Morning Commentary: Greenlight Capital convertibles on tap; Tesla active, in focus

By Abigail W. Adams

Portland, Me., Aug. 2 – While convertibles primary market activity has slowed its pace in the heart of earnings season, it has not stopped with one new deal in the works.

Greenlight Capital Re., Ltd. plans to price $100 million of five-year convertible notes after the market close on Thursday with price talk for a coupon of 3.5% to 4% and an initial conversion premium of 25% to 30%.

Underwriters are marketing the deal with a credit spread of 500 basis points over Libor and a 25% vol., a market source said. Using those assumptions, the deal models a little more than 3 points cheap.

The credit spread is aggressive, another source said, pegging it more like 550 bps over Libor. With a higher credit spread, the deal looked a little more than 1 point cheap.

The stock “fell off a cliff” in January and February and the largest holders are “index people,” the source said. However, the concurrent share buyback of 1 million shares is a plus and the borrow on the stock is decent.

Proceeds from the convertible notes offering will be used to help capitalize subsidiaries, which one source said gave them “the heebie geebies.”

However, the deal looked decent and would provide an opportunity to collect a higher-than-average coupon and ride the stock, the source said.

The capital raise comes as founder David Einhorn announced an 18.5% year-to-date loss for hedge fund Greenlight Capital, which was partly fueled by the company’s short position in Tesla Inc.

As Einhorn and Tesla CEO Elon Musk exchange twitter jabs, their proposed and existing bonds were the focus in the convertible space.

While Tesla reported an earnings miss after the market close on Wednesday, Musk’s composure on the earnings call, Tesla’s less-than-expected cash burn, ramped up production of Model S sedans and affirmation that it would be able to pay off its soon to mature SolarCity convertible bonds sent Tesla shares flying early Thursday with the company’s convertible notes following suit.

Tesla’s 0.25% convertible notes due 2019 jumped about 4 points outright to trade at 107.875.

Tesla’s 1.25% convertible notes due 2021 jumped more than 5 points outright to trade at 109.

Tesla’s 2.375% convertible notes due 2022 jumped more than 8 points outright to trade at 117.

Tesla’s stock was up between 9% and 10% early Thursday.

While the notes were slower to trade, the soon-to-mature 2.75% SolarCity bonds were also active.

They were seen trading Thursday at 99.25 with a 6% yield to maturity, according to a market source. The notes were trading with a 14% yield earlier in the week.

The 2.75% notes mature on Nov. 1, 2018 and have $230 million outstanding, according to Trace volume.

SolarCity’s 1.625% convertible bond due 2019 also saw its yield to maturity drop from almost 11% Wednesday to about 8% on Thursday with the notes creeping up to 92.5.

The 1.625% notes have $566 million outstanding, according to Trace data.

The soon-to-mature SolarCity notes have been pointed to as the straw that could break Tesla’s back and push the company into bankruptcy.

Musk reaffirmed on his earnings conference call that Tesla would be able to pay off the bonds without the need for an additional capital raise.

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