Morning Commentary: Convertibles primary wraps active week; Zillow, Intrexon, Arbor Realty price

By Abigail W. Adams

Portland, Me., June 29 – The primary market closed out another high-volume week for new paper by pricing $625 million over three deals.

Each deal priced at the cheap end of talk, an indication that investors are getting pickier given the influx of new paper in the market, sources said.

Zillow Group Inc. priced $325 million of five-year convertible notes after the market close on Thursday at the cheap end of talk with a coupon of 1.5% and an initial conversion premium of 37.5%.

The deal was reported to have struggled during bookbuilding and, while up outright, was flat on a dollar-neutral basis on its market debut, sources said.

Intrexon Corp. sold $200 million of five-year convertible notes after the market close on Thursday at the cheap end of talk with a coupon of 3.5% and an initial conversion premium of 27.5%.

While few bonds were trading, they were seen hovering around par.

Arbor Realty Trust, Inc. priced $100 million of three-year convertible notes after the market close on Thursday at the cheap end of talk with a coupon of 5.25% and an initial conversion premium of 10%.

The small offering was well-placed and was not active on the tape early in the session, sources said.

Zillow falls flat

Zillow Group priced $325 million of five-year convertible notes after the market close on Thursday at the cheap end of talk with a coupon of 1.5% and an initial conversion premium of 37.5%.

Price talk had been for a coupon of 1% to 1.5% and an initial conversion premium of 37.5% to 42.5%.

A concurrent offering of $325 million, or 5,701,754 shares, of class C capital stock priced at $57.00 per share.

The notes were seen trading at 101 with stock up to around $58.99 in decent trading volume. They were flat dollar neutral, a market source said.

With the convertible notes priced off of the concurrent offering, “everyone got the pop on the stock,” a market source said.

Zillow stock closed Thursday at $58.62.

The deal struggled during bookbuilding, sources said. With a credit spread of 225 basis points over Libor and a 16% vol., the deal modeled out to fair value at the midpoint of talk, sources said.

Some investors were passing on the deal, a market source said. After a trend of rich pricing, investors are beginning to expect some cheapness given the abundance of supply.

Intrexon’s deal

Intrexon priced $200 million of five-year convertible notes after the market close on Thursday at the cheap end of talk with a coupon of 3.5% and an initial conversion premium of 27.5%.

Price talk was for a coupon of 3% to 3.5% and an initial conversion premium of 27.5% to 32.5%.

Concurrently with the convertible notes offering, Intrexon priced $100 million, or 7,479,431 shares, of common stock at $13.37 per share.

The newly priced shares will be loaned to JPMorgan in a share lending agreement. Chief executive officer and principal shareholder Randal Kirk agreed to purchase all of the shares in the share lending agreement.

Few bonds were seen on the tape early in the session. However, the bonds that did trade were seen hovering around par.

Arbor’s deal

Arbor Realty Trust priced $100 million of three-year convertible notes after the market close on Thursday at the cheap end of talk with a coupon of 5.25% and an initial conversion premium of 10%.

Price talk had been for a coupon of 4.75% to 5.25% and an initial conversion premium of 10% to 15%.

The small deal was well-placed and did not see much aftermarket activity, a market source said.

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