Market eyes Benefitfocus convertible notes offering; tech active; credit names destroyed

By Abigail W. Adams

Portland, Me., Dec. 20 – After a record-setting year for new deal activity, the convertibles primary market is not yet done, despite a Federal Reserve rate increase and another brutal day for equity markets.

Benefitfocus, Inc. plans to price $200 million five-year convertible notes after the market close on Thursday.

While stock got slammed alongside broader markets on Thursday, the deal was still expected to price although terms were not available as of press time.

While the deal modeled cheap based on underwriters’ assumptions, it did not model cheap enough, other sources said.

Meanwhile, it was another brutal day in the secondary space with equity markets and crude oil prices continuing to plummet.

Credit names were especially heavy hit with spreads continuing to widen.

Ensco plc’s 3% senior notes due 2024 were again active and trading down as the energy sector continued to melt.

“Put trades” were on the tape, a market source said, with short-duration, high-delta, in-the-money names seeing some improvement despite the weakness in the market.

Illumina Inc.’s 0% convertible notes due June 15, 2019 and 51Job Inc.’s 3.25% convertible notes due April 15, 2019 were among them, sources said.

Tech names remained active with Micron Technology Inc.’s 3% convertible notes due 2043 continuing to see high-volume activity, although the notes were largely unchanged from Wednesday’s levels.

Microchip Technology Inc.’s 2.25% convertible notes due 2037 and 1.625% convertible notes due 2027 sunk further below par on Thursday with the notes contracted month over month.

Benefitfocus eyed

While a brutal day for the markets, Benefitfocus was still moving forward with its offering of $200 million five-year convertible notes with pricing expected after the market close.

Price talk is for a coupon of 0.75% to 1.25% and an initial conversion premium of 30% to 35%.

Underwriters are marketing the deal with a credit spread of 350 basis points over Libor and a 40% vol., according to a market source.

The deal models about 1.78 points cheap at the midpoint of talk, a source said. However, the deal is not cheap enough given the market conditions, another source said.

“The pricing was terrible,” especially given the Federal Reserve’s announced rate increase on Wednesday, another source said.

Given the rate increase, spreads should have been wider, the source said.

“It’s a judgment call. If you believe in static models it looks fairly cheap, but if you believe in dynamic models it’s not so cheap,” the source said.

Some sources questioned whether the deal was partially wall-crossed, which many felt it must have been if the deal was moving forward.

The deal was launched after the Federal Reserve announced a 25 bps rate increase, which some found surprising.

However, the company was probably waiting to test the market’s reaction to make sure the Federal Reserve did not make “some bizarre move,” a market source said.

It will be a benefit to the company to be able to add those funds to its balance sheet before the close of the fourth quarter – a benefit that may be worth paying a premium for, another source said.

Although, the company may have wished it priced a few weeks ago when markets were stronger, the source said.

Ensco weakens

Ensco’s 3% senior notes due 2024 were again active and trading down as the energy sector continued to melt on Thursday.

The 3% notes were off 1 point outright to 67.5 and were trading with a 11.625% yield to maturity early in the session, a market source said.

They continued their downward spiral into the afternoon, trading as low as 64.25 with a 12.73% yield to maturity.

Credit names were getting hit on Thursday, especially in oil and gas, a market source said.

Crude oil futures continued to plummet on Thursday, settling at $45.88, a decrease of $2.29, or 4.75%.

The put trade

Short-duration notes continued to be a theme of the secondary space with several high-delta, in-the-money names improved on Thursday despite weak market conditions.

51Job’s 3.25% convertible notes due April 15, 2019 were up slightly dollar-neutral, a market source said.

The notes changed hands around 144.25 early in the session with stock off slightly. 51Job’s stock continued to drift downward to close the day at $60.15, a decrease of 3%.

Illumina’s 0% convertible notes due June 15, 2019 were also improved in active trading.

The notes changed hands between 119.5 and 120 during Thursday’s session. They were improved about 0.5 point dollar-neutral, a market source said.

Illumina stock traded to a high of $304.00 and a low of $288.00 before closing the day at $292.33, a decrease of 3.65%.

Tech names active

Tech names remained active in the secondary space in the wake of Micron’s dire warning about a slowdown in demand for memory cards.

Micron’s 3% convertible notes due 2043 continued to see high-volume trading with the notes continuing to change hands around 109, a market source said.

They were largely unchanged dollar-neutral after a 0.625 point expansion on Wednesday.

Micron stock closed Thursday at $31.26, a decrease of 0.48%.

Microchip’s convertible notes sank further below par on Thursday, although they were holding up well on hedge compared to the rest of the market, a source said.

The 2.25% convertible notes due 2037 traded down to 93.5 on an outright basis. Month-over-month the notes contracted about 0.75 point, a market source said.

“That’s nothing in comparison,” a source said.

The notes remain heavily hedged and move on a 105% delta.

Microchip’s 1.625% convertible notes due 2027 dropped to the 95 level on Thursday. The notes were contracted about 0.625 point month over month, a source said.

They also remain heavily hedged and move on a 95% delta.

Microchip stock closed Thursday at $68.71, an increase of 0.15%.

Mentioned in this article:

51Job Inc. Nasdaq: JOBS

Benefitfocus, Inc. Nasdaq: BNFT

Ensco plc NYSE: ESV

Illumina Inc. Nasdaq: ILMN

Microchip Technology Inc. Nasdaq: MCHP

Micron Technology Inc. Nasdaq: MU

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