering looked cheap and was in demand during bookbuilding, sources said.

While the largest deal year to date, there have been several billion-dollar convertible notes offerings from the tech sector in 2018.

Many of the large tech deals to price in 2018 were on the tape on Tuesday as accounts made room for new paper from Splunk.

Splunk upsizes

Splunk’s two-tranche offering of convertible notes modeled cheap and was in demand during bookbuilding, particularly the short-dated paper, sources said.

Splunk upsized its tranche of five-year convertible notes to $1 billion from $850 million and downsized its tranche of seven-year convertible notes to $750 million from $850 million, lifting the total size of the deal to $1.75 billion, according to a market source.

The five-year tranche is expected to price with a coupon of 0.5% and an initial conversion premium of 27.5%, the source said.

Price talk had been for a coupon of 0.25% to 0.75% and an initial conversion premium of 27.5% to 32.5%.

The seven-year tranche is expected to price at the cheap end of talk with a coupon of 1.125% and an initial conversion premium of 27.5%.

Price talk had been for a coupon of 0.625% to 1.125% and an initial conversion premium of 27.5% to 32.5%.

The five-year tranche is non-callable for three years and the seven-year tranche non-callable for four years with both then provisionally callable subject to a 130% hurdle with a make-whole.

Underwriters marketed the five-year tranche with a credit spread of 160 basis points over Libor and a 35% vol., a market source said.

The deal looked to be about 2.2 points cheap at the midpoint of talk, a source said.

The seven-year tranche was marketed with a credit spread of 180 bps over Libor and a 35% vol.

The tranche was pegged about 2.73 points cheap. The assumptions looked fair, a source said.

There was strong interest in the deal, a market source said.

However, with the seven-year tranche not much cheaper than the five-year tranche, investors were eyeing the shorter duration paper, sources said.

The notes were seen between par and 100.25 in the gray market, a market source said.

Billion-dollar deals

While Splunk will be the largest deal year to date, there have been several billion-dollar convertible notes offerings from the tech sector in 2018.

Palo Alto Networks Inc. priced $1.5 billion of 0.75% convertible notes due 2023 in July, with the greenshoe later partially exercised, lifting the size of the deal to $1.69 billion.

There was some trepidation the notes from Splunk would have a similar market debut as Palo Alto’s 0.75% notes, which straddled par for its first few days in the market, despite modeling cheap, a source said.

However, the notes have since climbed with stock. The 0.75% notes traded between 106.135 and 106.377 on Tuesday, according to Trace data.

Palo Alto stock closed Tuesday at $234.05, an increase of 0.88%.

Twitter, Inc. priced $1 billion of 0.25% convertible notes due 2024 in June with the greenshoe lifting the size of the deal to $1.15 billion. The 0.25% notes were trading on an 88 handle on Tuesday.

Twitter stock closed the day at $29.22, an increase of 1.25%.

Akamai Technologies Inc. sold $1 billion of 0.125% convertible notes due 2025 in May, with the greenshoe later exercised in full, lifting the size of the deal to $1.15 billion.

The 0.125% notes were hovering around par on Tuesday, a market source said. Akamai stock closed the day at $74.33, an increase of 0.07%.

Western Digital Corp. priced $1 billion of 1.5% convertible notes due 2024 in January, with the greenshoe lifting the size the of the deal to $1.1 billion.

The 1.5% notes recently sank to their lowest level since pricing with the notes now trading on a 92 handle.

Making way

While trading surrounding 2018’s other billion-dollar deals from the tech sector was light on Tuesday, tech paper was for sale as accounts made room for Splunk’s new offering. The paper was weakening amid the selling activity, a market source said.

Atlassian Inc.’s 0.625% convertible notes due 2023 were changing hands between 126.5 and 127 on Tuesday with more than $12 million bonds on the tape.

Atlassian stock closed the day at $92.40, an increase of 1.42%.

Atlassian priced an upsized $850 million issue of the 0.625% convertible notes in April.

Square Inc.’s 0.5% convertible notes due 2023 were trading between 130.25 and 131.25 during Tuesday’s session, according to Trace data.

Square stock closed the day at $87.97, an increase of 1.28%.

Square priced a $750 million issue of the 0.5% notes in May with the greenshoe later exercised in full, lifting the size of the deal to $862.5 million.

“The space was definitely seeing people selling to make room,” a market source said.

Mentioned in this article:

Akamai Technologies Inc. Nasdaq: AKAM

Atlassian Inc. Nasdaq: TEAM

Palo Alto Networks Inc. NYSE: PANW

Splunk Inc. Nasdaq: SPLK

Square Inc. NYSE: SQ

Twitter, Inc. NYSE: TWTR

Western Digital Corp. Nasdaq: WDC

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