Wayfair convertible notes volatile outright, up on hedge on debut; high-grade notes gain

By Abigail W. Adams

Portland, Me., May 10 – It was another active day in the convertibles secondary space with new supply jumpstarting trading activity.

Wayfair Inc. was the name of the day after the serial issuer priced $600 million of five-year convertible notes in a refinancing of its 2024 and 2025 convertible notes.

The deal played to solid demand during book building despite some trepidations about the issuer and an increasingly difficult borrow.

The new notes were volatile outright, launching the day with strong gains but closing below par.

However, the notes maintained a strong dollar-neutral expansion amid the price movement.

The new paper hit the secondary space on a volatile day for equities as markets digested the latest Consumer Price Index report and the lack of progress in debt ceiling negotiations in Washington.

Equity indexes initially surged following a softer-than-expected headline CPI print, gave back their early gains to turn negative mid-session but were lifted into the close to end the day mixed.

The Dow Jones industrial average closed Wednesday down 30 points, or 0.09%, the S&P 500 index closed up 0.45%, the Nasdaq Composite index closed up 1.04% and the Russell 2000 index closed up 0.57%.

There was $308 million in reported convertible bond trading volume about one hour into the session and $802 million on the tape about one hour before the market close with Wayfair accounting for nearly one-quarter of the activity on the tape.

Investment-grade issues returned to focus with an “explosion” of activity in Duke Energy Corp.’s 4.125% convertible notes due 2026 (Baa2/BBB) and CMS Energy Corp.’s 3.375% convertible notes due 2028 (Baa2) also active with the notes set to be added to the Refinitiv convertible indices.

Welltower Inc.’s new 2.75% convertible notes due 2028 (Baa1/BBB+) continued to see heavy volume their second day in the secondary space with the notes improved on a strong day for Treasuries.

Wayfair in focus

Wayfair priced $600 million of five-year convertible notes after the market close on Tuesday at par at the midpoint of talk with a coupon of 3.5% and an initial conversion premium of 25%.

Price talk was for a coupon of 3.25% to 3.75% and an initial conversion premium of 22.5% to 27.5%.

The deal played to robust demand during book building despite some trepidations about the credit and an increasingly difficult borrow during Tuesday’s session.

Allocations were tight with the majority placed with holders of the convertible notes that were taken out in the refinancing, a source said.

The new paper was volatile on an outright basis, launching the day with strong gains but dropping below par by the market close.

However, they maintained a large dollar-neutral expansion throughout the session.

The notes were trading at 102 with stock flat early in the session, a source said.

However, they fell to a 99-handle as stock dropped as the session progressed.

The notes were changing hands at 99.625 about one hour before the market close.

They expanded 2 points dollar-neutral.

There was $153 million in reported volume.

Wayfair’s offering came as a refinancing of its existing notes with the company repurchasing for cash $82.5 million in principal of its 1.125% convertible notes due 2024 for $77.6 million and $534.5 million in principal of its 0.625% convertible notes due 2025 for $436.2 million.

The notes were bought back at a healthy premium to their previous trading level, a source said.

The buyback price for the 1.125% notes was 93.89, a source said.

The notes were trading between 91.25 and 91.5 the previous session.

The buyback price for the 0.625% notes was 81.57, a source said.

The notes traded up to 80 on Tuesday but were on a 78-handle prior to the deal’s launch.

Following the buyback, the 0.625% notes settled back to an 80-handle with the notes trading in the 80.125 to 80.375 context, a source said.

Wayfair’s stock traded to a low of $34.01 and a high of $37.15 before closing at $35.86, a decrease of 2.13%.

Index trades

Investment-grade issues returned to focus on Wednesday with the notes improved across the board.

There was an “explosion” of activity in Duke Energy’s 4.125% convertible notes due 2026, a former mainstay at the top of Trace volume that had seen activity diminish in recent session.

The 4.125% notes traded up to 102.25 early in the session and were wrapped around 102 heading into the market close.

They gained about 0.25 point dollar-neutral, a source said.

There was $125 million in reported volume.

The activity was an index trade with the notes set to be added to the Refinitiv convertible indices on May 11, a source said.

Duke Energy’s stock traded to a low of $98.13 and a high of $99.50 before closing at $99.14, an increase of 1.11%.

CMS’ 3.375% convertible notes due 2028 were also improved in heavy volume with the notes to be added to the Refinitiv convertible indices on May 12.

The 3.375% notes were changing hands in the 102.25 to 102.5 context on Wednesday.

They also gained about 0.25 point dollar-neutral.

There was $26 million in reported volume.

CMS’ stock traded to a low of $61.09 and a high of $62.11 before closing at $61.86, an increase of 1.09%.

Welltower improves

Welltower’s 2.75% convertible notes due 2028 continued to see heavy volume their second day in the secondary space with the notes improved.

The 2.75% added about 0.75 point outright with stock up a little more than 1%.

They were changing hands at 101.375 in the late afternoon, according to a market source.

There was $42 million in reported volume.

Welltower’s stock traded to a low of $77.95 and a high of $79.69 before closing at $79.38, up 1.35%.

Mentioned in this article:

CMS Energy Corp. NYSE: CMS

Duke Energy Corp. NYSE: DUK

Wayfair Inc. NYSE: W

Welltower Inc. NYSE: WELL

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