Convertibles flat to lower as broader markets sink; Lumentum slips; Pacira launches deal

By Rebecca Melvin

New York, March 6 – U.S. convertibles were flat to lower on Monday as the latest batch of new issuance was being absorbed amid weakness in the broader markets, market players said.

Last week’s new issuance, which amounted to about $2 billion in six good-sized deals, traded well for the most part upon release for secondary dealings. But on Monday, there was some weakness in those deals with the markets coming off, a New York-based trader said.

A second New York-based trader said that he saw his names flat to modestly lower across the board. “Investors were taking profits with equities hovering near record highs. Light volumes, though, all around,” the trader said.

Lumentum Holdings Inc.’s 0.25% convertibles, which debuted in the market on Friday, remained in action early on Monday and were among those names seeing weakness.

Among last week’s other new deals were Viavi Solutions Inc.’s 1% convertibles due 2024, Silicon Laboratories Inc.’s 1.275% convertibles due 2022, Square Inc.’s 0.375% convertibles due 2022, Encore Group Capital Inc.’s 3.25% convertibles due 2022 and HCI Group Inc.’s 4.25% convertibles.

All of them had “a nice pop,” but “with the market coming off, there is some weakness happening. On the whole, it’s not that bad, but it’s been a little weaker for choice,” a trader said.

The deal flow continued this week with the launch of a $300 million issue from Pacira Pharmaceuticals Inc. after the market close. The Pacira deal was being marketed by joint bookrunners J.P. Morgan Securities LLC, Jefferies & Co. and RBC Capital Markets LLC and was expected to price after the market close on Tuesday.

Stock markets fell amid weakness in financial and energy and commodity sectors and as expectations continued to grow for a Federal Reserve interest rate raise later this month.

The Dow Jones industrial average shed 51.37 points, or 0.24%, to 20,954.34, ending lower for a third straight session. The S&P 500 stock index lost 7.8 points, or 0.3%, to 2,375.31 and the Nasdaq Stock Market fell 21.58 points, or 0.4%, to 5,849.17.

Lumentum slips

The Lumentum 0.25% convertibles due 2024 were seen 101.75 bid, 102.25 offered with the underlying shares at $46.10, which represented about a 0.25-point decline on a dollar-neutral, or hedged, basis, a trader said. But those notes were still ahead of the game since they had expanded about a point on swap on Friday.

But shares of the Milpitas, Calif.-based maker of optical and photonic products ended higher, up $0.50, or 1%, at $47.20.

In general, convertible portfolio managers were weighing new issuance against expectations of newer paper coming down the pike. There is no way of knowing what will be coming in terms of new issuance, a market source noted, but the general expectation is that with stock prices at near records and with interest rates expected to go higher, the environment is optimal for corporations to use convertibles to satisfy their capital needs. “Particularly because convertibles have relatively short durations,” the source added.

If the primary market continues to flow at the current pace, “people will presumably have to rotate,” a trader said.

Pacira to price

Pacira, a Parsippany, N.J.-based specialty pharmaceutical company, launched an offering of convertibles with proceeds earmarked to buy back an older issue. There is $118.5 million face value of the older bonds outstanding. And they were trading most recently at double par, or at just under 205 on March 1, according to Trace data.

The new deal for $300 million of five-year convertible senior notes was launched after the market close and was talked to yield 2.75% to 2.875% with an initial conversion premium of 27.5% to 32.5%, according to a syndicate source.

The Rule 144A deal has a $45 million greenshoe.

The notes are non-callable for three years and then are provisionally callable subject to a 130% price hurdle to the conversion price. There is a coupon make-whole feature and net share settlement.

A portion of the proceeds will be used to repurchase Pacira’s 3.25% convertible senior notes due 2019 for a combination of cash and shares of Pacira common stock. Remaining proceeds will be used for general corporate purposes, including working capital, research and development expenditures and the license or acquisition of complementary products and/or technologies.

Pacira has a market capitalization of about $2 billion.

Mentioned in this article:

Encore Group Capital Inc. Nasdaq: ECPG

HCI Group Inc. NYSE: HCI

Lumentum Holdings Inc. Nasdaq: LITE

Pacira Pharmaceuticals Inc. Nasdaq: PCRX

Silicon Laboratories Inc. Nasdaq: SLAB

Square Inc. NYSE: SQ

Viavi Solutions Inc. Nasdaq: VIAV

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