Convertibles calendar builds; Envestnet, Square on tap; market eyes FireEye, NRG Energy

By Abigail W. Adams

Portland, Me., May 21 – The primary market stands poised for another active week with $1.25 billion in two deals expected to price after the market close on Monday and $1.05 billion in two deals expected to price after the market close on Tuesday.

FireEye Inc. plans to price $525 million of six-year convertible notes after the market close on Monday with price talk for a coupon of 0.5% to 1% and an initial conversion premium of 35% to 40%, according to a market source.

NRG Energy Inc. plans to sell $500 million of 30-year convertible notes after the market close on Monday with price talk for a coupon of 2.25% to 2.75% and an initial conversion premium of 40% to 45%, according to a market source.

Both deals appear to be fair value, market sources said.

Envestnet Inc. plans to price $300 million of five-year convertible notes after the market close on Tuesday with price talk for a coupon of 1.25% to 1.75% and an initial conversion premium of 30% to 35%, according to a market source.

Goldman Sachs & Co., Morgan Stanley & Co. LLC and J.P. Morgan Securities LLC are bookrunners for the Rule 144A deal, which carries a greenshoe of $45 million.

Square Inc. plans to sell $750 million of five-year convertible notes after the market close on Tuesday with price talk for a coupon of 0% to 0.5% and an initial conversion premium of 42.5% to 47.5%, according to a market source.

Goldman Sachs is the bookrunner for the Rule 144A deal, which carries a greenshoe of $112.5 million.

Meanwhile, the secondary space was quiet on Monday with $179 million in total trading volume on the tape by late afternoon.

The flurry of trading activity surrounding the $3.1 billion in new paper that priced last week slowed.

While trading of the notes was light, Ligand Pharmaceuticals Inc.’s newly priced 0.75% convertible notes due 2023 dropped below par their second day in the secondary market as the company’s stock “got hit,” a market source said.

The notes were largely unchanged dollar neutral.

The secondary space was a little soft on Monday with accounts making room for what is poised to be another volume-heavy week of new deals, a market source said.

FireEye’s deal

FireEye’s $525 million offering of six-year convertible notes appears to be fairly priced, sources said.

The deal is being marketed with a credit spread of 250 basis points over Libor and a 38% vol., a market source said.

The deal models out to fair value to 0.5 point cheap, a source said.

“It’s certainly not the cheapness you’d have on a new name,” a market source said.

FireEye is a repeat issuer of convertible notes with $460 million outstanding in 1.625% convertible notes due 2035 and $460 million outstanding in 1% convertible notes due 2035.

The deal comes with a call spread. In addition to covering the cost of the call spread, proceeds will be used to repurchase a portion of the Milpitas, Calif.-based cybersecurity company’s 1% convertible notes due 2035.

While it is unclear the price FireEye will pay for the 1% convertible notes, holders are expected to make out on the repurchase, a market source said.

FireEye’s 1% convertible notes traded up to 96 and 1.625% notes traded up to 93 on Monday, a market source said.

FireEye’s 1% convertible notes and 1.625% convertible notes trade about 3 to 5 points rich, a market source said.

FireEye stock was a “high-flyer” when the 1% and 1.625% convertible notes priced but has come in quite a bit, a market source said, with the conversion premium on the notes now almost 250%.

The notes have traded rich based on the implied credit. The new offering is expected to trade better than the company’s current “busted down yield paper,” a source said.

While the deal models to fair value, there is the possibility for some real returns from a long-short position on the new bonds, a market source said.

NRG Energy’s deal

NRG Energy’s $500 million offering of 30-year convertible notes also models out to fair value, a market source said.

The deal is being marketed with a credit spread of 275 bps over Libor and a 30% vol., according to a market source.

The spread is in line with an energy company, a market source said. While NRG Energy has a lot of debt, most of it is shorter duration, the source said.

NRG common stock carries a yield of 37 cents, which the larger coupon is compensating for, a source said. The lower vol. of the stock also requires a higher coupon.

In connection with the offering, NRG intends to use cash on hand to complete the previously announced $500 million share repurchase program with shares repurchased from the initial purchasers of the notes and through accelerated share repurchase transactions, according to a company news release.

While NRG Energy’s new convertible note offering is expected to do OK, market sources pointed to FireEye as the better deal to play.

NRG Energy is “constantly refinancing,” and the new offering is “not a thrill,” a market source said. While FireEye has no observable credit, NRG Energy does. “It’s kind of a different trade,” another source said.

Ligand below par

While trading of the notes was light, Ligand Pharmaceuticals’ newly priced 0.75% convertible notes due 2023 dropped below par as the San Diego, Calif.-based biopharmaceutical company’s stock dropped off on Monday.

The notes traded down to 98.75 on Monday with most trades wrapped around 99. They traded as high as 101 on Friday when the new notes made their secondary market debut.

The notes were largely unchanged dollar neutral, a market source said. The notes were also trading in line on their market debut.

Ligand stock closed Monday at $185.39, a decrease of 4.92%.

Mentioned in this article:

Envestnet Inc. NYSE: ENV

FireEye Inc. Nasdaq: FEYE

Ligand Pharmaceuticals Inc. Nasdaq: LGND

NRG Energy Inc. NYSE: NRG

Square Inc. NYSE: SQ

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