Market eyes Gogo’s $200 million offering; KBR, Chesapeake weaken; Wayfair slow to trade

By Abigail W. Adams

Portland, Me., Nov. 16 – While market conditions dampened what was expected to be a high-volume week for new deal activity, the convertibles primary market has one more deal on the forward calendar.

Gogo Inc. plans to price $200 million of four-year convertible notes after the market close on Friday. While there was no news of final terms at press time, it was still expected to price.

The deal looked cheap, although the difficulties with the borrow made it hard to value, sources said.

While the new deal was in the works, Gogo’s 3.75% convertible notes due 2020 were among the most actively traded issues in the secondary space.

The secondary remained soft on Wednesday even as equities rallied and the Dow Jones industrial average closed in the green for the second consecutive trading session.

KBR Inc.’s newly priced 2.5% convertible notes due 2023 reached their weakest point since hitting the secondary market on Tuesday.

Wayfair Inc.’s 1.125% convertible notes due 2024 were slow to trade on Friday. However, the notes traded down on an outright basis, again dropping below par.

Chesapeake Energy Corp.’s 5.5% convertible notes due 2026 dropped outright in active trading on Friday with the energy sector under pressure as crude oil futures posted their sixth consecutive weekly loss.

Gogo in focus

Gogo plans to price $200 million of four-year convertible notes after the market close on Friday with price talk for a coupon of 5.5% to 6% and an initial conversion premium of 20% to 25%, according to a market source.

Underwriters were heard to be marketing the deal with a credit spread of 900 basis points over Libor and a 40% vol., a market source said.

The deal modeled 10 points cheap at the midpoint of talk assuming a normal borrow, the source said.

Other sources pegged the credit spread as 800 bps over Libor and a 45% vol., based on the valuation of the 3.75% convertible notes due 2020.

Using those assumptions, the deal modeled 5 points cheap with a 6% rate on the borrow.

However, the borrow is a problem, sources said.

The short interest in the name “is gigantic,” a source said, with more than 50% of the float shorted.

“There’s not a whole lot out there,” another source said of the stock.

With no borrow, it is difficult to determine a valuation on the deal, sources said.

Gogo intends to use proceeds to repurchase $200 million of the principal amount of the company’s 3.75% convertible notes due 2020 with remaining proceeds to be reserved for interest payments on the new notes.

In connection with the pricing, Gogo may amend the forward stock purchase transactions entered into upon the pricing of its 3.75% notes to extend their maturity.

While the post-close Friday pricing of the notes was a surprise to some, the deal was most likely presold, a market source said.

Holders may have been pushing to refinance the 3.75% notes before they became a liability, the source said.

The 3.75% convertible notes have an enormous premium and will never be in the money, another source said.

However, they have rallied since July with the company’s credit story improving.

While the 3.75% convertible notes previously traded with a credit spread of 1,000 bps and a 45% vol., the spread tightened to between 500 bps and 600 bps as stock almost doubled, a source said.

The 3.75% notes were among the most active issues in the secondary space on Friday with most trades between 95.5 and 95.75.

The credit spread tightened to 455 bps over Libor, which was due to the refinancing deal, a market source said.

More than $13 million of the bonds were on the tape by late afternoon.

Gogo stock was under pressure during Friday’s session, closing the day at $5.01, a decrease of 23.74%.

Wayfair out of focus

Wayfair’s newly priced 1.125% convertible notes due 2024 drifted out of focus their second day in the secondary market.

While trading volume was light, the notes again dropped below par after a volatile market debut.

The notes were seen changing hands around 99.5 in the late afternoon after trading at 100.5 earlier in the session.

Wayfair stock traded as high as $91.00 on Friday but came in to close the day at $87.79, a decrease of 1.36%.

The new 1.125% convertible notes opened well below par in the secondary space on Thursday with initial trades as low as 98.75.

While the notes closed the day above par, they were contracted dollar-neutral.

KBR weakens

KBR’s recently priced 2.5% convertible notes due 2024 were the weakest they’ve been in secondary trading since hitting the market on Tuesday, a market source said.

The notes were seen at 98.75 bid, 99.25 offered versus an equity price of $19.77.

They were trading largely in line dollar-neutral after a 0.25 point contraction on Thursday, a market source said.

KBR stock closed Friday at 19.87, a decrease of 0.1%.

Chesapeake drops

Chesapeake Energy’s 5.5% convertible notes due 2026 dropped 2.25 points outright in active trading on Friday.

The notes were seen changing hands at 91.5 versus an equity price of $3.56, according to a market source. About $10 million of the bonds were on the tape by the late afternoon.

The notes have steadily traded down over the past two week as crude oil futures plummeted. While the barrel price of WTI crude oil for December delivery showed some improvement over the past two days, they closed the week with a 6.2% loss.

Names in the energy sector remain under pressure, sources said.

Mentioned in this article:

Chesapeake Energy Corp. NYSE: CHK

Gogo Inc. Nasdaq: GOGO

KBR Inc. NYSE: KBR

Wayfair Inc. NYSE: W

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